EDITION: December 2016 - February 2017

Life interest or usufruct

By Armin Gutschick & Anja Sämann-Gutschick
Setting up a life interest or usufruct and inscribing it in the Property Registry is a strategy for capital protection that is used quite frequently by real estate owners in Ibiza, in order to reduce the high taxes otherwise levied. A classic example is where the parents buy a property and put it directly in the children’s name or transfer its ownership to them, establishing a life interest or usufruct for themselves, which allows them to legally use it for life. Each case must be studied to evaluate whether setting up such a right makes sense. In this article, we wish to explain the basic principles that life interests operate under in Spain.

This is a royal right that gives a person the right to use a property, and it is regulated in the Civil Code. It assures the permanent right to use something that belongs to someone else, and is guaranteed by inscribing it in the Property Registry. It can also be established for a limited amount of time, but the one that is important in practice is the life interest or usufruct. The children become the owners, while the usufruct is established in favour of the parents as beneficial owners, for them to use and enjoy the property while they are alive.

For this reason, a life interest or usufruct makes sense, mainly, within family contexts, where there is a significant age difference between the owners and the beneficiaries. The parents become beneficial owners and know they will be able to use the property for their whole lives, while the children, even though they are the bare legal owners of the property, cannot use it freely until after their parents’ death. When the parents pass away, the property is not part of the inheritance and so, unless there are other properties, the costly steps required to accept an inheritance in Spain become unnecessary. It is important to note that even a usufruct right can be foreclosed, contrary to the right to inhabit, which cannot be pawned. Also, usufructuary parents who have passed on the bare property rights to their children will not be able to freely alienate the property, which means they depend on them in this respect.

Given that this beneficial owner also possesses the building, which means s/he holds a similar position to the bare owner, the Law obliges him/her to pay all costs related to the property. This means s/he must see to its maintenance and conservation, keep up to date with utility payments (electricity, water, community charges, etc.) and pay all taxes (IBI, rubbish collection tax, etc.). On the other hand, and contrary to the right to inhabit, which is personal and non-transferrable, a legal usufruct allows the person to rent out the property and receive all the income that provides. The bare legal owner must cover any extraordinary repairs, such as when a leaky roof needs repairing.
Setting up a usufruct is levied by taxes, but these are lower than for other property transfer formulas. A life interest or usufruct cannot represent a value of less than 10% nor more than 70% of the value of the property. The maximum 70% value is assigned when beneficiaries are less than 20 years old, and 10% is assigned when they are older than 79. Thus, after the age of 20, the value of the usufruct drops a percentage point per year. Its value can be calculated using the following formula: Usufruct = 89 minus the age of the beneficiary. For example, the value of the usufruct if the person is 64 years of age will be 25% of the total value of the property (89 - 64 = 25). Therefore, the value of the property will be 75%.•