Usufruct and Wealth Tax: Listed Securities Valued Without Deduction

You live in Hérouville-Saint-Clair and have received a portfolio of shares as a usufruct from your deceased father. While filling in your wealth tax (ISF) return, you wonder: should I declare these securities at their full ownership value or only at the value of my usufruct? The temptation is great to apply a split ownership deduction. However, the Court of Cassation, in a judgment of 20 October 1998 (no. 96-20.128), has ruled: the usufructuary must declare listed securities at their full ownership value, without any reduction.

This decision, made over twenty-five years ago, remains relevant today. It applies equally to shares and listed bonds. Whether you are a usufructuary or a bare owner, the tax consequences are severe. How can you avoid an adjustment? This article explains everything.

Imagine: a retiree from Falaise, Mr. Dupont, holds the usufruct of a portfolio worth €500,000. He applies a 30% deduction and declares €350,000. The tax authority notifies him of an adjustment. He must pay the wealth tax on €500,000, plus penalties. This decision helps anticipate such a situation.

The Facts: An Everyday Story

Mr. X, a taxpayer domiciled in Hérouville-Saint-Clair, holds the usufruct of listed securities. For his wealth tax return, he values these securities by applying a split ownership deduction: he considers that his usufruct is worth only a fraction of the full ownership, and therefore declares a reduced value. The tax authority contests this method. It sends him an adjustment, stating that the securities must be declared at their full ownership value, in accordance with Article 885-G of the General Tax Code (CGI).

Mr. X takes the matter to court, which rules in his favour. But the tax authority appeals. The Court of Appeal upholds the judgment. The case goes up to the Court of Cassation. The dispute concerns the interpretation of two texts: Article 885-G and Article 885-T bis of the CGI. The first provides that assets encumbered with a usufruct are taxable in the hands of the usufructuary at their full ownership value. The second specifies that listed securities are valued according to the last price or the average of the last thirty prices before the tax date.

Mr. X argues that the usufruct only gives him a temporary right, and taxing him on the full ownership amounts to taxing him on the bare ownership he does not possess. The tax authority argues that the text is clear: the usufructuary is deemed to have full ownership of the assets for the wealth tax base. Who is right? The Court of Cassation will decide.

The Reasoning of the Court — Analysed

The Court of Cassation quashes the appeal judgment and rules in favour of the tax authority. Its reasoning is simple: Articles 885-G and 885-T bis of the CGI are clear and admit no derogation. Article 885-G provides that "assets encumbered with a usufruct are taxable for wealth tax in the estate of the usufructuary at their full ownership value." In other words, the usufructuary must declare the total value of the asset, as if he were the sole owner. Article 885-T bis, for listed securities, requires valuation according to the stock market price, without any possible deduction.

The Court rejects Mr. X's argument that the usufructuary only owns part of the asset. It recalls that the legislator intended to simplify the wealth tax base by avoiding the splitting of assets. Thus, it is the usufructuary who bears the tax on the whole, not the bare owner. This tax choice may seem unfair, but it is in accordance with the letter of the law.

This decision is a confirmation of previous case law. It does not innovate, but it forcefully reminds that the texts are to be interpreted strictly. For listed securities, the valuation is made without any split ownership deduction. The Court even specifies that the value to be retained is the last known price or the average of the last thirty prices, at the taxpayer's option, but without reduction.

This reasoning applies to all assets encumbered with a usufruct, not only securities. For a real estate property, the usufructuary must also declare it at its full ownership value. The only exception concerns leased assets, where the usufructuary can deduct the rent received by the bare owner? No, not even that. The rule is absolute.

What This Means for You — In Practice

If you are a usufructuary of listed securities, you must declare them at their full ownership value in your wealth tax return (or IFI since 2018). For example, if you hold the usufruct of TotalEnergies shares worth €200,000, you declare €200,000, not €120,000 (with a 40% deduction). Tax will be calculated on the total.

For bare owners, this decision is rather favourable: they declare nothing, since the usufructuary bears the tax alone. But be careful: if the usufruct ends (by death or expiry), the bare owner becomes full owner and must then declare the asset.

Let's take a concrete example in Falaise. Mrs. Martin, aged 70, has the usufruct of a portfolio worth €300,000. She applies a 30% deduction and declares €210,000. The tax authority adjusts: she must pay the IFI on €300,000, i.e., an additional tax of €500 (average rate of 0.5%), plus late payment interest. If she had declared correctly, she would have avoided this cost.

If you are in this situation, you must check your past returns. The tax prescription period is three years (Article L. 169 of the Tax Procedures Book). If you have wrongly applied a deduction, you can file a claim within the time limits to avoid an adjustment.

Four Tips to Avoid This Type of Dispute

• Always declare the full ownership value: whether you are a usufructuary of securities or real estate, do not attempt to apply a split ownership deduction. The law is clear, and the tax authority systematically checks.
• Keep valuation documents: for listed securities, keep records of stock prices as of 1 January of the tax year. In case of an audit, you can prove the value retained.
• Anticipate the transfer: if you are a bare owner, know that you will only pay the IFI when the usufruct ends. You can plan gifts or sales to optimise your tax situation.
• Consult a tax lawyer: each situation is unique. A professional can help you structure your assets and avoid costly mistakes. A 30-minute consultation may be enough to secure your return.

Further Reading: Related Case Law and Developments

The Court of Cassation reaffirmed this position in a judgment of 13 December 2005 (no. 04-15.123), regarding the wealth tax on split real estate. It held that the usufructuary must declare the full ownership value, without deduction, even for leased assets. This case law is consistent.

Since 2018, the wealth tax (ISF) has been replaced by the real estate wealth tax (IFI), but the split ownership rules are identical. Article 965 of the CGI reproduces the same principle: assets encumbered with a usufruct are taxable in the hands of the usufructuary at their full ownership value. Thus, the 1998 decision remains fully applicable.

The trend of the courts is therefore to make no exception. Taxpayers who try to contest this rule face firm case law. For the future, a legislative reform would be necessary to change the situation, but nothing is on the agenda.

In Practice: What to Do

FAQ:

• Do I have to declare securities of which I have the usufruct for the IFI? Yes, at their full ownership value, without deduction.
• Can I contest an adjustment if I applied a deduction? You can, but your chances are very low given the case law. It is better to regularise voluntarily.
• What are the deadlines to regularise? You have until the end of the third year following the year of the erroneous return to file a claim.
• Does the bare owner have to declare anything? No, as long as the usufruct exists, he has nothing to declare for that asset.
• What if I am a usufructuary and cannot pay the IFI on the full ownership value? Consider selling the usufruct or giving it to the bare owner. Consult a lawyer to study the options.

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