Property Transfer & Usufruct: When an interest rate determines the tax liability

Sometimes a single percentage point can make the difference between a gift being tax-efficient or costly. This is demonstrated by a ruling of the Federal Fiscal Court dated 14 January 2026, case number II R 35/23.

A taxpayer had received a plot of land from her uncle and, in return, had promised him a lifetime annuity of 1,000 euros per month. This consideration must be valued; the contract stipulated an interest rate of 0.5 per cent for this purpose. The tax office, however, applied the statutory interest rate of 5.5 per cent. The Federal Fiscal Court ruled in favour of the tax office. 

This may sound technical, but it can make a big difference to the amount of money involved. The higher the interest rate used to discount a future payment or benefit, the lower its present value. In the case of a gift of land, this can quickly amount to a difference of several thousand euros. 

This is particularly important in the case of transfers subject to a reserved usufruct. For example, parents may transfer a let property to their children but retain the rental income via a right of usufruct. For tax purposes, the full value of the property is not considered a gift. The value of the right of usufruct reduces the value of the gift. Under the standard statutory procedure, the usufruct is calculated in accordance with the tables set out in the Valuation Act. This also incorporates the interest rate of 5.5 per cent. Anyone wishing to deviate from this requires a market value valuation report. This report can be used to value the property encumbered by the usufruct. In that case, one is not bound by the statutory interest rate, but may instead use a market-standard property interest rate, which is often lower for residential property – around 3.5 per cent. 

An example illustrates the effect. A 60-year-old father transfers a let residential property with a market value of 1 million euros to his son and retains a life-long usufruct. The annual net income amounts to 35,000 euros. Without a valuation report, the value of the life-long usufruct is around 450,000 euros. The tax-related value of the gift is then approximately 550,000 euros. If, however, a valuation report arrives at a life annuity value of around 530,000 euros based on a property yield of 3.5 per cent, the tax value of the gift falls to around 470,000 euros. The difference amounts to around 80,000 euros. Depending on the tax rate, this can save several thousand euros in gift tax.

Another advantage of a valuation relates to the early death of the usufructuary. Under the statutory procedure, the value of the usufruct may be reduced retrospectively in accordance with Section 14(2) of the Valuation Act. In extreme cases, it would have almost no value for tax purposes, and the value of the property gift would then be higher again. The situation is different if the lower open market value of the encumbered property is substantiated by an expert valuation and the usufruct is already taken into account therein as a value-reducing factor. In that case, this substantiated open market value of the encumbered property is applied from the outset. Section 14(2) of the Valuation Act does not apply in such cases. This has been ruled by the tax courts and is also recognised by the tax authorities in the state decrees of 9 September 2022. 

In practice, this means: In the case of property transfers under usufruct, one should therefore check in advance whether an expert valuation could result in a lower taxable value. Whether the effort is worthwhile depends on the individual case, in particular on the balance between the expected tax savings and the costs of the valuation report.