Tax treatment of a donation of bare ownership of immovable property with retention of usufruct
With regard to usufruct of immovable property – that is, the real right of the usufructuary to use and enjoy another’s property whilst preserving its integrity – we note that it is non-transferable and extinguishes upon the death of the usufructuary.
In the event that the heir acquires bare ownership of immovable property by notarial deed (such as a gift, parental gift or transfer for valuable consideration) whereby the usufruct is retained by the donor/transferor, and the donor/ usufructuary/transferor dies at a later date, bare ownership and usufruct are automatically merged, and the heir acquires the right to full ownership of the property.
With regard to the relevant tax liability arising upon the merger of bare ownership of immovable property with usufruct, upon the death of the usufructuary, we note that bare ownership is subject to tax at the time of its consolidation with the usufruct, and the tax is calculated on the value of full ownership at that time. However, bare ownership of immovable property is subject to tax in the following cases:
a) Where the heir to whom bare ownership passes already holds the usufruct under a separate title.
b) Where it passes to another heir following the renunciation of the inheritance by the person holding the usufruct under a separate title.
c) When it is transferred by the bare owner in return for consideration. The distribution of bare ownership is also deemed to be a transfer in return for consideration.
d) When the bare owner acquires the right to exercise the usufruct.
e) When the bare owner, by means of a declaration submitted to the head of the relevant department of the Tax Authority at any time, requests the immediate taxation of the bare ownership. In this case, the time of taxation is the time of submission of the declaration.
Consequently, in the event of a transfer of bare ownership by way of a gratuitous legal act, with a corresponding retention of the life interest, and provided that immediate taxation is requested, the entire tax liability is exhausted, with the result that no tax is due at the time the usufruct is merged with bare ownership.
* The information is accurate to the best of our knowledge as at the time of writing. We have no obligation to update it. We accept no responsibility against any third party who is not a client of the firm and has not signed the terms of our engagement.