Usufruct is often applied as part of estate planning in order to save on Estate duty, as the calculated value of the usufruct qualifies as deduction for Estate duty, should the usufructuary be the surviving spouse. E.g. a woman may bequeath her property to her son provided that her spouse has lifelong usufruct from it.
Obviously this kind of bequest may create problems, as the son is not able to utilise the property for personal use or rent it out as long as his father is still alive. If we talk about agricultural property the problems escalate and the practical administration of the usufruct can result in many a headache.
These issues are, however, of a personal nature and our opinion is that the root of the problem is actually the accountability of Capital Gains Tax which will revert to the owner when the property is eventually sold.
The value of the usufruct when it is created is recovered from the market value of the property in order to determine the bare property value. This calculated value will then represent the base cost of the property when it is eventually sold.
I, TOUGH TINA, bequeath my immovable property to my son, LITTLE JOHN, subject to the lifelong usufruct of my spouse, BIG JOHN. BIG JOHN is thus the usufructuary and LITTLE JOHN the bare owner.
Suppose the value of the property for the purpose of this example is R1 million. The usufruct value is calculated by capitalising R1 million allowing for BIG JOHN’s life expectancy (according to tables) and multiplying it by 12% (or a % as approved by SARS), in other words R1 million x 6,74206 x 12% = R809 047.
The bare property value at the death of TOUGH TINA is thus R1 million minus R809 047 = R190 953. Should LITTLE JOHN sell the property at R1.5 million after BIG JOHN’s death, taxable Capital Gains will potentially amount to R1 309 047 on which tax is payable.
We are not in principle against usufruct, but it is clear that costs and the influence of Capital Gains Tax on usufruct should be studied thoroughly before considering such a stipulation in your will.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.