The relevance of usufructs
The question regarding the relevance of usufructs has been prevalent over the past few years. One of the parties particularly interested in usufructs has been the Receiver of Revenue. Thrifty estate planners have tried to delay or minimize taxes and dutie
How it works
A usufruct grants the holder (of the usufruct) a right of use over property for a defined period, but not ownership. The ownership resides with the ultimate owner and their interest is known as the bare dominium. A responsibility is placed on the usufructuary (person to whom the usufruct is granted) to preserve the property for the ultimate owner.
Example: A husband leaves his fixed property (the bare dominium) to his son, with a usufruct to his wife.
In this example the wife will be able to use the property to live in, or rent the property out while she resides elsewhere. She still has a responsibility to maintain the property for the son as well as pay the rates and taxes.
There are a few variations to the above concept, for example, the right of habitatio, where the wife will only be able to live in the property and not rent it out to a third party. The available options should be considered with the help of a specialist.
The pros and cons
One of the most popular reasons for usufructs is to protect both the usufructuary and bare dominium holder as he or she cannot alienate the property without the consent of the bare dominium holder. An example would be a wife leaving her property to her husband with usufruct to her mother who has been living with them to ensure the mother will not be left destitute if there is not an amicable relationship between husband and mother-in-law.
Another common reason is to save on estate taxes and duties as the usufruct value is used to mitigate these expenses where it is bequeathed to a surviving spouse.
The main concern with a usufruct is the capital gains tax liability the ultimate owner incurs when the property is eventually sold. When a usufruct is granted, the formula for determining the new ‘beginning’ value (base cost) for the property is usually quite low which translates into a high “gain”.
The base cost value is calculated by capitalising the annual yield on the property at 12% over the life expectancy of the usufructuary (or a market related rate approved by SARS), from the date on which the usufruct is granted. This amount is then deducted from the market value of the property at date of sale to determine the bare dominium value. This bare dominium value will be the base cost when the asset is finally disposed of by the bare dominium owner.
Example: “I, Jack, bequeath my fixed property to my son Tom (25), subject to the lifelong usufruct over such property in favour of my wife Jill (50)”
Usufructuary = Jill
Bare dominium holder = Tom
Value of Jack’s fixed property at the date of his death = R500 000
Annual value of property (12% x R500 000) = R 60 000
The value of the usufruct on Jill’s life is then calculated according to her life expectancy, being R60 000 x 7.88967
Value included as an asset in Jill’s estate when she dies = R473 380
The bare dominium value as at Jack’s death (R500 000 - R473 380) = R 26 619
Assuming that Tom sells the property ten years after Jill’s death for R750 000, his capital gain will be R723 380 (R750 000 – R26 619). This is a significant implication that must be considered when granting a usufruct over property.
Another factor that needs to be considered is that where a financial institution holds a mortgage bond over your property, they are unlikely to agree to the registration of a usufruct. You will need to settle your bond first.
Conclusion
When considering whether a usufruct is suitable for your particular circumstances, make sure that it validates the cost and risk associated with such a structure in the long-term. SARS has been focusing specifically on usufructs and the tax treatment thereof. Should legislation be amended and your will contains a usufruct bequest, it may have significant consequences for your ultimate beneficiaries.
