The “Usufruct” – an intelligent succession plan

Already when purchasing a property in Mallorca, one has to consider the inheritance law and the tax law aspects. Necessary, is the succession plan and the regulations do not only contribute to the later legal “peace” to avoid disputes among the heirs; they are also a means of a forward-looking tax strategy. Particularly popular are models in which the older generation already transfers the property to the younger generation, but – with regard to future “angry” daughters-in-law or sons-in-law – “do not yet completely give up the sceptre”. One such possibility is, for example, the creation of a “usufruct” right, which is particularly well known and popular in the European legal system.

How the “Usufruct” rights work

The older generation provides the younger generation e.g. by donation in Germany (taking into account the very high gift tax allowances – eg. every 10 years per child and per parent 400,000 €) of available funds, with which the children buy the Mallorcan property and for the older generation a lifelong usufructuary right (usufruct vitalico) ordered. The younger generation will be ” sole owners”, the older generation (usufructuctuaries), on the other hand, have the lifelong rights of the property and to live in it as well as the beneficial owners. It is true that the sole owners can sell or encumber the property – but who buys a property that they cannot use? The details of the Spanish usufruct right is
described in Art. 467 ff. CC (Spanish Civil Code). Since the usufructuary is the beneficial owner of the property and he alone is entitled to the usufruct (he can, for example, also rent it out without asking sole owner), he must also bear all costs of the property (property taxes, consumption costs, maintenance costs, contributions to the owners’ association). Individual agreements between owner and usufructuary are permitted.

The usufruct right is entered as a real right of use in the land register, whereby both the order of the right and its expiry are taxable. The following rule applies to the valuation when ordering and deleting: In the case of lifelong usufruct, the value of usufruct decreases in inverse proportion to the age of the usufructuary on the basis of 70% of the value of full ownership for a person who is under 20 years of age. For every year of life that the usufructuary is over 19 years old, the 70% is reduced, but only up to a minimum of 10%.

Calculation example: When the usufruct is ordered, A. is 59 years old – i.e. 40 years over 19. The usufruct value of 70 % is reduced to 30 % of the value of full ownership at the time of ordering. If A. dies 20 years later, the usufruct value is reduced by a further 20% to the minimum value of 10%. Inheritance tax is payable on this 10 % – reduced by Spanish allowances – in Spain.

This model shows that there are – legal – intelligent succession arrangements that help to reduce or avoid inheritance tax. For this reason, the advice of a specialized lawyer or tax advisor should always be sought before the purchase.