What is France's usufruit rule for property and how can people benefit from 

Usufruit is a French legal term meaning the right to use and benefit from a property (whether living there or earning rental income from it) while not owning the property itself.

It means that a property owner can pass on ownership of a house to someone else but still retain the right to live there themself for their lifetime. 

This legal arrangement can be particularly useful for couples wishing to gift the nue-propriété (the residual ownership rights or 'reversion' in English law) of a property to others while retaining usufruit until the death of the surviving spouse.

How usufruit works

The nue-propriété is essentially the right to inherit the property once the usufruitier (the person retaining the right to use the property) passes away. 

When a property owner retains usufruit, the value of the gift of nue-propriété is lower than the full market value of the property.

The reduction is based on the donor’s age, with younger donors gifting a lower percentage of the market value. 

This is because the value of the gift reflects the fact that the recipient does not yet have full ownership rights. 

Once the usufruitier passes away, the recipient gains full ownership of the property without having to pay additional tax.

When the recipient receives the nue-propriété gift, the tax payable is therefore lower than if they were to inherit the property later. 

For example, if a 69-year-old donor wishes to gift the nue-propriété of a house worth €195,000 to their two nephews, the value of the gift is reduced to €117,000. 

The nephews would each receive €58,500, and after applying a tax allowance for nephews of €7,967, they would be taxed at 55% on €50,533, resulting in a tax liability of €27,793.15 each.

In comparison, inheritance tax on half the value of the property would be €49,243.15 for each nephew, making the gift of nue-propriété a more tax-efficient option.

Read more: Understand France's inheritance tax rules and nue-propriété

Tax benefits for children

Gifting nue-propriété can be even more advantageous when made to children. 

French tax law offers a €100,000 tax-free allowance for gifts made to children, renewable every 15 years. 

This means that, depending on the value of the property, children may be able to receive the gift without incurring any tax liability. 

Legal considerations and potential tax risks

While gifting nue-propriété can be tax-efficient, there are legal concerns to consider. 

In 2019, tax experts raised concerns over so-called montages juridiques - legal strategies designed to reduce tax liabilities. 

Under the 2019 Finance Act, a new rule was introduced stating that if a gift or transaction is deemed to be primarily for tax avoidance, the tax authorities may impose additional tax or fines for abus de droit (abuse of law).

Previously, arrangements had to be shown to be made ‘exclusively’ for tax reduction purposes, but the law now states that arrangements made ‘mostly’ for tax reasons may attract scrutiny. 

Although this is more likely to affect complex property arrangements such as Société Civile Immobilière (SCI), where the gift is given as shares in the assets the company owns, there is still a risk that the arrangement may be challenged by the tax authorities.

Gerard Barron, a Franco-British honorary advocate, suggests that this law is most likely to be relevant in situations involving SCI structures rather than direct gifts of nue-propriété. 

However, he recommends that individuals seek professional advice to ensure compliance with French tax law and avoid any future risks.

Usufruit value based on donor's age

The value of usufruit retained by the donor of the nue-propriété decreases with age. For instance:

• Donor under 21: usufruit is valued at 90% of the property value, leaving just 10% of the full value for nue-propriété gifted

• Donor under 31: 80% usufruit, 20% nue-propriété

• Donor under 41: 70% usufruit, 30% nue-propriété

• Donor under 51: 60% usufruit, 40% nue-propriété

• Donor under 61: 50% usufruit, 50% nue-propriété

• Donor under 71: 40% usufruit, 60% nue-propriété

• Donor under 81: 30% usufruit, 70% nue-propriété

• Donor under 91: 20% usufruit, 80% nue-propriété

• Donor over 91: 10% usufruit, 90% nue-propriété.