Keeping the right of possession

When giving property to someone, the donor may want to keep the right of possession. This means a restriction of how the recipient of the gift property can use it. Tax authorities take such a clause into consideration: gift tax is reduced accordingly.

The donor of a gift can keep the right of possession, usufruct or other similar rights with regard to the asset being the gift.

It may be the donor himself and/or someone else or several other people who become the holders of the right. The holder or holders can use the property and/or receive any yield, returns or privileges that the property produces. However, the holder(s) cannot sell or transfer the property, or a privilege associated with it, to someone else. Under the circumstances, the new owner of the property (the recipient of the gift) cannot sell it either, unless the holder(s) of the possession give their consent.

Whoever holds the right of possession pays the usual expenses for the property including real estate taxes — and receives the revenues derived from it, including rental income if the property is rented out. No payment of compensation for use is required from the holders of the right to the gift recipient i.e. to the new owner of the property.

Clause in the deed of gift; entry on the gift tax return

It is customary to write out a deed of gift that includes a clause indicating that the right of possession stays with the donor. Written gift deeds showing the names of the parties and the relevant terms and conditions are necessary when details on the assets and property concerned must be entered in various registers (units of real estate, summer cottages, parcels of land etc.). However, normally there is no need to present the deed of gift to the Tax Administration. The guidance on how to fill out the gift tax return form contains a list of the circumstances that make it mandatory to enclose documentation with a gift tax return.

Instructions for completing a gift tax return form

You must file a gift tax return that contains an entry on the retention of right of possession.

People who may become recipients of the right

It may be the donor himself and/or someone else or several other people who become the holders of the right.

Example: Antti gives a summer cottage to his grandson Mika who is the son of his daughter Liisa. Antti declares that he wants to keep the right of possession. This means that the right of ownership goes to Mika but the summer cottage continues to be in Antti's use.

If Liisa were also to use the cottage, Antti may decide to keep the possession right so as to designate both himself and Liisa as holders of the right. Similarly as in the first scenario, the right of ownership goes to Mika but the summer cottage is in Antti's and Liisa's use.

The right must not be fictitious

It is required that the holder(s) actually use the property and/or receive any cash yields associated with it. It is not acceptable for donors to include a retention clause only because they want to reduce the gift tax payment.

Example: Antti donates a single-family house to his daughter Liisa but keeps the right of possession. However, Antti does not live in that house, and neither does he receive rental income for it. Liisa moves in with her family. These actual circumstances make it clear that it is Liisa who uses both the right of ownership and the right of possession. Because Antti's purported right of possession is not backed up by actual circumstances, Liisa is not allowed to receive the related deduction in gift taxation.

Retention clauses may indicate a definite period or a 'for life' period

Donors may set out a clause saying that the right of possession stays with them for life. However, they may also specify that the right of possession is in force for a definite period only. If the latter alternative is chosen, both the deed of gift and the gift tax return must show the end date of such a period.

Example: Antti gives Liisa a summer cottage. He declares that he wants to keep the right of possession for five years. The right of ownership goes to Liisa but the summer cottage continues to be in Antti's use. Five years of the date of the deed of gift, Antti's right of possession ceases. At that time, Liisa will receive the right of possession over the summer cottage for which she already received the right of ownership.

The taxable value of a right of possession depends on whether it is based on a definite period or for life.

Gift taxation affected by the retention of the right of possession

Because the gift recipient's opportunities to use the gift are restricted when a right of possession is withheld to someone else, the tax assessment practice is to reduce the fair market value of the gift. This way, the base of gift tax is the adjusted, reduced value.  The recipient must report the fair market value of the received gift and enter information as appropriate under section IV of the gift tax return.

Even if the holder of the right of possession is a third party instead of the donor, the fact that they receive the right does not mean that they must pay gift tax on it.

Reducing the gift's taxable value

The amount reducing the value depends on how much money is expected as the annual yield from the gift property, and the length of time that the clause to retain the right of possession sets out.

Annual yield, annual return

The taxable value of a right of possession is affected by the annual cash flow, returns, or yield that is associated with the property.  For purposes of calculation, 'annual yield' refers to the actual amount of money received every year. This means that if the holder of the right of possession receives rental income, the c

Example: An apartment's fair market value equals €300,000. It is rented out to a tenant.  Because it is rented, we can find out its actual annual yield. Monthly rent is €1,000. To arrive at the net amount of money, we must deduct the relevant maintenance expenses from the rent (e.g. the monthly charge that goes to the housing company).  The monthly maintenance charge is €150. Consequently, annual yield is €10,200 (12 months × (€1,000 – €150 a month) ).

Calculation must be based on the net amount received.

Because many gifts are made of assets and property that do not have a real annual yield, the practice is to make use of theoretical yield coefficients. This means that the gift's fair market value (its probable selling price) is multiplied by a coefficient that ranges from 3% to 5% depending on property type.

Yield coefficients are

  • 3% for leisure home property
  • 5% for other property including residential apartments in housing companies, houses and book-entry accounts with corporate stock.

Example: An apartment's fair market value equals €200,000. Because it is not rented out there is no actual figure available that could show its annual yield. The calculation must then be €200,000 × the 5% coefficient = €10,000 annual yield.

Age of the recipient of a 'for life' right of possession, or the length of a definite-period right of possession

The amount reducing the value depends on the length of time that the clause to retain the right of possession sets out. Donors may set out a clause saying that the right of possession stays with them for life. However, they may also specify that the right of possession is in force for a definite period only.

Retaining the right 'for life'

If the donor has retained the right of possession to himself or herself for life, the authorities will multiply the estimated annual yield by a coefficient that reflects the age of the holder of the right.

If more people are the holders of the right of possession (e.g. both spouses in the case of a married couple), the age of the youngest individual determines the selection of the coefficient.

Age coefficients

Recipient's age: Coefficient that must be applied to the annual yield:
Less than 44 12
44–52 years 11
53–58 years 10
59–63 years 9
64–68 years 8
69–72 years 7
73–76 years 6
77–81 years 5
82–86 years 4
87–91 years 3
92 or older 2

Example:  Antti gives his grandson Mika a summer cottage worth €300,000. Antti's age is 75. Antti declares that he keeps the right of possession.  Because the summer cottage is not rented out and does not produce any cash flow, you must make use of an estimated annual yield figure when working out the value of the right of possession. This means that its value is the age coefficient 6 × an estimated rate of yield 3% × the fair market value of the cottage €300,000 = €54,000. This value is deducted from the fair market value. The result is the taxable value of the gift. Taxable value for purposes of gift tax equals €246,000 (€300,000 minus €54,000).Gift tax under the first bracket on a gift worth €246,000 in 2016 equals €33,590.

Even if Antti had written out a clause to retain the right of possession jointly to his wife Tiina (age 78) and to himself, the coefficient would still have to be selected in reference to Antti's age, because he is the younger spouse.

Similarly, if Antti wrote out a clause to retain the right of possession to his daughter Liisa (age 45), the coefficient would be selected in reference to Liisa's age.  Then the value would be the age coefficient 11 × yield rate 3% × the fair market value of the cottage €300,000 = €99,000. This value is deducted from the fair market value. The result is the taxable value of the gift. Taxable value for purposes of gift tax equals €201,000 (€300,000 minus €99,000).   Gift tax under the first bracket on a gift worth €201,000 in 2015 equals €25,940.

Gift Tax Calculator (in Finnish)

Retaining the right for a fixed term

If the retention of the right of possession is intended for a definite number of years only, the calculation rule is to multiply the annual yield with the number of years, then calculate the net present value of the result, using a discount rate of 8 percent. However, if the number of years gave a higher coefficient than that derived from a 'for life' right of possession (see the age-dependent schedule above), the latter must be used in the calculations.

Look up coefficients in a schedule (in Finnish; in Swedish):

Fixed-term coefficients - Määräaikaisen tuotto-oikeuden (esim. hallintaoikeuden) pidätyksessä käytettävä kerroin (pdf)

Example: Antti gives his grandson Mika an apartment worth €150,000. Antti's age is 75. He keeps the right of possession to himself for five years i.e. up to his 80th birthday.  Because the apartment is not rented out to a tenant, you must make use of an estimated annual yield figure when working out the value of the right. This means that the value of the right is the estimated rate of yield 5% × the fixed-term coefficient 3.99 × the apartment's fair market value €150,000 = €29,925. This value is deducted from the fair market value. The result is the taxable value of the gift. Taxable value for purposes of gift tax equals €120,075 (€150,000 minus €29,925).Gift tax under the first bracket on a gift worth €120,075 in 2016 equals €14,570.

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