Legal aspects regarding freehold ownership, bare-ownership, usufruct and the right of habitation
In many cases parents give thought to inheritance tax planning that will hopefully in the future benefit their children.
One of the possibilities that may be of interest is a gift of the ownership of property to the children with a reservation of the right of use or usufruct until the parent’s death.
This sort of arrangement creates different rights and obligations for both the holders of the right of bare-ownership and the holder of the right of usufruct over the property and in this article we will give consideration to the main aspects of these different concepts.
The first concept that must be considered is that of freehold ownership of property which can be defined as the right that gives the owner the possibility to both use and own property without any other limits than those established under Law.
The holder of the right to the freehold ownership of property may separate from this either a right of usufruct, or a right of habitation or use.
In this scenario, the ownership and use of the property will be shared between the bare-owners and the holders of the usufruct.
The bare ownership is nothing more than the right of ownership of the property which is held by one party which is subject to a usufruct over the same property that is assigned to a third party.
The usufruct held with regard to property gives the holder the right to the use the property and to enjoy its benefits subject to the obligation of conserving the form and essence of the property itself and unless the title constituting the usufruct authorizes anything to the contrary. Article 480 of the Civil Code establishes as a general rule that the holder of the usufruct may enjoy the benefits of the asset over which the usufruct is constituted and to transfer the said usufruct, even without consideration, subject to the contract by which the usufruct is transferred stating that the transferred right of usufruct will expire upon the expiry of the original right of usufruct.
The holder of the usufruct is obliged to make the ordinary repairs to the asset that has been assigned to him by virtue of the usufruct. These are understood to be those repairs that are necessary as a consequence of the normal use and deterioration of the asset, whilst the bare-owner of the asset is obliged to take care of the extraordinary repairs.
When does a usufruct expire? The right of usufruct expires upon the death of the holder, due to the expiry of the term for which it was originally constituted or the fulfilment of the condition to which it was subject, due to the renouncement of the holder of the usufruct, due to the loss of the asset given in usufruct, due to the cancellation of the right of the giver of the usufruct or due to the expiry of the legally established term of prescription.
As an alternative to the usufruct, one could also establish a right of use and habitation which is governed by the terms and conditions contained in the constitutive title or those generic dispositions contained in the Civil Code.
A right of use confers to the holder the right to enjoy the benefits of the asset over which the right is constituted to cover the needs of the holder and his family whilst the right of use gives the holder the right to occupy the part of a property that is sufficient for the holder and his family.
The main difference between the usufruct and the rights of use and habitation comes down to the fact that the rights of use and habitation cannot be transferred or ceded to a third party by virtue of any type of title pursuant to the rules established in article 525 of the Civil Code.
As such, whilst the holder of a right of usufruct may transfer their right to a third party with or without consideration subject to the rules that govern its constitution, the holder of a right of use and/or habitation cannot transfer his rights in any circumstances.