All about Equity Release

Table of Contents

Full domain

Full ownership means having the full ownership of a certain property. That is, when carrying out a normal sale of a property, full ownership of it is being sold. But what is not usually known is that this full property is divided into two parts:

• Bare property
• Usufruct

Bare ownership and usufruct are different rights, they can belong to different people, even if they fall on the same asset. So, full ownership of an asset will be held when usufruct and bare ownership coincide in the same person.

The bare property

The bare owner is the owner of a property but another person has a right of Usufruct – owns the right to use the property.

Although they are the bare owner, their property right is “empty” since the right to use and take advantage of the property belongs to the usufructuary and not to the bare owner.

What the bare owner can do is transfer ownership of the property (we will talk about real estate later) or even use it as a mortgage guarantee in some cases.

And, of course, once the usufruct rights of the other person come to their conclusion, then the bare owner becomes the full owner and therefore can begin to use and enjoy the property.

The Usufruct

According to Article 467 of the Civil Code:

"The usufruct gives the right to enjoy the property of others."

The owner of the usufruct, who is known as usufructuary, "you have the right to receive all the natural, industrial and civil fruits” of the thing (Article 471); and since we are talking about a right over real estate, it is the usufructuary who can fully enjoy the use of it.

The usufruct can be transferred in several ways:

• By inheritance, a testator leaves the property to one person and the usufruct to another or, even, the Law gives the legitimate interest to the spouse over the usufruct of assets and this will happen in non-testament succession.
• By sale: the owner or another person who already has the usufruct can sell it.

Depending on how and why it has appeared, usufruct has a fixed duration, it can have a specific duration specified (always before a notary) from date to date or conditioned to the occurrence of some event whose date is unknown.

As well can be for life, that is, that the usufruct will continue to exist as long as one person lives (or as long as several people live).

The sale of the bare property

With the sale of the Bare Property, the owner of a home, usually over 65 years of age, transfers the ownership of the house in exchange for a one-time payment upon formalizing the transaction and maintains the right to continue using and enjoying his or her home for life.

This allows the seller to continue living the same life as before and also to receive an instant and one-time payment, which can be used to pay off a debt, to enjoy with the family, take trips, etc.

The fiscal valuation of the bare property

In the field of taxes, Spanish legislation regulates how bare property should be valued. This is regulated in Spanish national law (Law 29/1987, of December 18) in its article 26.

The value of the bare property will be the value of an asset subtracting the value of the usufruct which is what said article 26 says.

If the usufruct is temporary, it will be worth 2% for each year that it lasts, without exceeding 70%.

If the usufruct is for life, it will be worth:

• 70% of the total value while the usufructuary is less than 20 years old.
• As of the usufructuary's 20th birthday, 70% will be removed from this 1% for each year over 20 that the usufructuary has, with a minimum limit of 10%.

At what point does the bare owner obtain the use and enjoyment of the bare property?

Having defined full ownership, we can say that it is established when ownership and use and enjoyment are brought together in the same person.

The consolidation of full ownership will take place in the person of the bare owner for one of two reasons: the sale or termination of usufruct.

The sale of usufruct

If the usufructuary decides to sell his usufruct right, he most often sells it to the bare owner.

After acquiring this right, the owner gets freehold (ownership, use and enjoyment of the property).

The extinction of the usufruct

• Compliance with the term for which it was established (in the case of temporary usufruct)

In the event that the usufructuary dies before the stipulated term, the use of the usufructuary will also pass to the bare owner, unless otherwise agreed.

• Death of the usufructuary (in the case of life usufruct)

When the usufructuary dies, the enjoyment, use and enjoyment of the usufruct property passes to the bare owner.

If the usufruct corresponds to several persons in undivided (refers to the situation of a thing or right that belongs to several people in common, without there being separate parties to each of the owners or holders of the right) the bare owner does not receive full ownership until the death of all the usufructuaries.

Rights of the owner

• Property rights: the bare owner retains ownership of the property, even though he does not have the right to use and enjoy it.
• Right to be restored the use and enjoymentthe bare owner will obtain the use and enjoyment of the property once the usufruct is finished (usually because the Usufructee has died or gone in to permanent Spanish healthcare), consolidating full ownership in his person.
• Right to mortgage bare property: the bare owner may request a mortgage loan on the bare ownership of real estate, even if he does not have his usufruct. Although it is true that currently conventional financial institutions are not granting mortgage loans on a bare property.
• Right to carry out works and improvements: the bare owner will have the right to carry out works and improvements in the usufructuated property, as long as the usufructuary is not harmed by them.
• Right to sell bare property: the bare owner may sell the bare property to a third party as long as the rights of the usufructuary are respected. Although the owner changes, the usufructuary will continue to have the use and enjoyment of the asset.

Obligations of the owner

• Take charge of building repair: the bare owner will have to take charge of the payment of the extraordinary repairs of the property usually by an Insurance policy.
• Respect the right of the usufructuary: the bare owner may not, in any case, make alterations to the property that harm the usufructuary.
• Take over the mortgage: in the event that when the usufruct of the property is constituted, it is mortgaged, it will be the obligation of the bare owner to pay the corresponding installments.

Advantages of bare ownership for the seller

After learning about the rights and obligations of the bare owner, it is easy to draw conclusions about the advantagesof a bare property sale for the seller. In addition, as we have already pointed out, these increase as the seller's age increases. Among the many existing ones we highlight:

FORMALIZATION EXPENSES

The seller will not have to pay any expenses related to the Notary, the Property Registry and the Agency. All taxes derived from the operation will be assumed by the buyer, except for the Plus Valia Tax, which will be assumed by the seller. This is typically hundreds of euros not thousands.

EXPENSES OF THE PROPERTY

The usufruct holder Will no longer pay the real estate tax (IBI/SUMA) and the buildings insurance. He will only be responsible for the ordinary community fees, the bills for the supplies (water, electricity, rubbish clearance etc.)

LEGAL GUARANTEES

It has all the legal guarantees, all transactions are formally completed before a Public Notary and registered with the Land Registry.

SHARED OWNERSHIP

The operation can be completed by two people ( e.g. spouses), as long as they are both the homeowners.

RENT AND SALE OF USUFRUCT

The usufruct holder has the right to rent the property or sell the usufruct.

EXCELLENT TAX TREATMENT

If the operation is carried out on a property declared as habitual residence, the usufructuary is exempt of paying taxes for the increase of the patrimony in the IRPF.

How the bare property is taxed in the personal income tax of the bare owner

Is it necessary to pay taxes for the bare property in the IRPF? How is the bare property included in the rent?

The truth is that a property over which you have bare ownership does not generate any type of taxation in the income statement. Who enjoys ownership of the property, the usufructuary, is the one who can rent the flat and obtain income from it.

The bare owner must include the real estate in the income tax return and indicate in the property key that they hold the bare property, but not the usufruct.

How is the sale of the bare property is taxed in the personal income tax of the usufructuary

If the usufructuary is over 65 years of age and the property being sold is his or her habitual residence, he or she is 100% exempt in the income statement. That is, you do not have to pay taxes to the Treasury.

In the case of second homes, these are subject to the payment of taxes in the income statement, unless the money obtained from the sale is used for life annuity insurance.

Economic value of the bare property

How much money can be obtained from the sale of bare property? at the time of calculate the sale price of the bare property it is necessary to estimate the life expectancy of the holder. The greater his life expectancy, the less economic value this right will have, and vice versa.

The reason is that the buyer will not be able to use or enjoy the property until the time of death. It is for this reason that we have placed so much emphasis on the orientation of this modality to the Elderly, since they are usually the main beneficiaries of this operation:

• On the one hand, it is a demographic group that generally owns some real estate. It is common that they are at least the owners of the real estate in which they live.
• On the other hand, since their life expectancy is shorter, so will be the discount applied to the sale price. So, the older the seller, the more money they will get for the sale of the bare property.

Below is a link to the real estate annuity calculator where approximate data is obtained on the monthly amount obtained from the sale of the bare property, depending on the age and gender of the usufructuary.

Practical cases: Tax calculation of bare property and usufruct

Example of sale of bare property with 57 years

Let's imagine that Carmen, a 57-year-old woman, needs income and decides to sell the bare ownership of her home, reserving the usufruct for life. The house is valued at €260.000.

To calculate the value of the usufruct we must:

• Subtract Maria's age from 89. 89 – 57 = 32.
• Calculate 32% of the total value (€260.000).
• We obtain, therefore, that the value of the usufruct is €83.200.

What, therefore, will be the tax value of the bare ownership of your home. To calculate it, all we have to do is subtract the value of the usufruct (€260.000) from the value of the home (€83.200). We will obtain a result of €176.800.

Example of sale of bare property with 80 years

Ricardo, an 80-year-old man, needs to enter a residence. However, he does not have enough income to do so.

The sale of the naked ownership of his home, valued at €160.000, is proposed.

To calculate the fiscal value of the usufruct we will repeat the previous operation:

1. 89 (life expectancy) – 80 (years) = 9% (discount).
2. As we have determined, the minimum discount in these cases is 10%, therefore, we will apply this figure.
3. 10% of €160.000 (house price) = €16.000 (usufruct price).
4. €160.000 (price of the house) – €16.000 (price of the usufruct) = €144.000 (price of the bare property).

Last example: temporary usufruct

We have already seen how lifetime usufructs affect certain scenarios. So we are going to offer one last example, to show how the temporary usufruct is calculated.

Again, let's imagine a character, Laura, who wants to go live in Madrid.

To pay the down payment on her new home, she plans to sell the current one, which she owns. However, she is in the middle of an important work project that has two years left and that will force him to return almost daily to his current location, Barcelona.

So, after conducting an investigation, Laura decides to sell her home, reserving a two-year usufruct.

In this case, the value of the usufruct will be 2% per year of duration (ie 4%). If Laura's home is appraised at €320.000, the value of the usufruct will be €12.800. Therefore, the fiscal value of the bare property will be €307.200.

Conclusions

In summary, Bare ownership, together with usufruct, are the components of full ownership. Therefore, whoever owns the bare property will have the deeds, but no rights to use and enjoy the asset.

However, at the time the usufruct is over, (for whatever reason), the bare owner will recover this power, thus becoming full owner.

We will list some of their differences so that everything is clearer.

• The bare owner is the legal owner of the property but does not have the use and enjoyment of it until the end of the Usufruct.
• The usufructuary has the use and enjoyment of the property but does not own the property.
• The bare owner will only be able to enjoy the house when the usufruct ends.
• The bare owner cannot rent the house, but can sell the bare property to a third party under the exact same terms as agreed on day one.
• The usufructuary can rent the house and obtain an income. They can also sell the usufruct to a third party.
• The usufructuary may enjoy the dwelling for the duration of his Usufruct rights.

If you are interested in this concept or have any questions, you can visit our FAQ on our sale of the bare property or you can contact us directly in contact ussince, at Mas Vida, are the market leading specialists in this type of operation.