This arrangement allows you to cancel inheritance taxes on the new house

Asset dismemberment, a barbaric term that usually hides a very good tax offer for those who know how to use it wisely. The most classic way is to transfer the bare ownership of the property to your children so that they retain only the usufructuary right (ie the right to occupy the property or collect the rent generated by it). The result: inheritance taxes only apply to part of the value of the property depending on the age of the donee (e.g. at age 60 the bare property is worth 50% of the total value). And in the event of the death of the donor, there is no additional tax to be paid by the donee(s) (those receiving). This is also the formula adopted by Françoise Hardy, who feared that her son Thomas Dutronc would have to pay “exorbitant inheritance tax”.

As an extension of this scenario, an even more advantageous formula can arise when you have land to build on. This is the case of 58-year-old Gérard, who just acquired a beautiful plot of land in his native village for 180,000 euros. It is here that he plans to build a house where he plans to spend his retirement. On the advice of his notary, who praised him for being genuine “tax trap”, hastily proceeded to gift the bare ownership of the land to his only daughter, to remain solely in the use of the land. To the extent that this bare ownership at Gérard’s age is only valued at half the value of the land (i.e. €90,000), the transfer is free of inheritance tax (to the extent that the donor has not yet touched the €100,000 that he can give to each child of each 15 years without inheritance tax).

Accessories follow the main one

Gérard will remain the owner of this house during his lifetime. On the other hand, after his death, the construction of his 180 m² mansion, whose working budget was estimated by the architect at 550,000 euros, will be considered “improvement” land, his notary explained to him. As such, this should not warrant the application of additional inheritance tax and his daughter will become the full owner of the house without paying anything to the tax authorities. “Please note that the right of usufruct cannot issue a building permit by itself, Barbara Thomas-David, a notary public in Paris, believes me. Either the bare owner does it alone, or together with the consumer.’ Here he follows the proverb “accessories follow the main”which leads her to consider that we must also be very careful about the origin of the funds used to finance the work. “In order to avoid any tax adjustment, I recommend modeling the financing of the building site on the distribution of the value of the usufruct and the bare ownership (in this case 50% for the bare owner and 50% for the usufructuary, if you are, for example, Gérard between 51 and the day before your 61st birthday ).

Measures that some of his colleagues may not necessarily find useful. “You have to adapt to your client, I am underlined by Olivier Pontnau, a notary in Paris. If his biggest fear is the tax adjustment, I would not recommend this adjustment to him, but if certain conditions are respected, it is an old formula, perfectly authorized and often very beneficial. However, he recognizes that building on cut-up land maintains gray areas and vagueness, especially on the issue of a ten-year guarantee to know who benefits (the user or the bare owner). He further warns that tax authorities are becoming more vigilant in detecting rights violations and hidden donations.

Non-taxable “improvements”

“The user has a perfect right to build on the land and social landlords use this model, explains Olivier Pontnau. However, the user must use it to his advantage, for accommodation that he will actually occupy or from which he will receive rent. The administration also ensures that the person doing this is not too old or suffering from serious health problems. Finally, there is the question of the scale of the investment. It must be in relation to the means of usufruct and must not lead to its impoverishment. According to him, the right of usufruct to an apartment can greatly enhance the real estate that he enjoys, and all this is transferred to the bare owner without inheritance tax. And the fact of installing a house on the land follows the same logic, although the “improvement” is much more important. “It must be done honestly, for personal use, explains Olivier Pontnau. In all cases, the onus is on the administration to demonstrate that there has been a maneuver to subvert these policies.” A setup that can be dug into, but for which it is better to surround yourself with (very) good professionals.

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