TAX CONSEQUENCES OF USUFRUCTS CREATED UPON DEATH
20 Nov 2019
A usufruct is a limited real right in property. The usufruct construct takes the form of a common-law personal servitude, which, as a limited real right, grants the holder (the usufructuary) the right to use someone else’s property, including the fruits. Typical examples include where someone is granted the right to use a house, or the right to receive interest on a loan account or dividends on shares. While the right to use the asset is granted to a person, the ownership, or bare dominium of the property, does not transfer to the usufructuary. The usufructuary merely receives the right to the enjoyment of an asset. The use of usufructs has several tax consequences, one of which occurs when a usufruct is created upon death.
A usufruct created under a testament will trigger a part-disposal for capital gains tax (CGT) purposes in the hands of the testator if the usufruct is bequeathed to the surviving spouse while the bare dominium is bequeathed to another person, such as a family trust. In these circumstances, there will be a disposal of the bare dominium to the deceased estate while there will be a roll-over to the surviving spouse.
When the testator directs that a usufruct is to be created upon his or her death and neither the usufruct nor the bare dominium in the asset is bequeathed to a surviving spouse, there will be a disposal of the full ownership in the asset to the deceased estate and the executor will dispose of the usufruct to the usufructuary and the bare dominium to the bare dominium holder.
Usufructs created upon the death of a person (i.e. where someone is granted a usufruct of an asset which the deceased owned) must be valued (to “split” the market value of the total ownership between the usufruct portion and the bare dominium portion). This valuation involves determining the present value of the annual right of use at 12% a year over the expected life of the person receiving the benefit, or when the right of enjoyment is a lesser period, over that lesser period. If the asset subject to the usufructuary interest cannot reasonably be expected to produce an annual yield of 12% on the value of the asset, SARS must decide, on application by the taxpayer; such sum as reasonably represents the annual yield. This could, for example, be the case where a usufructuary is granted the usufruct over a loan account, and 12% interest (in the current economic circumstances at least) cannot be expected to be a fair representation of the annual yield.
On an oversimplified basis, where a usufruct is created upon death, and the bare dominium is bequeathed to a trust, subject to a usufruct by a surviving spouse, the following tax consequences will ensue:
A split of the market value (and base cost) of the property is required, in line with the above valuation. There will be a deemed disposal of the bare dominium in the deceased’s hands at market value at the date of death. Since the usufruct has been left to a spouse, there is a roll-over in respect of that asset.
The tax consequences of a usufruct created upon death are very complex, and advice the correct treatment thereof should be obtained from a specialist in the field.
Gerhard van Graan (email@example.com / 082 900 4441)
Herman Nieuwoudt (firstname.lastname@example.org / 083 864 0654)