Investing in a French property at a reduced cost: the purchase of the bare title only

What is bare ownership?

Under French law, the title to real estate can be split in different manners. The most common one is for each owner to have a percentage in full ownership, i.e.: usufruct + bare title. Typically, a couple buying a home will have 50% of the full ownership each. However, these percentages can be different, for instance, if the respective contributions to the purchase price are different in amounts. But it is also possible for one to have more usufruct or more bare title than the other, the parties are entirely free to do what they want.

Now it is also possible for certain people to own the usufruct only while the bare title is owned by others.

Both the usufruct and the bare title have a value, which is calculated by the French tax administration based on the age of the usufruct holder at any given time, as follows:

Bare ownership refers to the right of ownership that the bare owner of a dwelling has. This right excludes the possibility of using the property or receiving rental income from it when the property is rented, as this is the usufruct right. The bare owner therefore does not have the "usufruct" of the property. This division is also known as a dismemberment of the property right. Once the full ownership is restored on one head, the owner can decide to live in the dwelling, rent it out or make a gift to his heirs.

How does bare ownership work?

Why buy in bare ownership?

Bare ownership: What are the disadvantages?

Funding a purchase in bare ownership

What are the rights of the creditor and the debtor in a pledge?

How does bare ownership work?

The distribution of charges and obligations between the bare owner and the usufruct holder will be indicated in the authentic deed of sale. The bare owner recovers full ownership of the property at the end of the usufruct and can thus decide to occupy the dwelling, sell it or rent it. The dismemberment of a property must in all cases be made by notarial deed.

Why buy in bare ownership?

Buying in bare ownership only offers many advantages:

• The cost of a property purchased in bare ownership is lower than the cost of acquiring a property purchased in full ownership. You benefit from a discount of 30 to 50% on the selling price;
• Your loan interest can be deducted from your property income  if you buy with a loan, provided that the usufruct is held by a social landlord or by a lessor liable for income tax;
• You do not bear the costs of management and maintenance of the accommodation, which are borne by the usufruct holder;
• You avoid the risks associated with rental management;
• Your investment is not included in the IFI (tax on real estate wealth) taxable basis ;
• You are exempt from property tax and housing tax since they are supported by the usufructuary;
• You automatically recover full ownership of the property at no additional cost once the dismemberment period has ended;
• You can transfer the bare ownership to your heirs at any time and benefit from advantageous taxation.

Bare ownership: What are the disadvantages?

The main disadvantage of buying bare ownership lies in the impossibility of enjoying the use of the property during the dismemberment phase. In the case of renting the property whose ownership is dismembered, for example, only the usufructuary is able to collect the rental income. It is therefore important to anticipate this temporary shortfall when designing an investment plan, and in particular not to account for the rents generated by the rental of the property as a source of income as part of the repayment of a mortgage. It is for this reason that banks generally require a substantial financial contribution and numerous guarantees and that they tend to favour investor profiles who already own their main home. It is also necessary to specify in the sales contract the responsibilities of the bare owner and the usufructuary, because, in the absence of details, the bare owner will have to bear major repair and maintenance work (as this is the default rule under the French Civil Code).

The purchase in bare ownership can be done between private individuals with the assistance of a Notaire (Notaires in France have a monopoly on conveying title to real estate), but a professional market has developed, and it can be done via a commercial company. A number of these can be found on the internet.

Such companies will of course charge for their services, but there are advantages to using one of those;

• The main one is that ownership of the usufruct right by the company will be for a limited period of time only (usually 15 to 20 years)
• and during that period, the property will be professionally managed and cared for (rentals and upkeep).

The investor-buyer will benefit on purchase from a reduction in the price of typically 30 to 40% of the full market value of the property, which is the consideration of the fact that he will receive no rental income during the said period.

At the end of the usufruct period, he will automatically become the full owner, free of French tax, and will be able to use it, rent it or sell it. It is to be noted that the bare title right can be sold on its own, but if an agreement with a company is in place, one would need to make sure that the contract allows this and under which possible restrictions. Before considering this sort of investment, a British buyer should also seek advice from a UK accountant to check what the tax treatment, if any, of such an investment would be in the UK. 

Funding a purchase in bare ownership

Banks do not consider bare ownership acquisition to be common. Thus, it can be difficult to find adequate financing: the property does not produce income, and you are not the full owner of the property, which prevents the bank from taking a mortgage to guarantee itself ... But there are other solutions:

• The mortgage on another of your assets: you must nevertheless already hold a property of equivalent value, and not mortgaged.
• The pledge of a life insurance policy: if you hold a contract for a value equivalent to that of your acquisition, the bank can also guarantee itself by taking it as a "mortgage", which is called "collateral" for financial products. Nevertheless, this means that you must have substantial funds in your assets. You can then for example take out a credit "in fine": you will only pay the interest for the duration of the credit and repay the capital at maturity. Few banks finance this type of acquisition. 

Mortgage:

The mortgage is a guarantee taken on a property to ensure the repayment of a debt. In real estate, mortgage credit is a loan secured by real estate from the borrower's estate. The mortgage is therefore a "security". It is registered at the mortgage office by a notary and must be released when the debt no longer exists or when the property is sold.

According to the French Civil Code, the “hypotheque” constitutes a "real estate right on an immovable assigned to the discharge of an obligation". Thus, when a lender agrees to finance the repayment of a debt via a mortgage, this mortgage gives the creditor certain privileges and fundamental rights:  either the right of preference, which makes him the  priority creditor over other creditors and the resale right which allows him to exercise his right over the property despite the fact that the property has changed ownership.

The overall cost of a mortgage on real estate is calculated on the basis of certain elements, including the notary's fees, which are calculated according to a tariff schedule fixed by decree and any ancillary costs. There is also the real estate security contribution which amounts to 0.05% of the loan, plus 20%. Then, the registration fees, correspond to the land registration tax at the rate of 0.715% on the sums guaranteed.

Collateral

The pledge is a guarantee system for a so-called "intangible" property: company shares, goodwill, life insurance contract. Thus the creditor obtains a right on the property of the borrower: in case of non-repayment of the sums lent, he will be entitled to seize the pledged assets for his benefit. Collateral is in a way the equivalent of a mortgage on non-physical assets.

In terms of real estate credit, collateral is mainly practiced in the context of in fine loans. Thus, it is common to guarantee such a loan by pledging a life insurance contract: the sums paid on this contract can be recovered by the creditor in case of problem during the repayment of the loan.

What types of intangible assets can be pledged?

It is possible to pledge a life insurance contract, a capitalization contract, securities accounts, employee savings contracts, company shares... Not- all intangible assets can be used as collateral to secure a debt.

What are the rights of the creditor and the debtor in a pledge?

If the debtor is only entitled to retain ownership of his investments, the creditor will have several rights. By being a preferential creditor, the creditor will have a right of preference, that of being the first to be repaid before the other creditors when paying the debt. Then, he will have a right of retention that will allow him to keep the property as collateral until the debt is paid. In addition, if the debtor were to die during the term of the loan, the creditor would be the first-ranking beneficiary. Finally, in the event of default by the debtor at maturity, the amount of the monthly payment may be deducted directly from the pledged investment.

Donation in bare ownership

The donation in bare ownership is an effective way to predict the transmission of a property. The dismemberment of property  allows the donor to keep the usufruct of the property and to register his or her heir(s) as bare owners. This makes it possible to reduce gift or inheritance taxes because they are not calculated on the value of the full ownership but on the value of the bare ownership only. The latter is determined according to the age of the usufructuary. Thus, the earlier the donation is made, the lower the transmission costs. Be careful not to rush too much into a donation as the notarial deed which seals this operation is irrevocable, and the agreement of the bare owner is then mandatory if you decide to sell the property. For a donation in bare ownership to be valid, the death of the usufructuary must not occur during the 3 months following the signing of the deed. 

Sale in bare ownership

The sale in bare ownership is interesting for a seller who wishes to keep the usufruct of his property. The status of usufructuary that he retains after the sale allows him to live in the dwelling or to rent it out to receive rental income. Although the selling price of a property sold in bare ownership is lower than the selling price applied to a property sold in freehold, the sale in bare ownership is interesting to meet a need for cash flow thanks to the immediate collection of a large capital. The sale in bare ownership is thus an alternative to the life annuity.

Buying bare ownership with your parents

The purchase in bare ownership can allow parents to give a helping hand to their children regarding the acquisition of their principal residence. The purchase in bare ownership with his parents makes it possible to do this. Parents can indeed buy the usufruct of a property and leave the bare ownership to their children. As the bare owner cannot, in theory, enjoy the use of the property, the parents must, in this case, make the property available to their children free of charge. 

Bare ownership rental

When a property in bare ownership is rented, the rents resulting from this rental activity are for the benefit of the usufructuary, who assumes the role of a traditional landlord. It is the holder of the usufruct who is responsible for all rental management: signing the rental contract, taking out unpaid rent insurance, collecting rents and maintaining the housing. He is therefore required to fulfil the same obligations as a traditional landlord towards his tenants. Repairs that require extensive work are generally borne by the usufructuary if specified that way in the authentic deed (by default, major repairs and only those are borne by the bare title holder). It is also he who must take charge of the renovations in case of degradation of the dwelling by the tenant. The lease remains valid even in the event of the death of the usufructuary, and the bare owner must wait until the end of the lease to be able to put an end to it, without forgetting to comply with the contractual notice period.

An investment in the bare title may constitute a good opportunity for some people, but professional legal and tax advice must be sought beforehand. Talk to our Avocat Herve Blatry today.