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
- The holder of the possession right can give up the right for example by filing a free-form letter.
- 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. This means that the calculation of gift tax is now based on the value of the day when the holder of the right decides to give up the right. The previous, original tax value of the right is no longer important.
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.
If it had been arranged that 2 or more persons are co-holders of the right until it is given up, the youngest person’s age would be the one entered into the gift-tax calculation.
Example of giving up the right of possession retained for life
In 2017, Antti gave his grandson Mika a summer cottage, but retained the right of possession for life. However, in 2022 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 2022 (tax bracket 1).
Frequently asked questions
When you relinquish the rights that you previously had, at the time when the apartment is sold, the taxes depend on your current circumstances:
- You simply give up the right of possession and you receive no cash compensation. The apartment’s owner receives the right. In these circumstances, the apartment’s owner – the recipient of rights of possession – must submit a gift tax return and pay gift tax. The gift tax return submitted by the owner must inform the Tax Administration that the holder has given up the right of possession.
- When you relinquish the rights you had, you receive some form of compensation or an amount of money. This is considered a transfer of property, and the received compensation is taxable income. You must submit a tax return following the instructions for reporting capital gains on the sale of property. Read the instructions for submitting a tax return in connection with a sale of property or assets. For more information, see chapter 3 of the in-depth guide “Right of possession; usufruct over property and taxation” — Hallintaoikeus omaisuuden luovutuksen verotuksessa (in Finnish and Swedish).
- You have been having the right of possession over an apartment. The apartment is sold to an outside buyer. After that, the seller buys another, similar apartment – and your right of possession now concerns this apartment. For purposes of taxation, you are not considered to fully give up the right of possession, instead, only the property being possessed has changed. Because in this example, the first apartment was similar to the second, newly purchased apartment, so their value is the same, it is also considered that your right of possession’s value is same as before. Under the circumstances, it is not necessary to submit a gift tax return, and no gift tax will be imposed although the apartment has changed.