One of the very useful legal institutions of the Spanish system, like other civil code jurisdictions, is the usufruct, which has its roots in ancient legal rights over real estate. In common law jurisdictions the usufruct is roughly equivalent to a life interest in certain types of trusts.
This is a very common feature of inheritances in Spain as the forced heirship rules requires that the surviving spouse inherits a proportion of the estate of the deceased spouse. With this type of usufruct, the surviving spouse is entitled to have the use and enjoyment of one third of the assets of deceased spouse. Upon the death of the surviving spouse the assets pass directly to the surviving children of the deceased spouse, without being part of the Will of the surviving spouse.
In effect, the assets subject to the usufruct are split into two interests, the right to use the assets for the duration of the life of the surviving spouse and the remainder which would typically pass to the children. On the death of the surviving spouse the right of usage is extinguished and the children acquire the absolute right to use the assets. The matrimonial home is typically subject to the usufruct system but the system can apply equally to any other inherited assets, including investments and bank deposits.
Spanish forced heirship rules do not usually apply to foreigners as they are entitled, by virtue of Article 9 of the Spanish Civil Code to make their Wills in accordance with the legal system of their nationality.
Nevertheless, a foreigner is perfectly entitled to create a usufruct in their Will in favour of the surviving spouse. This type of usufruct is called a voluntary usufruct as against the statutory usufruct that applies in the case of a Spanish law inheritance.
As the usufruct is fundamental to the Spanish system, the tax system interprets its existence logically and without any complications.
The total value of the assets subject to the usufruct is apportioned between the beneficiary of the usufruct and the remainder beneficiaries, according to the age of the usufruct beneficiary, as the higher of the following:
- 89 minus the age of the usufruct beneficiary on the date of death of the deceased spouse.
Example: Spouse inherits the usufruct of the home and the children inherit the remainder.
|Total value of assets||361.000€|
|Age of the spouse is 65, so value of usufruct is 89-65, i.e. 24%||86.640€|
|Value of remainder||274.360€|
Unless exempt from tax, the spouse and the children would pay inheritance tax on these values according to the inheritance tax rates that apply in the region of Spain. These now have wide regional variations, with some areas like Madrid and Andalucia providing full exemption in the case of inheritances by the spouse and children.
On the death of the surviving spouse, the children would pay a further amount of tax on the inheritance of the usufruct. This is recalculated using the value of the assets on the date of death of the surviving spouse multiplied by the original percentage (i.e. 24% in the above example). This value is then subject to inheritance tax at the average tax rate that applied to the original inheritance.
With the inheritance tax exemptions available in certain regions of Spain, the usufruct has become an attractive way of passing assets to the next generation without complicating matters for the surviving spouse.
This is especially so in the case of second marriages where the children relate to a previous marriage. This is because ,if assets are first inherited by the surviving spouse and then on the death of the surviving spouse passed on the deceased spouse’s children, the tax rates increase very dramatically (one could say ruinously) because the children are not blood related to the surviving spouse.
A voluntary usufruct can be subject to many conditions determined by the person making the Will, i.e. a number of years but by default the following conditions will apply:
- The usufruct rights will last until the death of the usufruct beneficary.
- The usufruct beneficiary is responsible for the costs of maintenance and is required to maintain assets in good condition.
- The usufruct beneficiary must notify the remainder beneficiaries of any extraordinary rapairs The usufruct beneficiary must pay all property taxes.
- The usufruct beneficiary may use the home or rent it to receive income
- The assets subject to the usufruct may be sold with the agreement of the remainder beneficiaries. The usufruct beneficiary can then benefit from the income generated from investing the capital from the sale, but not usually from the capital itself. However, in the case that income generated will be small, the law allows a proportion of the capital to be attributed to the usufruct beneficiary. The proportion is a percentage calculated by taking 89 and deducting the age of the usufruct beneficiary. Example: Usufruct beneficiary is 79 years old so the proportion of the capital is 10%
- The usufruct and remainder beneficiaries can negotiate the termination of the usufruct at any time with compensation payable as agreed.
One of the interesting uses of the usufruct is to leave assets to a charity after the death of the surviving spouse.
A voluntary usufruct does not have be granted by a Will and can be created at any time by deed signed by the owner of the property. This may not be tax efficient as the act of creating a usufruct is regarded as a partial disposal of the property and will trigger a liability to capital gains tax on the usufruct proportional value of the assets.