What is Usufruct (Usufruit) in French Real Estate?

Posted on 30th November, 2024

Usufruct (usufruit in French) is a civil law term that refers to the right to use and enjoy the benefits and fruits of someone else’s property without damaging or altering it as long as it is used for its intended purpose. This concept is commonly found in civil law systems and is rooted in Roman law.

How Does Usufruct Work?

The individual who holds the usufruct, known as the usufructuary, has the right to live in the property, rent it out, and collect any income generated. However, the usufructuary does not own the property and cannot sell or make any changes or alterations without the owner’s prior consent.

Does It Have a Time Limit?

Usufruct can be established for a specific period or the lifetime of the usufructuary. It can be created through a contract, a will, or a law. Once the usufruct ends, complete ownership and control of the property revert to the original owner or their heirs.

How is Usufruct Used?

Usufruct is often utilised in estate planning and inheritance to provide for a surviving spouse or other family members while ensuring the property is preserved for eventual transfer to heirs.

Ownership of a property can then be split as follows:

• the usufruct with the right to use the property and receive the income from it; and
• the bare ownership of the property (nue-propriété). The bare owner holds the property for the benefit of the usufructuary with remainders to themselves. This is similar to a freehold subject to a lease (in this case, the usufruct).

Establishing a usufruct is a common way of holding assets in France, particularly amongst members of the same family. It can be very tax-efficient.

For French tax purposes, the respective value of the bare ownership and usufruct depends on the age of the person owning the usufruct.

The Potential Tax Benefits

The split between usufruct and bare ownership is advantageous from a French tax standpoint, as on the death of the person owning the usufruct, no French inheritance tax (IHT) is payable on that asset, and the bare owner becomes the outright owner of the property (or their share of it).

It is very common for parents to give their children the bare ownership of a property to use the €100,000 French IHT tax-free allowance between parents and children. As the bare ownership value is based on the age of the person having the usufruct and on the basis that no further tax is payable on the death of the person with the usufruct, it is possible to transfer the ownership of a property to the next generation with limited French IHT exposure, if any. This also ensures that the property’s value growth is outside French IHT.

Usufruct and UK Home-Owners

HMRC normally treat a usufruct as an interest in possession trust for UK IHT purposes, with the owner of the usufruct being the life tenant of the trust. This treatment often makes usufructs inefficient for tax purposes.

For example, because of the usufruct arrangement, the parents in the above example would have reserved a benefit in the property so that the usufruct would be included in their estate for IHT purposes. This is provided the parents are domiciled or deemed domiciled in the UK on death. As the usufruct arrangement was created precisely to avoid an IHT charge on the parent’s death, the UK treatment of usufructs makes the whole arrangement inefficient for IHT purposes.

For Expert Tax Advice

Our legal expert, François Mouniélou, specialises in taxation, wealth tax, succession, etc… for property owners and investors in France. François has extensive knowledge of the French tax system. Do not hesitate to contact him directly for more information. If you are starting the search for your own dream property, please take a look at our guide to learn about buying a property in France.

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