Gift tax and giving up the right of possession

The right of possession may have been retained for life or for a definite period. If the holder of the possession right gives up the right, it is regarded as a new taxable gift received by the gift recipient.

How to give up the right of possession

  1. The holder of the possession right can give up the right for example by filing a free-form letter.
  2. The current owner of the asset, i.e. the gift recipient, must file a gift tax return and inform the Tax Administration that the holder has given up the right of possession. Instructions for filing and payment

When the right of possession has been given up, both the right of ownership and the right of possession belong to the gift recipient.

Is giving up the right of possession subject to tax?

Giving up the right of possession is a taxable gift because in the original gift tax assessment the amount of tax was reduced as the right of possession was retained. The owner of the property is liable to pay gift tax because the owner now receives the right of possession to the property donated earlier.

How is the right of possession calculated?

When the holder decides to give up the right of possession, it is treated as a gift received by the owner of the property.

The value of the gift is dependent on the value of the right of possession on the day when the right is given up. Although the value of the right of possession may originally have been lower, the gift tax will be assessed on the basis of the value on the day when the right is given up.

The value of a right of possession is affected by

  • the fair market value of the asset/property
  • annual yield
  • the age of the holder giving up the right.

Example of giving up the right of possession retained for life

In 2013, Antti gave his grandson Mika a summer cottage, but retained the right of possession for life. However, in 2018 as he turns 80, he decides to give up the possession right. At that time, the fair market value of the summer cottage is €350,000.

The value of the possession right is thus age coefficient 5 × yield coefficient 3% × fair market value €350,000 = €52,500. Being the owner of the summer cottage, Mika must pay the gift tax. Gift tax on a gift worth €52,500 is €4,450 in 2018 (tax bracket 1).

More information on valuating the right of possession.

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