Optimising inheritance tax: How to strategically manage your property's value with usufruct rights
Is a property coming up for inheritance and are you worried about a high tax burden? The usufruct right is an effective tool to legally reduce inheritance tax. We show you how to secure assets through a strategic lifetime gift and make optimal use of allowances.
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The topic briefly and concisely
A usufruct reduces the tax base for inheritance and gift tax by deducting the capital value of the right of use from the property value.
The calculation of the capital value is based on the annual value of use (rent) and an official multiplier, which depends on the life expectancy of the usufructuary.
The 10-year deadline for gifts does not start in the case of a comprehensive reserved usufruct, which is a common and costly mistake.
The transfer of real estate assets often presents heirs with a financial challenge: inheritance tax. Did you know that granting a usufruct right can significantly reduce the taxable base? This approach allows the donor to continue using the property or receive rental income, while ownership is already transferred to the next generation. The key advantage lies in reducing the taxable value of the gift by the so-called capital value of the usufruct. This article explains step-by-step how to circumvent inheritance tax through usufruct rights, calculate the value correctly, and which legal pitfalls, such as the 10-year rule, you need to consider.
The essentials at a glance: Strategic tax advantages through usufruct
When transferring real estate, the right of usufruct reduces the taxable value of the gift, often leading to a tax saving of over 50%. The value of the usufruct is deducted from the market value of the property, allowing personal allowances, such as €400,000 for children, to be used more effectively. The calculation of the usufruct value is based on the statistical life expectancy of the usufructuary and the annual value of usage, for example, rental income. A crucial point is the 10-year period, which, according to a BGH ruling, often does not commence in the case of reserved usufruct, requiring careful planning. Registering the usufruct in the land register is mandatory for it to be legally effective.
Basics of Usufruct: More Than Just a Right of Residence
The right of usufruct, regulated in § 1030 BGB, grants a person the comprehensive right to use a property and derive income from it without being the owner. Unlike mere residential rights, which only permit habitation, usufruct also allows the rental of the property, with rental income belonging to the usufructuary. When transferring a property valued at 800,000 euros, usufruct can significantly reduce the tax assessment basis for gift tax. The usufructuary bears the ordinary maintenance costs and charges such as property tax. For legal validity, notarisation and entry in Section II of the land register are mandatory. An accurate valuation for lifetime gifting is the foundation for all subsequent steps. The distinction between these two rights is fundamental for strategic estate planning.
Calculating Net Present Value: The Formula for Reducing Taxes
The amount of tax savings directly depends on the capital value of the usufruct, which is deducted from the property value. Its calculation follows a clear formula from the Valuation Act (BewG): annual value of use × capital value multiplier. The annual value corresponds to the achievable net cold rent; in the case of own use, a notional rent is used. The multiplier is determined by the Federal Ministry of Finance based on the statistical life expectancy of the usufructuary and depends on age and gender. An example for clarification:
A 65-year-old mother transfers a property with a market value of 700,000 euros.
The annual net cold rent is 24,000 euros.
The multiplier for her age according to the BMF table is 11.718.
Thus, the capital value of the usufruct is 24,000 euros × 11.718 = 281,232 euros.
The taxable value of the gift reduces to 418,768 euros. After deducting the personal allowance of 400,000 euros for her child, only 18,768 euros need to be taxed. Without usufruct, it would be 300,000 euros. An exact market value for the tax office is essential here. This calculation shows how the capital value directly influences the tax burden.
The 10-year period: A costly mistake in retained usufruct
Many property owners believe that a gift becomes irrelevant for tax purposes after ten years. In principle, personal allowances can be used anew every ten years. However, in the case of a gift with reserved usufruct, where the donor retains full use, the 10-year period for the compulsory share supplement claim does not begin. The Federal Court of Justice (BGH) already ruled in 1994 that the donor has not completely relinquished economic control over the property. The asset is only considered fully transferred upon the death of the donor. This means that the property can still be considered in the calculation of compulsory share claims even after more than ten years. This regulation is intended to prevent compulsory heirs from being disadvantaged by such arrangements. To trigger the period, the donor would have to relinquish significant usage rights, which often undermines the purpose of usufruct. The role of an appraisal in an inheritance is further emphasized here. This legal subtlety must be considered in planning to avoid future conflicts.
Usufruct vs. Right of Residence: The Right Choice for Your Goals
The decision between a usufruct and a simple right of residence has far-reaching consequences. The right of residence merely allows the entitled person to live in the property or part of it. For example, if the entitled person permanently moves into a care home, the right of use generally expires. The usufruct, on the other hand, is more extensive and remains even if the person moves out. The usufructuary could then rent out the property and use the income to cover care costs of, for example, €3,000 per month. The capital value of a usufruct is usually higher than that of a right of residence because of the rental option. This leads to a stronger reduction in gift or inheritance tax. A higher capital value can bring the value of the gift below the tax allowance of €400,000. The valuation of a property with a right of residence therefore differs significantly. The choice thus depends on the desired flexibility and financial goals.
Risks and Disadvantages: What You Should Consider Before Deciding
Despite the tax advantages, usufruct rights are not without drawbacks. The new owner has only limited authority over the property. Although a sale is theoretically possible, it is practically difficult because the usufruct remains in place, and few buyers would purchase a property burdened by such rights. Furthermore, the usufructuary is responsible for ongoing maintenance and the payment of public charges like the property tax. Larger renovations, such as re-roofing at a cost of 30,000 Euro, must be borne by the owner. This relationship can lead to conflicts if no clear contractual agreements are made. Accurate valuation is crucial to ensure the usufruct is fair. Uncertainties regarding the correct value can be quickly resolved using the Auctoa Inheritance Tax Calculator. A careful consideration of the obligations is therefore essential before notarisation.
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The right of usufruct is one of the most effective methods to legally reduce inheritance tax on real estate assets. By deducting the capital value from the property value, personal tax allowances can be optimally utilised and the tax burden often reduced by more than 50%. The key to success lies in precise planning and a realistic property valuation. Important aspects such as the calculation of the capital value and the pitfalls of the 10-year period must be considered to achieve the desired effects. Usufruct not only secures assets for the next generation but also the donor’s quality of life. If you need a well-founded basis for decision-making regarding your property, the Auctoa Inheritance Manager offers you a data-driven and neutral analysis. Make an informed decision for your future.
Additional useful links
The Wikipedia article provides a comprehensive definition and explanations of usufruct law.
An article by Haufe explores the inheritance tax aspects of usufruct.
The guide from Sparkasse provides information on passing on real estate, including usufruct.
Finanztip offers practical tips and comprehensive information on usufruct.
The R+V Versicherung explains asset transfer through usufruct.
The Volksbank Raiffeisenbanken provide an article on usufruct in the context of inheritance.
FAQ
Can I sell a property with a registered usufruct?
Yes, the owner can sell the property, but the usufruct right remains for the buyer. This significantly reduces the sale price and makes a sale very difficult in practice.
Does the usufruct extinguish upon death?
Yes, the right of usufruct is a highly personal right. It is not inheritable and automatically expires upon the death of the usufructuary.
Does a usufruct need to be registered in the land register?
Yes, for legal validity, notarisation of the usufruct agreement and the registration of the right in section II of the land register are absolutely necessary.
What taxes are incurred by the usufructuary?
If the usufructuary receives the right free of charge, gift tax may be due. If he receives rental income, he must declare it as income from renting and leasing.
What happens if the usufructuary moves into a care home?
The right of usufruct remains in place. The usufructuary can rent out the property and use the income to cover care costs. In this case, a mere right of residence would often expire.
How can Auctoa assist with a gift subject to usufruct?
Auctoa provides an accurate, data-driven property valuation that serves as the basis for calculating the usufruct value and tax planning. This creates a reliable foundation for your notarial and tax decisions.
