Under Spanish law the right of ownership of a property is divided in two different rights, bare ownership and possession. An example, you can rent the property out for a period of time as a landlord. Then you are transferring possession, but you keep the ownership. They are two different legal rights that can be transferred separately.
The usufruct is the right of one person to use and get benefits of a property. Nothing to do with bare ownership. The person with the usufruct does not own part of the property, but has a right to live or use of the property. However, this right does have a value, and it can be transferred for a period of time or for life. Therefore, you can sell, donate (gift) or give as an inheritance the usufruct, but still keep the bare ownership.
An example of a query we received is a lady wanting to know some information if she buys a property with her husband in joint names. If she dies first with 3 children would her husband have the right to stay or use the property until he dies. Or could the children force him to leave and sell it?
In this scenario, if she dies first it rests on how her Will is written (which preferably should be a Spanish Will as makes matters easier and less expensive). If she has written her Spanish Will that she gives her husband the usufruct (right to stay there/use the property the rest of his life, but ownership to the children) then he would have possession until he dies and they would have bare ownership. When he dies then they would have full ownership.
They could not sell the property without his agreement while he was alive and could not let it either. It would require his agreement.
In this scenario when the lady dies, a Spanish probate would need to be done for her half share of the property. Property in Spain does not go automatically to a co-owner on death, as in the UK or Ireland, for example. A probate process must be done to transfer the share of the property (and in this case the usufruct too). This is done by a solicitor, through a deed signed in a Notary and then through the Land Registry and Tax Office. There are several costs involved in this process, which cannot be avoided.
Would the husband have to pay inheritance tax or just a portion of tax as the children will inherit ownership? Inheritance tax depends on the rules of the region at the time someone dies, so it is difficult to predict what it will be in the future. It is not paid by the Estate in Spain but the beneficiaries.
At the moment, for assets in the Valencia region, children have a 100,000€ tax free allowance on their inheritance. Spouses also have this same allowance for inheritance but not for gifts (children do).
When there is an usufruct such as we are describing above to calculate the value of the husband’s usufruct the calculation would be as follows:-
The number 89 less the age of the owner. This percentage is the value of the usufruct of the total value of the property
An example, if the lady owner is 70 years old when she passes away, the value of the usufruct is 19% of the house (89-70=19). If the total value of the house is 100.000 euros, the value of the usufruct is 19.000 euros (19% of 100.000 euros). The value of the bare ownership is the difference: is this case 81.000 euros. Taxes have to be paid in relation to this value.
Thus the husband currently would have a 100,000 tax free allowance in the Valencia region and would pay no inheritance tax on his usufruct. The children would have also 100,000€ tax fee allowances thus the
value of their inheritance of shares of ownership of the house would fall into this. There would be no inheritance tax if the lady dies at the moment with her Will written this way. Only costs of the notary, land registry, solicitor, town hall tax etc.
When the husband dies his right of usufruct ends and there would be no further costs. The children would simply then have full ownership and the right to use and dispose of the property as they wish.