One of the devices used among families in tax planning between generations here in Spain to reduce the effects of gift or inheritance tax is the “Usufruct”. This is the right of a person to have the benefit of the use of property, such as the right to live in the family home, without actually becoming the owner. For example a surviving parent can retain the Usufruct for their lifetime while the “Bare Property” or “Nuda Propiedad” is passed on to children or other descendents. A Usufruct can also be granted for a fixed period.
However disputes can arise over the rights and responsibilities of the owners of the Usufruct and the Bare Property. These rights and responsibilities can be regulated either by a specific written agreement between the owners of the Bare Property and the Usufruct, or if there is no specific agreement they are regulated by articles 467 to 529 of the Spanish Civil Code.
Fundamentally, the beneficiary of a Usufruct has the right to their personal use and enjoyment of the property but not to sell it, rent it out, damage it, or diminish its value in any way other than through fair wear and tear. There are special rules where the property includes agricultural land, or where the Usufruct is for the exploitation of property which becomes depleted over time, such as mines or mineral rights.
Normal repairs and maintenance are the responsibility of the owner of the Usufruct. Article 497 specifically states that the owner of the Usufruct must look after the property as “un buen padre de familia” – a proper custodian – and carry out normal maintenance. Repairs and necessary improvements that go beyond the scope of normal maintenance are the responsibility of the owner of the Bare Property, but if these have to be carried out by the owner of the Usufruct he has the right to reclaim them from the owner of the Bare Property.
Annual taxes and other recurrent fees are also the responsibility of the owner of the Usufruct.
If the property is subject to a mortgage it is for the owner of the Bare Property to pay the mortgage installments, and if the property is repossessed or becomes subject to an embargo the owner of the Bare Property is obliged to compensate the owner of the Usufruct. If the owner of the Usufruct makes payments, say to protect his home from repossession he is entitled to be reimbursed by the owner of the Bare Property.
Insurance of the property can be the joint responsibility of the owners of the Bare property and the Usufruct, but if the owner of the Bare Property does not contribute to the insurance premium the proceeds of any insurance policy are paid to the owner of the Usufruct, but he is obliged to use the money only to restore or rebuild the property.
A Usufruct normally comes to an end when the beneficiary dies, or when the term of years granted for it expires. If a Usufruct is granted to more than one person, such as a mother and father, the Usufruct will only expire when the last beneficiary dies. Where limited companies are used as vehicles for tax planning it is important to bear in mind that a Usufruct cannot be granted for more than 30 years (art. 515).
If the property is abused or misused the owner of the Bare Property can request the surrender of the property by the owner of the Usufruct but in return the owner of the Bare Property must pay to the owner of the Usufruct an annual sum as compensation for the loss of the Usufruct.
It can sometimes happen that the maintenance of a property can be a great burden and in such a case the owner of the Usufruct can renounce it in which case the owner of the Bare Property becomes absolutely entitled to it.
If the property is destroyed or damaged, so that it cannot be repaired then the Usufruct will also come to an end.
The grant of a Usufruct can be a useful way of apportioning the value of property between the generations but it is important to bear in mind that it the rights are personal to the beneficiaries of the Usufruct and that it must correctly documented.