THE USUFRUCT: A LEGAL WAY OF PAYING LESS INHERITANCE TAX
The Usufruct in Spanish Law:
The right of usufruct has its origin in the Roman law. In the Spanish law it is mainly regulated in the Civil Code (articles 467 to 522).
We can define the usufruct as the right of enjoyment enabling a holder (“usufructuary”) to use and derive profit or benefit from a property that is titled to another person (in Spanish “nudo propietario” which literally means "naked owner").
Basically the holder of a usufruct has the right to use (usus) the property and enjoy its fruits (fructus).
Main rights of the usufructuary:
- Right to use and enjoy the property.
- Right to receive the fruits of the property. Fruit refers to any renewable commodity on the property, including (among others)actual fruits, livestock and rental payments derived from the property.
- Right of disposal over the usufruct. The usufructuary can sell and rent the very same right of usufruct.
Main duties of the usufructuary:
- To keep the property without destroying or damaging it (with the exception of the usufruct over consumables).
- To give back the property at the end of the usufruct.
In Spain the usufruct is quite important in inheritances. Let’s see why:
Under Spanish Law an indefeasible portion of the estate known as “legítima” passes to the deceased's issue (or even to the deceased’s parents if there is no living issue).
The surviving spouse has also a right of usufruct over a share of the deceased’s estate (which is called “usufructo viudal”). The share of the spouse’s usufruct depends on if there is or not living issue or living parents of the deceased. The rest of the estate is free to dispose of by will.
Let’s see now the most common case: a married couple with children.
In this case and according to the Civil Code:
- The children have by law the right over two thirds of the deceased’s estate. There are nuances on this, but it is not worth it to get to the bottom of this matter.
- The surviving spouse has by law the right of usufruct over one of the former two thirds (“usufructo viudal” or “spouse’s usufruct”).
- The remaining third of the estate is free to dispose of by will.
The normal case is that the deceased spouse wants to leave to the surviving one as much as possible of the estate. So a Spanish spouse will leave by will to the other the spouse’s usufruct (“usufructo viudal”), plus the free third of the estate.
But there is a formula which is used to improve the situation of the surviving spouse, and in fact that is the formula which appears in the most of the wills made by a married couple with children: the spouses bequeath to each other, for life, the universal usufruct of the inheritance, appointing the children as heirs.
Imagine that the inheritance of the deceased spouse (who has made a will in the former terms) is a house. In this case the surviving spouse can, for life, use the house, live in the house, rent the house (keeping the rental payments), etc. The only restriction is that the surviving spouse cannot sell the house. The surviving spouse can sell the right of usufruct but not the property itself. To sell the house, the surviving spouse will need the signature of the “naked owners”, i.e. the children. On the other side, the children can sell the house, but the buyer must respect the usufruct. Once that the surviving spouse dies too then the children will consolidate the “full ownership” over the house, i.e. the children will be the owners of the house at all the effects.
It is true that in some cases the value of the usufruct for life of all the assets can be higher than the value of the “spouse’s usufruct” plus the free third of the estate. Usually this is not a problem because in the most of the cases the children respect the deceased parent’s will. In addition in the Spanish wills it appears a complementary formula that says that if one of the children does not respect the will of the deceased parent, then his/her share of the inheritance will be reduced to the “legítima estricta”, i.e. the proportional share of only one third of the estate. The second third will accrue the share of the respectful children.
What is the importance of this way of making a will when talking about British citizens with assets in Spain?
Well, it can be important for two reasons:
The Civil Code (article 9.1) says that the national law of a person will rule the inheritance. Keeping it simple this means that a British citizen can do a will in Spain in the same terms that in UK, i.e. that the British citizen is not subject to the Spanish system of “legítimas”. This way for example, a British husband can appoint his wife as heir and he has no need to make any provision for the children. Due to that it is very common to see Spanish wills made by British citizens with formulas like this one: “I appoint my wife as universal heir. For the case that my wife predeceases me, then I appoint my children as universal heirs by equal shares”. In the past there was no problem at all with these kind of provisions.
Everything was clear and easy regarding the inheritance of British citizens with assets in Spain. But then the Spanish High Court pronounced a sentence on 23rd September 2002 which applied for the first time to an English inheritance the Spanish system of “legítimas”. The Spanish High Court said that the Spanish law was applicable to an English citizen’s inheritance because this citizen was resident in Spain and he had only real estate assets in Spain.
So since this sentence, if a British citizen is resident in Spain and has only assets in Spain, then the Spanish law could be applicable to the inheritance with its system of “legítimas”, i.e. two thirds of the property should go by law to the children.
Notwithstanding that sentence of the High Court, the Spanish authorities are not going to control the application of the Spanish law case by case. The Spanish law should only be applicable if the children challenge the parent’s will at Court and the Court decides that in that particular case the Spanish law must be applied (with the “legítimas”).
It is true that the former case does not happen very often, but it can happen. A way of avoiding this disagreeable situation with the heirs (surviving spouse and children) will be to make a Spanish will appointing the children as heirs but bequeathing the spouse, for life, the universal usufruct of the inheritance, i.e. exactly as the Spanish people married and with children use to do. This would be one reason to make a will in these terms.
Let’s see know two different situations:
1) A British citizen who is not resident in Spain and in addition has real estate assets in UK.
2) A British citizen resident in Spain and whose only asset is a house in Spain. This British citizen is convinced that his children will respect his will so he wants to leave his house to his wife.
It is true that in those two cases that British citizen can make the will in the terms that he wants. In the first case the English law should be applicable to the inheritance and in the second case too (unless the children challenge the will at Court).
But in the most of the cases it could be still interesting making a will as a Spanish citizen married and with children would do, TO PAY LESS INHERITANCE TAX.
The inheritance tax is a progressive tax. This means that the higher is the value of the inherited assets, the higher is the percentage of tax to be paid.
But if the testator leaves a property to the children but bequeathing the usufruct to the spouse, then the value of the property is someway “split”. Neither the spouse nor the children will receive the 100% of the value of the property. The wife will pay inheritance tax for the value of the “usufruct” and the children will pay inheritance tax for the value of the “naked ownership”. As the value of the “usufruct” is less than 100% and the value of the “naked ownership” is less than 100%, the percentage of inheritance tax to be paid by both the spouse and the children will be lower than the percentage that either the spouse or the children would pay if they received the “full ownership” of the property, i.e. if they receive the 100% of the value of the property.
So we can see that there are two advantages for making a will appointing the children as heirs but bequeathing the spouse the usufruct of all the Spanish assets for life:
1) This system is fully respectful with both the Spanish and the British law and, in general, it is a good way of defending the economic interests of both the surviving spouse and the children.
2) It is a perfectly legal way of reducing the inheritance tax to be paid by the surviving spouse and the children.
Salvador Manzano (Solicitor)
salvadormv@serveco.es