Staff Reporter
By Peter Dougherty of Bissan Wealth Management
YOU may have run across an unfamiliar term in Spanish taxes called usufructo.
Although usufructo is not as complicated as splitting the atom, it may seem that way to us expats in Spain. And it does involve splitting: in this case an asset. The word comes from Latin – usus fructus – and means ‘the use and/or enjoyment of a fruit’.
In Spain, usufructo is important in the following taxes:
• Income Tax (Impuesto sobre la Renta de las Personas Físicas)
• Wealth Tax (Impuesto sobre Patrimonio)
• Inheritance Tax (Impuesto sobre Sucesiones y Donaciones)
In the United States, we only encounter usufructo in taxes collected in Louisiana. That’s because Louisiana’s tax laws are based on Spanish and French heritage.
In the UK, unless we create a trust (eg, life interest trust or interest in possession trust) to mimic the characteristics of usufructo, there is no direct equivalent.
So, for us expats to understand the concept, let’s relate it to a visit to a coffeehouse.
When you walk into your local Starbucks or Costa Coffee, there’s a sign that indicates the price of each type of coffee.
Think of these prices like the value of a house – determined either by its appraised value, the purchase price, or its value declared on Spanish taxes – that’s equivalent to full ownership. But you could also have partial ownership of the house. It’s as if we could split our Starbucks or Costa Coffee serving into components: the cup and the coffee, the cup itself, and the coffee.
Here is the term for each component in Spanish:
• Pleno dominio = the cup and the coffee
• Usufructo = only the coffee
• Nuda propiedad = only the cup
And imagine that the price of the coffee was based on whether it was just a seasonal offering or whether the coffeehouse always serves that type of coffee. If it were a seasonal offering (usufructo, temporary), the formula for valuing the coffee is 2% multiplied by how many years it’s offered in Starbucks or Costa Coffee – with a minimum of 2% and a maximum of 70%.
If it were offered permanently (usufructo, lifetime), the coffee would be more highly valued by younger coffee drinkers because they would have more years to enjoy drinking the coffee.
In this case, the formula for valuing the coffee is 1% multiplied by the difference between 89 and the age of the coffeehouse customer – with a minimum of 10% and a maximum of 70%.
If someone wanted to know the value of just the cup itself – that is, the bare ownership of the asset – simply subtract the value of the coffee (the usufructo) from the price listed on the sign: the coffee and the cup (full ownership).
Now, let’s apply what we know to a will in Spain. The widow might inherit lifetime use of the house (the usufructo), whereas the children may be bequeathed the house itself.
The widow’s taxes would be based on the value of a lifetime usufructo, and the children would be taxed on the value of the nuda propiedad. Years later, once the widow passes away, the children’s ownership interest would become pleno dominio.
That’s a good place to end our analogy. There’s no need to add cream or sugar to the explanation.
Peter Dougherty is a Financial Planner at BISSAN Wealth Management in Spain. He holds an MBA in finance from Columbia University in New York and an MS in Spanish taxation (Máster en Fiscalidad y Tributación) from Nebrija University in Spain. He is certified as a European Financial Planner (EFP) in Spain and as a Chartered Retirement Planning Counselor® and Investment Adviser Representative in the United States.
For more information: https://www.financial-planning-in-spain.com
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