It is important to consider what should happen to one’s estate at an early stage. Real estate is often transferred between parents and children so that the tax-free allowances available every ten years can be utilised. The usufructuary and residential rights are of particular interest for the protection of the parents.
But what does “usufruct” or “right of residence” actually mean? And what is the difference between the two? What about inheritance tax?
First of all: The important difference between right of residence and usufructuary right
While the right of residence only allows personal use, the usufructuary right allows the extensive use or exploitation of the property.
The right of residence
The right of residence is regulated in § 1093 BGB and allows the beneficiary the sole use of the accommodation. The owner is not entitled to use it.
Example: You transfer the house you live in to your child and have a right of residence listed in the land register. The house then belongs to your child, but you then have the right to live in it.
The right of residence can also be limited to only part of a property (such as a room). According to § 1093 (3) BGB, the beneficiary may then share the facilities intended for common use, such as the kitchen, bathroom or garage, even if this does not include the granted areas.
The owner of the property is required to tolerate the exercise of the right of residence. The owner bears all private and public burdens resting on the property, while the beneficiary must ensure the maintenance of the property. Deviating agreements on the distribution of costs are possible within a narrow margin.
The running costs (water, heating, electricity, etc.) are to be carried by the beneficiary.
The right of residence is a personal right and is therefore not transferable. It expires upon the death of the beneficiary. However, the exercise of the right of residence may be granted to third parties if this is agreed or if the beneficiary takes in his or her family (§ 1093 (2) BGB).
In the case of several entitled persons, the rights of the one are still valid after the death of the other.
The right of residence may be granted conditionally or for a limited period, e.g. until a certain age.
The word “usufruct” comes from the Latin usus fructus. Usufruct entitles the usufructuary to draw fruit from the property granted. The usufructuary may decide for himself whether he wants to use the flat himself or whether he wants to rent it out to third parties in order to generate rental income. The usufruct cannot therefore be limited to individual rooms or parts of the building.
The usufructuary right is not only limited to real estate, but can also be granted to companies, gardens, vehicles and other objects as well as to rights (perpetual usufruct, heritable building rights, mortgages…).
While the usufruct entitles the usufructuary to extensive use, the usufructuary may not alter or substantially change the object. Repairs and renovations are only to be carried out to the extent that they are part of the normal maintenance of the property (e.g. cosmetic repairs, garden maintenance…).
According to § 1047 BGB, the usufructuary bears the public charges resting on the property for the duration of the usufruct as well as those charges under private law which were already resting on the property at the time the usufruct was granted.
Extraordinary costs and burdens, e.g. renewal of the heating system or the roof, shall be borne by the owner.
The usufruct is also non-transferable and ends with death (§ 1061 BGB), but can also be limited in time.
Tax and inheritance regulations
Inheritance tax is due if the capital value exceeds the beneficiary’s tax-free allowance.
Regardless of whether the usufruct is actually exercised or not, a certain value can be assigned to it.
If the property is occupied by the owner, the capital value corresponds to the annual value of the saved rental expenses multiplied by the factor to be applied in accordance with the Valuation Act for the corresponding life expectancy of the beneficiary.
If the right of usufruct or right of residence was limited in time, the duration determined by the donor or testator is to be used for the calculation.
Within ten years, the gift is to be taken into account for the calculation of the claim to the compulsory portion (§ 2325 BGB). If applicable, it is also relevant for equalisation pursuant to §§ 2050 ff. BGB. When calculating a claim to a supplementary compulsory portion, the capital value of the usufructuary right is then deducted.
Before you determine the usufruct in the context of a gift, inheritance or sale, the advice of a lawyer is essential.
There are many possibilities to deviate from the legal regulations for both the right of residence and the usufruct. We will be happy to help you find the solution that suits your personal circumstances and to clarify any inheritance tax and compulsory portion claims.
We are also happy to advise you on usufruct (Art. 745 ff. ZGB) in Switzerland!