An usufruit is a bit like a UK life interest trust, in that it allows an individual to give the freehold of the property (the nue-propriété) to an individual, but allow someone else (a life tenant) to use the property (to enjoy the usufruit) during their lifetime.
How does it work?
So, typically an individual could give the freehold of their property (the nue-propriété) to their children, and (during their lifetime) retain a right to use the assets. Alternatively on death they could allow their spouse (the life tenant) to live in the property (enjoy the usufruit) for the rest of their life. This may be particularly attractive for individuals who have children from previous relationships, who ultimately want their children to receive their property, but who also want to make provision for their spouses.
It can also be attractive to those who may be concerned about issues such as their spouse’s remarriage after their death, or undue influence. An usufruit does not only have to be made up of immovable property (buildings and land) it can also be of movable property such as a portfolio of investments. The life tenant cannot spend the core assets (the capital) that comprise the usufruit, but they have a right to the income and in the case of real estate, the right to occupy the property. As well as the right to occupy the real estate, with some exceptions the life tenant also has a right to right to let the property and take the proceeds.
How do usufruits arise?
Usufruits can arise either as a result of a lifetime gift, or on death. They can be set up in a will for specific assets, or indeed for the entire estate. Alternatively where no will has been left (called an intestacy) and where the deceased has left children, a spouse can choose whether or not to take a fixed 25% share of the estate, or choose the usufruit of 100% of the estate for their lifetime – after which it passes to the deceased’s children.
Usufruits and taxation
The French tax system favours usufruit, so there may be tax advantages to creating a lifetime usufruit, particularly for those who are domiciled in France, but in a cross-border context this is not necessarily the case and your advisor should be able to explain to you whether an usufruit is advantageous in your particular circumstances.
Can an usufruit be removed?
Unless prohibited by the document creating the usufruit, the owner of the nue-propriété (the freehold) and the usufrutier (the life tenant) can sell or gift their interests Either the person benefitting from the usufruit (the usufrutier) or the children can unilaterally convert the usufruit into a rente viagère, which is a life annuity, usually paid annually. An usufruit can also be terminated by agreement between the parties and in these circumstances the children (or other ultimate beneficiary) can ‘buy out’ the usufrutier. Since 17th August 2015 of course, it is necessary to consider which law would apply to UK and other non-French nationals, but it is possible to structure your will/s to incorporate usufruits to maximise the succession (and potentially taxation) benefits.
Content written and provided by Dan Harris.