Fictitious Donation: When the Tax Authorities Reclassify Your Property Transfer

Imagine for a moment: you own a house in Valognes, in the Manche department. Keen to plan your succession, you decide to give a sum of money to your son so that he can buy the bare ownership (the right to possess a property without having the use of it) of your property, while you retain the usufruct (the right to enjoy it and receive the income from it). This is a classic strategy to reduce inheritance tax. But beware: the tax authorities may reclassify this transaction as a fictitious donation, and reintegrate it into your estate upon your death.

This question was decided by the Court of Cassation in a judgment of 23 January 2007 (No. 05-14.403). It held that the regular donation which allows the presumption of fictitiousness of the split of ownership provided for by Article 751 of the French General Tax Code (CGI) to be rebutted is the donation of the bare ownership or the usufruct of the property itself, and not the donation of a sum of money enabling the fictitious purchase of the bare ownership or usufruct thereof, even if that donation is itself made regularly.

Why is this distinction so important? Because it can cost you hundreds of thousands of euros if you do not follow the letter of the law. Let us decipher this decision together, its implications for property owners in Bricquebec, and how to avoid a tax adjustment.

The Facts: A Story Like Many Others

The case concerns a family where the grandmother and father had, by notarial deed of 31 August and 5 September 1989, respectively acquired the usufruct of a property. The exact details of the arrangements are not fully public, but the typical scheme is as follows: a parent gives a sum of money to his child, who uses those funds to buy the bare ownership of a property of which the parent retains the usufruct. On the face of it, everything is regular: the donation of money is notarised, the acquisition of the bare ownership is registered. But the tax authorities see it as a transaction in substance equivalent to a donation of the bare ownership, carried out indirectly.

Article 751 of the CGI provides for a presumption of fictitiousness for splits of ownership carried out by donation of money: if the donor (the person giving) or an interposed person reserves the usufruct of the property acquired with the funds given, the donation of money is presumed fictitious, and the property is reintegrated into the donor's estate. To rebut this presumption, it must be proved that the donation of money is regular and does not conceal a disguised donation of the bare ownership.

In this case, the family challenged the tax adjustment. The case was brought before the courts, up to the Court of Cassation. The central question: can a donation of money followed by the acquisition of the bare ownership by the donee (the person receiving) be considered a regular donation of the bare ownership? The Court of Cassation said no.

The Reasoning of the Court — Analysed

The Court of Cassation relies on Article 751 of the French General Tax Code. This provision states that "are deemed to form part, until proof to the contrary, of the estate of the usufructuary, movable or immovable property belonging in usufruct to the deceased and in bare ownership to one of his presumptive heirs, when this split of ownership was carried out by a donation of a sum of money made by the deceased to the heir, on condition that the latter acquire the bare ownership of those assets." In other words, the law presumes that this arrangement is fictitious: the donor (the usufructuary) is considered the true owner of the property, and the property is reintegrated into his estate.

To rebut this presumption, the taxpayer must show that the donation of money is "regular" and that the transaction does not conceal an indirect donation of the bare ownership. The Court of Cassation specifies here that the only regular donation capable of rebutting the presumption is one that relates directly to the bare ownership or the usufruct of the property. The donation of a sum of money, even if regular, is not sufficient if its purpose is to purchase the bare ownership or the usufruct. In other words, the taxpayer cannot circumvent the presumption by making a donation of money and then acquiring the split of ownership: he must donate the split of ownership directly.

This reasoning is a confirmation of previous case law. It is a strict interpretation of Article 751, aimed at avoiding abusive arrangements. The Court of Cassation rejects the taxpayers' argument that the regularity of the donation of money is sufficient. No, it insists, the donation itself must relate to the split right.

Why this strictness? Because the tax authorities have a mission to combat tax evasion. If a donation of money followed by a purchase of bare ownership were systematically validated, it would suffice to go through this double act to transfer a property without paying transfer taxes. The Court closes this door.

What This Means for You — Practically

If you are a property owner in Bricquebec or elsewhere, this decision has direct consequences for your transfer strategy. You cannot simply give money to your children to buy the bare ownership of your house, and then retain the usufruct. The tax authorities will reclassify the transaction and the property will be reintegrated into your estate, increasing the inheritance tax accordingly.

Let us take a concrete example: you own a house valued at €300,000 in Valognes. You give €150,000 to your daughter, who buys the bare ownership (generally 50% of the value, i.e. €150,000), and you retain the usufruct. Upon your death, if the authorities consider the donation of money to be fictitious, the full €300,000 will be included in your estate. If you are in a 20% inheritance tax bracket, that represents an additional €60,000 to pay. Not to mention late payment interest and penalties.

For tenants, the impact is indirect: this type of arrangement can affect the owner's ability to transfer the property, and therefore rental stability. For buyers, be vigilant if you are buying a split ownership property: check the title deed. A recent split by donation of money may be reclassified after death, leading to succession complications.

If you are in this situation, you must absolutely consult a specialist lawyer before carrying out such an arrangement. The safest solution is a direct donation of the bare ownership or the usufruct, by notarial deed, without the intermediary of a sum of money.

Four Tips to Avoid This Type of Dispute

• Donate the split directly: If you wish to transfer a property while retaining the usufruct, make a donation of the bare ownership itself, not a donation of money. The notarial deed must mention the property, the value of the bare ownership, and the usufruct rights.
• Comply with Article 751: If you opt for a donation of money, ensure that the purchaser of the bare ownership is not a presumptive heir (your child), or that the donation of money is not linked to the acquisition. But this is risky. Prefer a direct donation.
• Have the property valued by an expert: The value of the bare ownership and the usufruct depends on the age of the usufructuary (tax scale). An inaccurate valuation may attract the attention of the tax authorities. Use a notary or a lawyer.
• Keep all deeds and supporting documents: In the event of an audit, you will have to prove the regularity of the transaction. Keep the notarial deeds, bank statements, and any document showing that the donation of money was not a mere sham.
• Consult a lawyer before any arrangement: Each situation is unique. A professional will advise you on the best strategy, whether it be a simple donation, a cross split of ownership, or a property investment company (SCI).

Further Analysis: Related Case Law and Developments

This decision is part of a consistent line of the Court of Cassation. In an earlier judgment of 27 November 2001 (No. 00-15.293), the Court had already held that a donation of a sum of money followed by the acquisition of the bare ownership by the donee could not rebut the presumption of fictitiousness if the donation of money was made on condition of acquiring the bare ownership. The 2007 judgment confirms and clarifies: even without an express condition, if the link is established, the presumption applies.

The trend of the courts is therefore towards strictness. The tax authorities, for their part, are increasing audits on these arrangements, especially in areas where property is expensive such as the Côte d'Azur or Paris. In 2024, the Conseil d'État reminded that the burden of proof lies with the taxpayer (CE, 12 February 2024, No. 467892).

For the future, it is likely that the case law will remain unchanged, unless the legislature modifies Article 751. But no reform is in sight. The only solution for taxpayers is to scrupulously follow the forms: donation of the bare ownership or the usufruct, not of money.

Frequently Asked Questions

• Can I give money to my child for them to buy a property of which they will be full owner, without a split of ownership? Yes, no problem. Article 751 only applies if you retain the usufruct or if a split of ownership is created.
• What should I do if I have already made a donation of money followed by a purchase of bare ownership? Consult a lawyer immediately. You may be able to regularise the situation by a rectifying deed or a supplementary donation. But the risk exists.
• What are the limitation periods for a tax adjustment on this basis? The tax authorities have six years (recovery period) from the triggering event. For a donation, the starting point is death.
• Can I donate the usufruct to my child and keep the bare ownership? Yes, it is possible, but Article 751 only covers the case where the usufructuary is the donor. If you donate the usufruct, you are not the usufructuary, so the presumption does not apply.
• What is the advantage of this arrangement compared to a simple donation? The split of ownership allows you to transfer the property while retaining the income (rent). But if you want to transfer at a lower tax cost, a direct donation of the bare ownership is safer.

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 →