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Everything you always wanted to know about France - from France |
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France - Make your dream come true.
Definition of Usufruct (usufruit, usefruit, usufruite)Usufruct - the right to use and enjoy the profits and advantages of something belonging to another, as long as the property is not damaged or altered in any way (from the Latin, fructus, meaning enjoyment. Fruit is a related word). The usufruct lapses either: 1. When the usufructuary dies. If the heirs die before the usufructuary, their share of the usufruct assets is transferred to their heirs, but remains subject to the existing usufruct. 2. At the end of a fixed term in which case it is like any other asset - it lasts for the fixed term regardless of deaths, the term can be any period. Usufruct originates from civil law, where it is a real right of limited duration on the property of another. The holder of a usufruct, known as the usufructuary, has the right to use and enjoy the property, as well as the right to receive profits from the fruits of the property. The Latin words usus and fructus refer to the rights of use and fruit, respectively, and the English word usufruct derives from these Latin roots. The term fruits should be understood to mean any replenishable commodity on the property, including (among others) actual fruits, livestock, and even rental payments derived from the property. Usufructary - One who has the right and enjoyment of an usufruct. The duties of the usufructuary are, 1. To make an inventory of the things subject to the usufruct, in the presence of those having an interest in them. 2. To give security for their restitution; when the usufruct shall be at an end. 3. To take good care of the things subject to the usufruct. 4. To pay all taxes, and claims which arise while the thing is in his possession, as a ground-rent. 5. To keep the thing in repair at his own expense. === With the proliferation of leaseback properties and offers, people often forget that there are other forms of property investment available in France. There is the traditional buy to let, for those seeking income + capital growth, and there is "propriete nue" for those seeking maximum capital growth opportunities. === Typical application of usufruct in France for Inheritance tax Usufruct (Usufruit) One popular method to reduce the impact of French inheritance tax is for the property owners to give away their property whilst retaining a lifetime right (usufruit) to remain in occupation. The person owning this lifetime right is also entitled to any income (such as rent) that the property may produce. The younger the donors, the more effective is this technique. Example A married couple of under 50 years of age each give half of the freehold of their French house (worth 900,000) to their three children. The value gifted is 50 per cent of 900,000 or 450,000. Each child therefore receives one third or 150,000. However, because the freehold is subject to the lifetime occupational right of the parents, the French tax authorities will reduce the value of the gift by 40 per cent (in relation to the parents age), i.e. to 90,000 each child. There is no tax payable as each child can receive 92,000. After 10 years, the 92,000 limit is available again. Assuming that the house is still worth 900,000, the other half is now given equally to the three children. As the parents are now under 60 years old, the reduction is 30 per cent (not 40 per cent). Each child therefore receives one third x 50 per cent x 900,000 x 70 per cent, i.e. 105,000. The tax on 105,000 per child is 650 a total of 3 x 650 = 1,950. This tax is reduced by 50% as the donors are aged under 65 years i.e. to 875. Thus, the 900,000 has been given to the three children at a cost of just 875. However, the surviving spouse will retain a life interest and can always live in the house. This example is based on the children taking the maximum tax-free allowance from each parent on each occasion. Valuations The usufruct is valued on a sliding scale. Similarly, the value of the freeholder (in the example above, the children receive the freehold) is on the same sliding scale. In French this is known as the nue-propriété. The valuations depend on the age of the life-interest holder. The older the donor, the greater the value of the freehold. Calculations of inheritance or gifts tax are based on the value of the nue propriete. No taxes are payable when the property reverts to the "nue proprietaire" on the death of the life-interest holder. === An Example of usufruct in France for Investment For simple and straight forward capital growth opportunities we can offer properties on a freehold basis where the use -usufruite- has been sold separately, this is not to be confused with a leasehold / freehold situation, there is no lease. Hence you can buy a property at 50% -55% of its present market value and, at the end of the "usufruite" period (for example here, 16 years), regain possession at no cost. All charges and property taxes on these properties are borne by the owner of the usufruite during the duration of the 'usufruite', hence no costs after the original investment, return of the property in good condition, no hassles with management firms or tenants, and as 16 years will have expired no French capital gains tax to pay. You pay 50% of the value but benefit from property inflation working on 100% of the value. Interest only and repayment mortgages available. As an example, take a house with market value of 100,000 euro, ° Cost buying it on the 'Propriete Nue' principle 50,000 euro ° Newbuild, hence legal fees of 2%-3% ............ 1,500 euro ° Total Cost 51,500 euro Possible gains over 16 year period ° Assuming a low figure of 5% annual property price inflation (according to INSEE, the French state statistics office, prices in the region we have developments rose by 65% over a six year period to 2004) ° 5% of 100,000 over 16 years 118,287 ° Total Value of Investment after 16 years 218,287 euro ° Total profit on investment 166,787 euro which represents 9.5% p/a compound interest on the full original investment. There is no French capital gains tax payable on this profit. There are over 2,000 features and articles on this site about French life and living in France. Do browse through our website and please use the advertising links, they help pay for the site. I do try to reply to all mail - Contact Me - most is about property or living in France. I publish comments in this newsletter which I believe are of interest and may help find answers for people wanting to come to France. I hope readers will go to the adverts which help support our overheads. |
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