Gift and right of possession
When you give a summer house, a dwelling or other property to someone, you may want to retain the right of possession.
Because the gift recipient's opportunities to use the gift are restricted when the right of possession is retained, the tax to be paid by the gift recipient is smaller.
The recipient must fill out a gift tax return stating that the donor retains the right of possession. The Tax Administration calculates a formal value for the possession right and deducts it from the gift's value. This deduction reduces the amount of gift tax.
What does a right of possession mean?
Donors can retain the right of possession for themselves or for someone else. The right of possession may be held by one or more people.
The right of possession means that the donor or whoever is given the right of possession
- can use the property that was donated
- receives the revenue generated from the property (e.g. rental income)
- pays the fixed expenses relating to the property, such as the real estate tax or maintenance charges, but
- cannot sell or transfer the property or a privilege associated with it (such as the rental right) to someone else without the gift recipient's consent.
No gift tax is imposed on the person for whom the right of possession is retained, not even if the person is someone else than the donor.
When you receive a gift to which the right of possession is retained
If the right of possession to a gift you receive is retained for the donor or for another person
- you are the new owner of the property
- you pay less gift tax because you have restricted opportunities to use the gift without the right of possession
- you are unable to sell the property unless the holder of the possession right gives their consent to the sale.
Frequently asked questions
The donor can retain the right of possession for him- or herself or for one or more other people.
Example: Antti gives a summer cottage to his grandson Mika, who is the son of his daughter Liisa. Antti declares that he wants to retain the right of possession. This means that the right of ownership transfers to Mika but the summer cottage continues to be in Antti's use. If Liisa also uses the cottage, Antti may decide to retain the possession right both for himself and for Liisa. As in the first case, the right of ownership transfers to Mika, but Antti and Liisa have the right of possession.
The right of possession can be retained for life or for a definite period. If the latter alternative is chosen, both the deed of gift and the gift tax return must specify the end date of the period.
Example: Antti gives Liisa a summer cottage. He declares that he retains the right of possession for five years. The right of ownership transfers to Liisa but the right of possession is held by Antti. Five years after the date of gift, Antti's right of possession expires and Liisa will have the right of possession as well as the right of ownership to the summer cottage.
Retaining the right of possession reduces the gift tax.
Because the recipient's opportunities to use the gift are restricted, the Tax Administration calculates a formal value for the right of possession and deducts it from the fair market value of the gift. In other words, the basis of gift tax is the fair market value from which the value of the possession right has been deducted. Calculating the right-of-possession deduction
The person who retains the right of possession is required to actually use the property or receive the revenue generated from it. It is not allowed to retain the possession right only to reduce the gift tax.
Example: Antti donates a single-family house to his daughter Liisa but retains the right of possession. However, Antti does not live in the house, and neither does he receive rental income from it. Liisa moves in with her family, so in fact it is Liisa who exercises both the right of ownership and the right of possession. Because Antti's right of possession is not backed up by the actual circumstances, Liisa is not entitled to a right-of-possession deduction in gift taxation.
Draw up a deed of gift. The deed should contain a clause stating that the right of possession to the gift is retained. You should also state for whom the right is retained and for how long – whether it is for life or for a definite period. If you choose the latter alternative, state the end date of the period.
There is usually no need to submit a deed of gift to the Tax Administration. The instructions for completing a gift tax return contain a list of the circumstances that make it mandatory to enclose a deed of gift or other documentation with the gift tax return. Instructions for completing a gift tax return form
When you fill in the return, enter the fair market value of the gift and state that the right of possession or the profit right or some other right to the gift is retained. This does not affect the gift's fair market value but it changes the basis on which the gift tax is assessed.
The meaning of “right to the gift is retained” is that the gift-giver continues to use the property and/or receive any profit that the property produces. There may also be another type of right, which the giver determines and decides to retain, or keep.
Several synonyms are used: right of possession, access right, easement, usufruct. The giver of the gift must determine the exact nature of the right that will be retained.
Right of possession to the gift — other pages
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