Usufruct and Bare Ownership: The Tax Trap That Awaits Donors (Cass. civ., 7 Dec. 1993)

Imagine: you live in Sallanches, in a nice family house. Your father, anxious to organise his succession, makes a gift to you of the bare ownership of his flat in Cluses, while reserving the usufruct for himself. You think that gift tax will be calculated on the value of the bare ownership on the day of the gift, taking into account the reserved usufruct. But the tax authorities decide otherwise: they consider that the usufruct is only 'opened' upon your father's death, and recalculate the tax accordingly. Result: a painful tax adjustment.

Hundreds of owners have experienced this situation. The question is simple: at what point is the usufruct reserved by the donor legally 'opened'? On the day of the gift, or on the day of death?

The Court of Cassation, in a ruling of 7 December 1993 (No. 91-20.864), has decided: the usufruct reserved in the deed of gift is considered to have been opened on the day of the gift. A victory for taxpayers, which avoids an unfavourable double calculation. Analysis.

The facts: a story that happens every day

Mr X, a retiree from Sallanches, wishes to transfer a property located in Cluses to his two daughters, Marie-Anne and Sylvie, during his lifetime. To do this, he opts for a partition-gift: he gives the bare ownership of the flat to his daughters, while reserving the usufruct for himself. In practice, the daughters become owners of the 'walls' (bare ownership), but their father retains the right to live in the property or to receive the rent from it until his death.

The deed of gift is signed at the notary's office. To calculate the gift tax, the notary applies the usual rules: he values the bare ownership according to the age of the usufructuary (the father), in accordance with the tax scale provided for in Article 762-I of the French General Tax Code. The tax is paid on this basis.

But a few years later, the tax authorities carry out an audit. They consider that the usufruct reserved by the father is not 'opened' on the day of the gift, but only on the day of his death. Consequently, they consider that the gift related to full ownership, and not only to bare ownership. They demand additional tax, plus late payment interest.

The daughters challenge this adjustment before the court, then the court of appeal. Alas, the lower courts rule in favour of the tax authorities: in their view, as long as the father is alive, the usufruct is not 'opened', because it has not yet ended. The daughters appeal to the Court of Cassation.

The Court of Cassation quashes the appeal ruling: it recalls that, under Article 762-I, paragraph 2, of the French General Tax Code, for the settlement of transfer taxes on gifts, only usufructs opened on the day of the transfer are taken into account. However, in a gift with reservation of usufruct, the usufruct is established in the deed of gift itself: it is therefore deemed to have been opened on that date. The court of appeal violated the law.

The reasoning of the court — broken down

The issue is technical but crucial. Article 762-I of the French General Tax Code sets out the rules for valuing bare ownership in the presence of a usufruct. Its second paragraph provides that, for the calculation of gift tax, only usufructs 'opened on the day of the transfer' are taken into account. In other words, if the usufruct does not yet legally exist at the time of the gift, it cannot be invoked to reduce the value of the bare ownership.

In this case, the tax authorities argued that the usufruct reserved by the donor was not 'opened' on the day of the gift, because the donor was still alive. According to this logic, the usufruct would only arise upon the donor's death (or at the agreed term), because it is at that moment that the bare owner recovers full ownership. In the meantime, the donor is merely the holder of a right of use and habitation, but not of a constituted usufruct.

The Court of Cassation rejects this analysis. It considers that the usufruct reserved in the deed of gift is a usufruct 'established' by that deed. However, a usufruct is 'opened' as soon as it is legally constituted, and not only when it ends. The partition-gift with reservation of usufruct immediately creates a split of ownership: the donor retains the usufruct, the donees acquire the bare ownership. This split exists legally from the signing of the deed.

This solution is part of a consistent line of case law: the notion of 'opened' usufruct must be understood as the constituted usufruct, and not the exercised usufruct. It avoids double taxation: if the tax authorities' logic were followed, tax would be calculated once on the bare ownership without taking into account the usufruct (thus higher), and then a second time upon the donor's death on the transfer of the usufruct (which is extinguished and does not give rise to tax, but the prejudice has already been suffered).

The Court of Cassation thus confirms an interpretation favourable to taxpayers, aligned with the wording of Article 762-I, paragraph 2. It censures the court of appeal which had misunderstood the meaning of this provision.

What this changes for you — practically

If you are a landlord owner and are considering a gift with reservation of usufruct, this ruling secures you. When you sign the deed of gift, the usufruct you reserve for yourself is immediately taken into account for the calculation of transfer taxes. The value of the bare ownership is therefore reduced according to your age, in accordance with the tax scale. For example, if you are 70 years old, the bare ownership is valued at 40% of the value of the property in full ownership.

For the donees (those who receive the bare ownership), it is a guarantee: they do not risk a tax adjustment several years after the gift, on the grounds that the usufruct was not opened. The administration cannot challenge the initial valuation, except for calculation errors.

Let's take a concrete example: a property located in Cluses, worth €300,000. A donor aged 75 gives the bare ownership to his son. According to the scale, the bare ownership is worth 30% of the value: i.e. €90,000. Gift tax is calculated on €90,000, after allowance. If the administration had followed its initial logic, it would have considered that the gift related to full ownership (€300,000), multiplying by more than three the tax payable. Thanks to this ruling, the initial calculation is final.

If you are a tenant, this decision does not directly concern you. But if your landlord is a usufructuary, it may have an impact on the duration of your lease: the usufructuary can give you notice to sell, but under certain conditions.

On the other hand, if you are a buyer of a property burdened with a usufruct, beware: the usufructuary must consent to the sale, and the value of the property is affected. This ruling does not change anything on this point.

Finally, for co-owners, the split of ownership can complicate decisions at general meetings: who votes? The bare owner or the usufructuary? The Law of 10 July 1965 gives the right to vote to the usufructuary for decisions concerning enjoyment, and to the bare owner for decisions concerning alienation. But be careful: this ruling only concerns the tax aspect, not the voting right.

Four tips to avoid this type of dispute

• Have the deed of gift drafted by a notary specialised in estate planning. An experienced notary knows the case law and will be able to draft the deed expressly stating that the usufruct is constituted and opened upon signature. This will avoid any subsequent challenge.
• Keep all tax documents carefully. In case of an audit, you will need to prove that the usufruct was taken into account in the initial calculation. Keep a copy of the deed of gift, the calculation of tax and the payment receipt.
• Anticipate the civil consequences of the split. Beyond the tax aspect, think about who will pay for works, co-ownership charges, and how decisions will be made. A quasi-usufruct agreement or a split agreement may be useful.
• In case of an adjustment, challenge it promptly. You have a two-month period to refer the matter to the administrative court after receiving the notice of enforcement. Do not wait: a quick response can avoid additional penalties.

Further reading: related case law and developments

This 1993 ruling is part of a line of decisions favourable to taxpayers. Already in 1986, the Court of Cassation had held that the usufruct reserved in a gift was an 'opened' usufruct within the meaning of Article 762-I (Cass. com., 3 June 1986, No. 84-16.672). The 1993 decision confirms this position and clarifies it by rejecting the argument that the usufruct was only opened upon death.

Since then, the Conseil d'État has also had the opportunity to rule, notably in a decision of 13 July 2016 (No. 386.384), where it recalled that the value of the bare ownership must be determined according to the usufruct existing on the day of the transfer, and not a future or potential usufruct.

The trend of the courts is therefore clear: the split of ownership is approached realistically, taking into account the legal situation existing at the time of the gift. This secures gifts with reservation of usufruct, which are a common tool for estate planning.

For the future, it is possible that the legislature may modify the usufruct scale, but the principle of opening on the day of the gift seems firmly anchored. Practitioners can therefore advise this type of arrangement with confidence.

In practice: what to do

FAQ: 5 frequently asked questions

1. Can I give the bare ownership of my house to my children while continuing to live there?
Yes, that is the principle of a gift with reservation of usufruct. You retain the right to live in the property (usufruct) and your children become its owners (bare ownership). Upon your death, they recover full ownership without additional inheritance tax.

2. How is the value of the bare ownership calculated?
It depends on the age of the usufructuary on the day of the gift. The tax scale (Article 669 of the French General Tax Code) provides, for example: under 21: 90%; 21-30: 80%; 31-40: 70%; 41-50: 60%; 51-60: 50%; 61-70: 40%; 71-80: 30%; over 80: 20%.

3. What happens if the usufructuary dies shortly after the gift?
Nothing changes from a tax perspective: the tax has been definitively settled on the basis of the usufruct opened on the day of the gift. The children become full owners without paying any further tax.

4. Can the tax authorities challenge the valuation of the usufruct?
Yes, if they consider that the deed is fraudulent or that the valuation is erroneous. But since the 1993 ruling, they cannot argue that the usufruct was not opened. The challenge will relate to other points (for example, the value of the property).

5. Do I have to declare the gift to the tax authorities?
Yes, any gift must be declared (form 2735) within one month of the deed. The notary usually handles this, but you must ensure the declaration is made.

Checklist for a gift with reservation of usufruct

1. Choose the property to give and have it valued.
2. Consult a notary to draft the deed and calculate the tax.
3. Check that the deed clearly states that the usufruct is constituted and opened.
4. Pay the gift tax within the deadlines.
5. Keep all documents (deed, tax receipt).

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