Tax consequences of usufructs created upon death

A usufruct is a limited real right in property. The usufruct construct takes the form of a common-law personal servitude, which, as a limited real right, grants the holder (the usufructuary) the right to use someone else’s property, including the fruits. Typical examples include where someone is granted the right to use a house, or the right to receive interest on a loan account or dividends on shares. While the right to use the asset is granted to a person, the ownership, or bare dominium of the property, does not transfer to the usufructuary. The usufructuary merely receives the right to the enjoyment of an asset. The use of usufructs has several tax consequences, one of which occurs when a usufruct is created upon death.

A usufruct created under a testament will trigger a part-disposal for capital gains tax (CGT) purposes in the hands of the testator if the usufruct is bequeathed to the surviving spouse while the bare dominium is bequeathed to another person, such as a family trust. In these circumstances, there will be a disposal of the bare dominium to the deceased estate while there will be a roll-over to the surviving spouse.

When the testator directs that a usufruct is to be created upon his or her death and neither the usufruct nor the bare dominium in the asset is bequeathed to a surviving spouse, there will be a disposal of the full ownership in the asset to the deceased estate and the executor will dispose of the usufruct to the usufructuary and the bare dominium to the bare dominium holder.

Usufructs created upon the death of a person (i.e. where someone is granted a usufruct of an asset which the deceased owned) must be valued (to “split” the market value of the total ownership between the usufruct portion and the bare dominium portion). This valuation involves determining the present value of the annual right of use at 12% a year over the expected life of the person receiving the benefit, or when the right of enjoyment is a lesser period, over that lesser period. If the asset subject to the usufructuary interest cannot reasonably be expected to produce an annual yield of 12% on the value of the asset, SARS must decide, on application by the taxpayer; such sum as reasonably represents the annual yield. This could, for example, be the case where a usufructuary is granted the usufruct over a loan account, and 12% interest (in the current economic circumstances at least) cannot be expected to be a fair representation of the annual yield.

On an oversimplified basis, where a usufruct is created upon death, and the bare dominium is bequeathed to a trust, subject to a usufruct by a surviving spouse, the following tax consequences will ensue:

A split of the market value (and base cost) of the property is required, in line with the above valuation. There will be a deemed disposal of the bare dominium in the deceased’s hands at market value at the date of death. Since the usufruct has been left to a spouse, there is a roll-over in respect of that asset.

The tax consequences of a usufruct created upon death are very complex, and advice the correct treatment thereof should be obtained from a specialist in the field.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)




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IC Marais

Professional experience:

IC Marais is a certified CA (SA) with public sector and private sector technical knowledge based on 5 years’ Public Sector accounting, auditing and financial management experience and 5 years audit, tax and accounting experience. Detailed knowledge of private and public sector accounting and auditing standards (GRAP, IPSAS, IFRS, IAS, ISA) and public sector financial legislation (MFMA, etc.)

He enjoys the outdoors, hunting and fishing.


Professional experience:

In 1995, Schalk started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and then Mazars Moores Rowland in 2007) in Bloemfontein. In 1998, Schalk was appointed as manager at Moores Rowland, where he became a partner in 2003. Schalk received his Postgraduate Certificate in Advanced Taxation in 2006 and in 2009 he received his Certificate in the Administration of Estates.


Professional experience:

Cedric started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and Mazars Moores Rowland in 2007), Bloemfontein, in 1986. After completion of his articles, he joined the Special Investigations Division of the Department of Finance (SA Revenue Services) as a senior inspector from 1990 to 1991.


Professional experience:

Lucha started her career as a tax inspector at the Inland Revenue Department of New Zealand. After this she worked in commerce in Canada, Mexico and the United States.

On her return to South Africa, she completed her CA training contract with us and has been with Newtons ever since. She became a Partner in 2012.

Apart from her CA(SA) qualification she also holds a postgraduate certificate in Advanced Taxation (2005) and has the overall responsibility for training as our Training Officer.