The usufruit

You can pass on your property in your lifetime while keeping the right to use it.

A married couple can, for example, gift the nue-propriété ('reversion' in English law, meaning residual ownership rights) of a property to someone while retaining the usufruit (lifetime use) until the death of the surviving spouse.

If the donor keeps the usufruit of a home then the value of the gift of the reversion is reduced compared to the full value of the property (the younger the donor, the lower the value – fixed by official tables, see right).

Tax payable by the recipient at the time of receiving a nue-propriété gift is lower than if inheriting the same property later, as the value of the gift takes into account the fact the beneficiary does not (yet) have full rights to it. Then, when the usufruitier (life tenant) later dies, the recipient gets the full ownership of the property with no additional tax to pay.

As an example:

• If the donor is 69 and wants to pass the nue-propriété of a house valued at €195,000 to his or her two nephews, the gift is worth €117,000 (discounted because the value of nue-propriété for this age is 40% of the full value)

• Each nephew gets €58,500

• There is a €7,967 tax allowance for nephews, so they are taxed at 55% (nephews' rate) on €50,533 giving tax of €27,793.15 per person.

• By comparison, inheritance tax on half of the house for each nephew would have been €49,243.15.

What is more if giving a gift of usufruit to one's own children, their tax allowance is €100,000 each, renewable every 15 years, so depending on the home value, they may have nothing to pay.

You should note, however, that if you do not survive at least 15 years after making a gift of nue-propriété, the value of such a gift must later be accounted for in calculating allowances against inheritance tax (for example the €100,000 allowance for a child).

Concerns about such arrangements were raised in 2019 by some tax experts due to a rule in the 2019 Finance Act relating to so-called montages juridiques (where someone is deemed to have used a legal strategy so as to pay less tax than would otherwise have been due on a transaction). According to this law additional tax and a fine could be due where an action was found to amount to abus de droit (abuse of law) by the tax authorities.

Under a previous law an arrangement had to be proved to have been undertaken 'exclusively' for tax reduction reasons; now the wording has changed to 'mostly' for tax reasons, applicable from 2020.

However Franco-British honorary avocat Gerard Barron from Boulogne-sur-Mer said that in his view this would be more likely to concern situations where people set up an SCI to hold the property rather than a direct gift of nue-propriété. 

"The gift in this case is shares and the underlying value of shares where usufruit and nue-propriété are dissociated is less than the value of the assets the SCI owns, which reduces the tax base," he said. However he said he would expect the notaire or lawyer setting up the SCI to advise about any such risks.

There had also been speculation that courts would be unlikely to enforce the rule in cases concerning modest family assets, he said. People should nonetheless take professional advice on this point, he added.

Gift of temporary usufruit

It is possible to make a temporary gift of the usufruit of a property or an investment such as a shares portfolio, to one's child to help them finance studies or get them started in working life.

Parents have options for helping their child while obtaining tax advantages - such as keeping them ‘attached’ to the family home for tax purposes, as long as they are under 25 and in full-time education, so as to maintain the extra family quotient half ‘part’ (or whole part if there are three children or more); others use the tax reduction available for paying a child a pension alimentaire (support payments).

A third option is donation temporaire d’usufruit, which can be organised inexpensively by a notaire. The value of a temporary usufruit is 23% of the full value, per period of 10 years – and this can benefit from the usual gift tax allowances, meaning each parent can give €100,000 per child, every 15 years, tax-free. 

So, for example, a couple who jointly own a second home worth €500,000 could give use of it (or the right to rent it out for an income) to their child for eight years and the value of the gift is €115,000 [23% of €500,000] (€57,000 each) and there is no gift tax to pay.

If you have several children, it is best to do this in the context of a donation-partage arrangement, taking account of the others’ interests, as otherwise the child who receives the temporary usufruit gift will have to report the full benefit gained from it when they come to inherit in the future.

As for the parents, if they are wealth tax payers, the item gifted can be ignored for purposes of wealth tax declarations.

The parents will continue to pay taxe foncière on the property but not other taxes related to the home.

If there is a rental income it is the child who declares it for income tax.

Similarly in the case of a shares portfolio, it would be the child who would declare any interest and dividends.

From a tax perspective, these procedures should in theory only be used where a child needs help (ie. not if they are working in a well-paid profession); and it is also possible to give them a pension alimentaire should they still be needy despite the usufruit gift.