An unknown way to buy property in Spain is through a right of occupancy. Actually, this is the light version of a split purchase where one party buys the usufruct and the other party buys the bare ownership. A right of occupancy in Spain is mainly suitable for more complex family situations or when you wish to protect third parties after your death.
What is a right of occupancy in Spain?
A right of occupancy is a right in rem in Spain, just like usufruct or a building lease, for example. As the beneficiary of a right of occupancy, you and your family can use the property according to your personal needs. In exchange, you are obliged to maintain the property and bear the costs of its use. However, if the right of occupancy is limited to a part of the property, in principle there are no charges.
The right of occupancy is personal and therefore not transferable. In other words, you can neither sell the right nor rent out the property. Nor can you pledge or mortgage the right.
Difference with usufruct
A right of usufruct is the light version of usufruct. With usufruct, you can use the property as you wish and you are also entitled to the rental income. With a right of occupancy, you may only use/"occupy" the property. On the other hand, the value is lower than with usufruct.
How do you value a right of occupancy?
As with usufruct, there is a set formula for a right of occupancy. You take 75% of the value of the property and apply the usufruct formula to this: 89- age youngest usufructuary = percentage value, with a minimum of 10%.
An example. You are 75 years old. The property has a value of EUR 300,000. 75% x 300,000 = 225,000. 89 - 75 = 14%. So you take 14% of 225,000 = 31,500. The value of the right of occupancy is then EUR 31,500.
What about taxes?
At purchase you pay on the value of the right of occupancy ITP/registration rights as in a resale. No VAT or AJD is applicable; not even for new construction.
At inheritance we look at how the right of occupancy was acquired. If this right was acquired, upon inheritance the owners of the property will ITP/registration duties pay. If the right of occupancy was granted as part of an inheritance, the owner will pay Spanish inheritance tax upon inheritance.
At sale of the property, provided all parties agree, you can cancel or terminate the right of occupancy. Therefore, although you cannot transfer the right of occupancy, it is possible to cancel it in exchange for a price. However, you will then also pay tax on any capital gains.
Why can a right of occupancy in Spain be interesting?
A right of occupancy is an inheritance planning tool. This method, like usufruct, allows you to buy property in the name of a third party without losing control of the property. If the purpose of the purchase is in a family context, the advantage is mainly fiscal. In case of death, the tax payable is lower with usufruct. If your intention is to rent out or eventually sell the property, a right of usufruct is not a suitable solution.
In addition, the right of occupancy is a solution to favour heirs or third parties.
Example 1. You have no legal relationship with your partner and you have no children. There are also no non-common children. You wish to protect your partner later on. And this without getting married or legally living together. For example, by buying a second residence. It is not your intention to rent out property.
In this case, you can obtain the right of occupancy while your partner buys full ownership of the property. The financing of the property is done through a prior cash donation. Through this route, you will be able to use the property at any time. Your partner is the owner and will later pay minimal taxes (unlike inheritance tax, which is higher for third parties).
The other way around, of course, is also possible. You can have a right of occupancy testamentary legacy to a third party.
Example 2. Again, you have no legal relationship with your partner. Together with your partner, you plan to emigrate to Spain and buy property there. You have non-common children. However, your intention is that your partner can continue to live in the house later, without disadvantaging your children. Given the high third-party inheritance tax, bequeathing a right of occupancy may then be a suitable solution. Your partner can stay in the house without paying too much inheritance tax and the children become full owners.
A company can also grant a right of occupancy to a private individual, for example. However, this route is rarely recommended because of the possible tax consequences.
Do you have any questions about the purchase options of real estate in Spain? Then feel free to take contact on.