Usufruct… who’safruct?

If you’ve ever been involved in a formal inheritance, gift or sale, you will certainly have already heard the terms “usufruct” and its counterpart, “bare ownership.” But what is usufruct exactly, and how does it work? The myLIFE team explains.

What is usufruct?

The term usufruct comes from the Latin usus (use) and fructus (enjoyment). Usufruct is the right of the beneficiary (the usufructuary) to use and benefit from property that belongs to another person (the bare owner).

The usufructuary therefore has the right to use a property (live in a house, drive a vehicle, etc.) and to derive profit from it (in the form of rent, interest, etc.) for a fixed period or until a specific event occurs, such as death. In exchange for this right, they must maintain the property by making sure it is kept in a good state of repair and paying for any costs of upkeep.

However, the usufructuary does not have the right to sell, give away or destroy the property. This right is reserved for the bare owner, who is also responsible for large-scale repairs, unless they are needed as a result of neglect by the usufructuary.

Useful info: full ownership of a property is made up of the usufruct (the right to use it and receive income generated by it) and bare ownership (the right to dispose of it).

Full property ownership = bare ownership (possession of an asset) + usufruct (right to use and benefit from the asset).

Generally, usufruct is granted for life, meaning that it ends when the beneficiary dies. But that doesn’t mean usufruct can’t be granted for a fixed period. This is known as temporary usufruct. There’s also something called quasi-usufruct. This is when property is consumable, i.e. it can only be used once, as is the case with food, wine, money, and so on. The usufructuary can use it, but must return items either of the same quality and in the same quantity, or pay the estimated value on the date of return.

When do we talk about usufruct?

Usufruct and bare ownership generally come up in the context of an inheritance, gift or sales agreement. Usufruct can be attached to immoveable property (like a house or land), moveable property (like a car or furniture) or securities (like shares or cash).

• Inheritance

In the context of an inheritance, for example, if a couple has children and one spouse dies, the surviving spouse shares the estate with the children. According to the default inheritance rules under the Law of 26 April 1979, the surviving spouse is entitled either to the right of usufruct over the main residence and the furniture it contains, or to the same sized share as each child in full ownership. If the deceased spouse has left the surviving spouse the special discretionary portion for the spouse (quotité spéciale entre époux), the latter may receive either the standard share and the usufruct of the rest of the estate, or the entirety of the estate in usufruct.

But remember, if the inheritance involves immoveable property, it must have belonged to the deceased in its entirety – or as joint property with the surviving spouse – to be able to apply one of these options. Find out more in the article Inheritance: who gets what?

• Donation

A property owner has the option of transferring only a portion of their assets – the bare ownership or the usufruct – when making a gift. This allows them to reduce the cost of inheritance while still being able to benefit from their property; for example, if they transfer the bare ownership of their house to a relative whilst remaining the usufructuary, they can still live in or rent the property, but they no longer own it.

In Luxembourg, however, trying to reduce real estate inheritance costs is only really worth it if the gift is being made to someone who is not an immediate relative. Indeed, with a few exceptions, inheritance tax is low, or non-existent for direct descendants.

• Sale

Usufruct also comes up in sales agreements. This can involve a moveable asset, but also transferable securities, for example. In this case, an investor can sell the bare ownership of their securities. The voting right at the general meeting of shareholders will belong to the bare owner (except when it comes to decisions concerning appropriation of income, which are reserved for the usufructuary), but the usufructuary will be entitled to any profits distributed by the company.

If usufruct has been granted for life, the value varies depending on the age of the usufructuary when the gift is made.

How to determine the usufruct value

• Life usufruct

If usufruct has been granted for life, the value varies depending on the age of the usufructuary when the gift is made. It is based on the following scale:

Source: guichet.lu 

This value is used to determine the taxable base for stamp duty on gifts or inheritance.

• Temporary usufruct

In the case of a fixed-term usufruct, the value is estimated at 2/10 of the value of the entire property for every ten years that the usufruct is granted (this value may not exceed the value of a life usufruct).

Remember that if improvements are made to the property, the usufructuary cannot claim financial compensation when the usufruct ends.

Stamp duty and taxes

• Stamp duty

In Luxembourg, inheritance and gifts made by notarial deed are subject to a stamp duty.* The amount depends on the relationship between the person making the gift and the person receiving the gift, and varies between 1.8% and 14.4% according to the value of the property. This rate is applied to the fraction of the full ownership value according to the scale above.

Example:

Mr Dupont, aged 55, gives his flat in Luxembourg to his son Martin, aged 25. In doing so, Mr Dupont retains usufruct over the flat and Martin becomes the bare owner.

Value of the apartment when the gift is made: €1,000,000
Usufruct value: 5/10 x 1,000,000 = €500,000
Stamp duty: €500,000 x 1.8% (rate for immediate relatives) = €9,000
On top of this, there is also a transaction duty (1%) and a communal surcharge**.

Remember that if the gift involves real estate located outside of Luxembourg, it does not need to be notarised in Luxembourg and is therefore not subject to stamp duty. That said, the property will generally be subject to a gift tax in the country where it is located.

• Tax

The usufructuary and the bare owner are taxed differently because of their different statuses. The property to which the usufruct is attached is recognised under the usufructuary’s assets. They will pay the charges associated with its use (tax on rental income, local taxes, etc.), and can deduct these on their tax return. As the property is not recognised under the bare owner’s assets, they do not need to pay any capital taxes.

Bare ownership ends at the same time as the usufruct – when the usufruct ends, the bare owner becomes the full owner.

When does usufruct end?

Usufruct ends in the following situations:

• • upon the death of the usufructuary;
  • upon expiry of the period for which the usufruct was granted;
  • if the usufructuary also becomes the bare owner of the property;
  • if the usufruct is not used for a period of 30 years;
  • in the event of the full loss of the property covered by the usufruct;
  • if the usufructuary abuses their right (damage to the asset, failure to maintain the asset).

Bare ownership ends at the same time as the usufruct – when the usufruct ends, the bare owner becomes the full owner.

^{*Donations to foundations and university or public school bursaries are exempt from stamp duty.}

^**With some exceptions, property gifts are subject to transaction duties (1% of the market value of the property) and a Luxembourg City communal surcharge (50% of the applicable stamp duty). Stamp duty is halved for wedding gifts or gifts included in a marriage contract. See Planning your estate: what to look out for.