Joint Usufruct for Surviving Spouse: ISF Exemption Upheld

Imagine: you have just lost your spouse, and you learn that the usufruct (right to use property and receive its income without being the owner) that you had over the family home in Hyères is subject to ISF (wealth tax, now IFI). A cold shower. Yet another usufruct, provided for by a different legal provision, escapes this tax. What is the difference? And how do you know if you are affected?

The question every owner asks: is the usufruct I hold over my deceased spouse's property exempt from ISF? The answer, as often in law, depends on a detail: the legal source of this usufruct.

In a judgment of 22 February 2005 (No. 02-18.625), the Court of Cassation ruled clearly: the usufruct provided for in Article 1094 of the Civil Code (in its version prior to the 2001 reform) does not qualify for the ISF exemption, unlike that of Article 1094-1. A technical distinction with serious financial consequences. Analysis.

The Facts: A Common Story

Mr X, owner of a villa in Brignoles, died in 1998, leaving his wife and two children from a first marriage. The couple were married under the legal community property regime. By will, Mr X bequeathed to his wife the usufruct of all his property, in accordance with Article 1094 of the Civil Code (donation between spouses known as "in usufruct").

Mrs X, now alone, declared her wealth to the tax authorities. She included the villa but considered that the value of her usufruct was exempt from ISF under Article 885 G of the General Tax Code (CGI). This provision provides that property burdened with a usufruct is taxed in the name of the bare owner (the one who has ownership without use), not the usufructuary. But the tax authorities refused: the exemption does not apply to the usufruct arising from Article 1094.

The dispute began. Mrs X challenged the assessment before the Toulon High Court, then the Aix-en-Provence Court of Appeal. She lost at first instance but won on appeal: the court held that Article 885 G does not distinguish based on the origin of the usufruct, and the exemption should apply. The tax authorities appealed to the Court of Cassation.

The Court's Reasoning — Dissected

The Court of Cassation set aside the appeal judgment. Its reasoning boils down to one sentence: the legislature "expressly dissociated the treatment of the usufruct resulting from Article 1094 of the Civil Code from that resulting from Article 1094-1 of the same Code." In other words: Article 885 G of the CGI, in its wording resulting from the law of 29 December 1989, only covers the usufruct provided for in Article 1094-1 (that of the surviving spouse in the absence of a will), not that of Article 1094 (donation between spouses by will).

The legal basis: Article 885 G a) of the CGI provides that "property burdened with a usufruct is included in the estate of the bare owner" for the calculation of ISF. An exception is made for the usufruct of the surviving spouse provided for in Article 1094-1. But not for that of Article 1094. The Court recalls that the texts are clear: tax law is strictly interpreted. One cannot extend an exemption to a case not provided for.

Mrs X's arguments: usufruct is a real right, whatever its source. Why treat two identical usufructs differently? The Court replies: because the law does so. The tax authorities argued that Article 1094 allows a spouse to bequeath the usufruct to his/her spouse by will, while Article 1094-1 gives the surviving spouse a legal right, without a will. The legislature intended to favour the spouse who received nothing, not the one who already benefited from a gift.

This decision confirms consistent case law: the tax advantage is reserved for the surviving spouse who was not gifted by will. A reversal? No, a clarification.

What This Means for You — Practically

Landlord owner in Hyères? If you received a usufruct by will from your spouse (Article 1094), you will be subject to ISF/IFI on the value of that usufruct. Example: a villa valued at €500,000, a usufruct at 60% = €300,000 taxable. Conversely, if the usufruct stems from Article 1094-1 (succession without a will), the exemption applies.

Tenant or buyer? You are not directly affected, but if you buy property burdened with a usufruct, check the origin of that right. A usufructuary exempt from IFI may be more inclined to sell their right, as they have no tax advantage in keeping it.

If you are in this situation, you must anticipate: the tax authorities can assess you even several years later. The reassessment period is 3 years (or even 10 years in case of omission). Possible amount of reassessment: several tens of thousands of euros in tax, plus 10% late payment interest and 40% penalties for deliberate failure.

In Brignoles, a client had to pay €45,000 in ISF on a usufruct bequeathed by will, whereas he thought he was exempt. Once the decision was known, it was too late to challenge.

Four Tips to Avoid This Type of Dispute

• Check the origin of your usufruct: ask your notary whether your right comes from Article 1094 (will) or 1094-1 (law). The distinction is crucial for your tax returns.
• Declare your usufruct for IFI: even if you think you are exempt, declare it. The tax authorities can verify. In case of doubt, attach an explanatory note.
• Consult a tax lawyer before accepting a donation between spouses. A life usufruct can be replaced by an annuity or a quasi-usufruct to avoid ISF.
• Plan the transfer: if you are an owner, consider bequeathing the bare ownership to your children while retaining the usufruct. This can reduce ISF and inheritance tax.

Further Reading: Related Case Law and Developments

The Court of Cassation had already ruled similarly in 2002 (judgment No. 00-19.876): Article 885 G only applies to the legal usufruct of the spouse, not to the contractual usufruct. This case law has been consistent since the 1989 law.

Since 2005, the trend has strengthened: the 2012 Finance Act abolished ISF and replaced it with IFI (real estate wealth tax) in 2018. But the rule remains the same: Article 965 of the CGI reproduces the distinction. The courts continue to apply this solution.

For the future, the legislature could unify the regime, but no reform is in sight. In the meantime, caution is advised.

Frequently Asked Questions

1. What is the difference between Article 1094 and 1094-1 of the Civil Code? Article 1094 allows a spouse to bequeath the usufruct of their property to their spouse by will. Article 1094-1 automatically gives the surviving spouse, in the absence of a will, a usufruct over the deceased's property (within the limits of their legal rights).
2. Can I challenge a tax assessment if my usufruct comes from Article 1094? Yes, but your chances are slim. The case law has been consistent since 2005. It is better to negotiate a reduction of penalties for good faith.
3. What deadlines do I have to regularise my situation? The reassessment period is 3 years from the declaration. If you have not declared your usufruct, you can file a spontaneous corrective declaration to limit penalties.
4. Is IFI affected in the same way? Yes, Article 965 of the CGI reproduces the same distinction. A usufruct arising from Article 1094 is subject to IFI, unlike that of Article 1094-1.
5. What should I do if I am a bare owner of property burdened with a usufruct? You must declare the bare ownership for IFI, but without the usufruct. Your share is generally lower. Consult a lawyer to assess your situation.

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 →