Tax tip: Advantage with usufruct

If you earn rental income as a parent, you can transfer this to your child in the form of a maintenance allowance. The income is then taxed for the child. This is the case if a so-called usufruct is granted in favour of the child. The advantage of this is the utilisation of the child's tax-free basic allowance of currently 10,908 euros and the application of a lower tax rate if the child earns less income than the parents.

The Federal Fiscal Court recently had to deal with the question of whether this is an abuse of tax planning in its judgement of 20 June 2023 (case reference: IX R 8/22). In the judgement case, the couple had acquired a property and rented it out to a GmbH owned by the father. The usufruct was granted to the children in such a way that the rental income was attributed to them for a limited period of time (grant usufruct). The source of income was thus transferred from the parents to the children.

This resulted in a tax advantage in that the basic tax-free allowance and the lower tax rate of the children, who otherwise had no income, were applied. The tax office, and subsequently the Berlin-Brandenburg tax court, saw this as an abuse of tax planning and attributed the income to the parents.

However, the BFH did not follow this in the above-mentioned judgement and sees the justification of the usufruct as a permissible transfer of the source of income.

As the usufructuary cannot continue the depreciation of the property in the case of a beneficial usufruct, this is particularly worthwhile for older, largely depreciated properties.

It should also be noted that the granting of a beneficial interest constitutes a gift taxable donation, which only remains tax-free within the tax-free amount of 400,000 euros. The involvement of a supplementary guardian is generally required for the agreement of a beneficial interest in favour of a minor child.