Deferred accession in usufruct: the bare owner is not taxable before the end of the usufruct

Imagine: you own a plot of land in Mont-de-Marsan. You give the bare ownership (the right to become owner later) to your daughter, but you retain the usufruct (the right to use the land and receive its fruits). Over the years, you build a house on this land. Upon your death, your daughter becomes the owner of the house. But the tax administration demands gift tax on this house, as if you had given it immediately. Is this fair?

The question every owner who has split a property asks: does the construction made by the usufructuary immediately enrich the bare owner? Or must we wait until the end of the usufruct to draw the tax consequences?

The Court of Cassation, in a judgment of 19 September 2012, ruled: the accession provided for in Article 555 of the Civil Code (which makes the owner of the land the owner of the constructions) does not operate immediately in favour of the bare owner. It only occurs upon the extinction of the usufruct. Thus, the bare owner cannot be taxed on the value of the constructions before that time. A decision that protects families and clarifies the tax regime of split ownership.

The facts: a story like many that happen every day

Mr X, a father living in Mont-de-Marsan, wished to transfer his assets to his minor daughter, Laura. In 1995, he gave her the bare ownership of several plots of land, while reserving the usufruct for himself. This means that Mr X retained the right to use the land and receive its income, while his daughter would become full owner upon his death.

On one of these plots, Mr X had a residential house built at his own expense. A few years later, the tax administration considered that this construction constituted an indirect gift in favour of his daughter, Laura. Why? Because under Article 555 of the Civil Code, constructions made on land belong to the owner of the land. However, Laura was the bare owner. The administration therefore considered that the construction had been transferred to her immediately, and demanded gift tax from Mr X (over €80,000) plus penalties.

Mr X contested this adjustment before the court, then the court of appeal, and finally the Court of Cassation. His argument? The construction only enriched his daughter in theory, because she could only enjoy it at the end of the usufruct, i.e., at his death. In the meantime, it is he, the usufructuary, who occupies the house and benefits from it. Taxing the gift immediately would amount to taxing a future and uncertain enrichment.

The case had several twists: the administrative court initially ruled in favour of Mr X, but the court of appeal set aside that judgment. It was ultimately the Court of Cassation that ended the dispute, ruling in favour of the father.

The reasoning of the court — dissected

The judges of the Court of Cassation based their reasoning on a fine analysis of the split of ownership (separation between bare ownership and usufruct). Article 555 of the Civil Code provides that constructions, plantings and works made on land with materials belonging to a third party are presumed to have been made by the owner of the land at his expense. But does this general principle apply immediately in the presence of a split?

The Court answers in the negative. It recalls that the usufructuary has the right to enjoy the property (Article 578 of the Civil Code), which includes the ability to build constructions on it. These constructions, as long as the usufruct lasts, benefit the usufructuary alone. The bare owner only has a right in expectancy: he only becomes owner of the constructions upon the extinction of the usufruct.

Thus, the accession provided for in Article 555 does not operate immediately. It is deferred. Consequently, the bare owner receives no enrichment before the end of the usufruct. The tax administration cannot therefore consider the construction as an immediate gift and demand gift tax on that basis.

The Court also specifies that the liberal intention (intention to give) of the father is not sufficient to characterise a taxable gift, if the beneficiary receives no concrete advantage at the time of the facts. In this case, Laura derived no profit from the construction before her father's death. Taxing this gift would amount to anticipating a future and hypothetical event.

This judgment confirms earlier case law (notably Cass. com., 20 May 2008, No. 07-13.591) and constitutes an important protection for taxpayers who use split ownership.

What this changes for you — concretely

If you are the bare owner of a plot on which the usufructuary has built, you do not have to fear an immediate tax adjustment. The administration cannot tax you on the value of the construction before the end of the usufruct. This is a relief for many families, especially in areas where land is expensive, such as in Mimizan, where a construction can easily exceed €200,000.

Let's take an example: a couple gives the bare ownership of a plot to their two children, while reserving the usufruct for themselves. They have a house of 150 m² built on it, worth €300,000. Without this judgment, the administration could consider that the children have received a gift of €150,000 each (their share in the construction) and demand gift tax from them. Henceforth, they will only be taxed at the end of the usufruct, upon the succession. And even then, if the construction is considered as the usufructuary's own property, it may benefit from allowances.

However, be careful: if the usufructuary dies and the bare owner becomes full owner, the accession occurs at that time. The construction will then be included in the succession, and may be subject to inheritance tax. It is therefore essential to plan the transfer well.

For real estate professionals, this decision clarifies the rules regarding split ownership: when selling a split property, one must distinguish the value of the bare ownership from that of the usufruct, and constructions follow the same regime as the land.

Four tips to avoid this type of dispute

• Draft a clear gift deed: specify that future constructions made by the usufructuary remain his property until the end of the usufruct. This avoids any ambiguity with the administration.
• Keep proof of expenses: invoices, contracts, bank statements. In case of an audit, you will be able to prove that the constructions were financed by the usufructuary, not the bare owner.
• Regularly value the split property: have the value of the bare ownership and the usufruct estimated by a notary or an expert. This will allow you to anticipate future taxes.
• Consult a tax lawyer before undertaking major works: if the usufructuary builds on a plot whose bare ownership belongs to his children, it is better to secure the arrangement to avoid an adjustment.

Further reading: related case law and developments

The Court of Cassation had already addressed this subject in a judgment of 20 May 2008 (No. 07-13.591), where it held that the usufructuary who builds on a split property acquires ownership of the constructions until the extinction of the usufruct. The 2012 judgment confirms and clarifies this solution in tax matters.

Another interesting decision is that of the Court of Cassation of 4 May 2012 (No. 11-13.921), which dealt with the issue of compensation due by the bare owner to the usufructuary for constructions, under Article 555. This case law shows that the judges clearly distinguish between the time of accession (end of usufruct) and the financial consequences between the parties.

The trend is therefore favourable to taxpayers: split ownership is a appreciated transmission tool, and the Court of Cassation protects families against premature taxation. In the future, it is possible that the legislator will further clarify the tax regime, but for now, the rule is stable.

What you absolutely must remember

FAQ:

1. Can I be taxed on a construction made by the usufructuary before the end of the usufruct? No, according to this judgment, accession only operates upon the extinction of the usufruct. The administration cannot demand gift tax before that term.
2. What happens if the usufructuary dies? At that time, the bare owner becomes full owner of the land and constructions. The value of the constructions will be included in the succession and may be subject to inheritance tax.
3. Must I declare the constructions to the tax administration? It is prudent to declare them upon succession, but not before. In case of a gift of bare ownership, mention the existence of future constructions in the deed.
4. Does this rule also apply to plantings? Yes, the same reasoning applies to plantings and other works made by the usufructuary.
5. Can I contest an adjustment already notified? Yes, if you are in a similar situation, you can invoke this Court of Cassation judgment. Consult a lawyer to file a claim.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →