In a nutshell, when purchasing a property in spain the idea involves splitting the ownership between a bare owner and a usufruct holder.
When the usufruct holder (usually the previous owner of the property) passes away his or her right to use the property automatically is transferred to the Bare Owner. ie- The investor who has purchased the property for a discount of around 50% . They take over the property according to the Spanish tax laws with no inheritance tax to pay.
Usufruct or usufructo is the right of use and enjoyment of a Spanish property.
This Spanish term allows an individual the right to live in and “enjoy (hence the name) a property for the remainder of their life or a specific time frame.
The usufruct holder will have no power or right to sell the property and sometimes they cannot rent it either, depending on the deal negotiated. They must look after it, keep the home maintained and pay the relevant tax on it; Community fees, Suma tax etc, again unless otherwise agreed with the new owner, or bare owner.
This is how Banking Giant BBVA explain the concept:
Bare-ownership is a right,a fully legal concept, which involves owners of property in Spain selling their homes, with large price drops for a lifetime lease, or usufructo as mentioned above.
While the usufructo has the right to stay in the property rent free until the end of their days, the bare owner of a property in Spain has no right to occupy it or rent it out.
However, when the usufruct holder dies, full ownership of the property is passed to the owner, the investor, currently without any liability for inheritance tax. This investor can then dispose of it, gift it, sell it, rent it, live in it as he wishes.
The max duration of the usufruct generally corresponds to the usufruct holder’s lifetime. This is a life usufruct. It is possible of course to set a predefined term which is called temporary usufruct, 10 years or 20 years for example).
What is the Spanish Press saying about Bare Ownership?
It is difficult from this piece to discern if the people at the Local newspaper like it or not, but the main concern appears to be it is morbid or a little sad to think about death. As with any inheritance, someone has to pass away eventually. Clients don't have a problem with this relatively well understood phenomenon (death) when they sign wills, so why is this different?
We love the fact that our clients are no longer asset rich cash poor. Now, they can get a lump sum now, when they are still young enough to take advantage of it.
Are you looking for a way to invest in Spain? Maybe this Spanish Real Estate Market idea of Bare Ownership is for you?
There are many tax benefits.
Let's say you buy a property for an investment for 200k. You’ll expect to rent it for about 10,000 pa. This rental income will hopefully cover your mortgage payments, until you realise you are taxed on it. There is no income tax with Bare Ownership however as there is no income tax. You get a 50% discount, the full appreciation on the total value of the house and you get full title in your name after helping the previous owner to enjoy their “Grey years”.
Our retired clients and property owners love the idea. They do not want to move home. They would like a cash injection now to pay for the world tour, family wedding or new car.
Example for the investor?
A client of ours has a 200,000 euro property for sale in Cabo roig. If he sells he will have to find a rental property instead, move away from his friends and be at the mercy of the landlord. Imagine for the sake of argument, John has 15 years of life expectancy left.
We’ll help John sell his home for 100,000 euro, with a 20 year / lifetime lease included in the deal.
We can easily value the house- There are 20 identical homes for sale on the Cabo Roig strip, so the investor knows what the house will sell for today in real money. He acquires in the notary the full title deeds with the usufructo included.
He has no income tax to pay on the rental income, no hassle with rental agencies, no empty weeks when he is paying rent and perhaps the property can double in value in the next 15 years. Last year property appreciated in spain by 7% according to the Tinsa valuation company.
To us this appears to be the perfect win/win arrangement for property investors in Spain and of course property owners.