Keeping the right of possession but giving it up later

Donors may write out a clause 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 a donor later decides to change the clause, it may give rise to a gift subject to gift tax.  The basis of gift tax depends on the date when the donor gave up the right of possession.

Giving up the right of possession is a taxable gift if

  • the right of possession was retained when giving the gift away;
  • the right of possession was received by virtue of a will or
  • a surviving spouse has withheld their right of possession over their permanent home.

One way to give up a right of possession is to make a statement to that effect. Another way is to have the property sold off. Other assets are received in exchange, but the right of possession is not transferred to these assets.

Because the original gift tax or inheritance tax was reduced by virtue of the right-of-possession clause, the fact that the donor now loses the right is treated as a gift subject to gift tax. The owner of the property (the gift recipient) is responsible for paying the gift tax because the owner now receives the right of possession over the property of which they previously only had the right of ownership.  After the giving up of the right, the gift recipient is the one who now holds both rights: the right of ownership and the right of possession.

Taxable value depends on the date of the transfer

The value of the gift is in this case dependent on the current value of the right of possession on the date of transfer.  The annual yield of the property, the age of the holder of a 'for life' possession right, or the effective period of a fixed-term possession right have an impact on the current value.  If there is no information available on the annual yield, an estimated yield rate must be used.  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.

More information on the retention of the right of possession

Example: In 2011, Antti gave his grandson Mika a summer cottage, but kept its right of possession to himself for life. However, in 2016 as he turns 80, he decides that he no longer wants to keep the possession right.  At the time in 2016 when Antti gives it up, the cottage's fair market value is €350,000.

Value of the right at transfer date: age coefficient 5 × 3% × €350,000 = €52,500.  Mika being the owner of the summer cottage must pay the gift tax, which under the first bracket on a gift worth €52,500 in 2016 equals €5,120.

Gift tax on the giving up of the right is assessed in accordance with its value on the date of transfer although the previous assessment of the value of the right had referred to a lower value.

Example: Antti gave his grandson Mika a summer cottage in 2011. Antti's age was 75 years at that time. In 2011, the cottage's fair market value was €280,000.  Antti declared that he keeps the right of possession for life.  The value of that right was assessed to be €50,400 (€280,000 × age coefficient 6 × estimated yield rate 3%). This amounted to a deduction from gift tax.  Accordingly, Mika paid gift tax on €229,600.

In 2016 as Antti turns 80, he decides that he no longer wants to keep the possession right although he said he wants it for life.  At the time in 2016 when Antti gives it up, the cottage's fair market value is €350,000. Value of the right at transfer date: age coefficient 5 × estimated yield rate 3% × €350,000 = €52,500.  Mika being the owner of the summer cottage must pay the gift tax.  Because the value of the gift, in this case the relinquishment of the possession, is dependent on the date when it happens, the base for gift tax is €52,500 not €50,400.   Gift tax under the first bracket on a gift worth €52,500 in 2016 equals €5,120.

See Gift Tax Schedule on the Amount of gift tax pages (in Finnish)

Example: In 2011, Antti gave his grandson Mika a summer cottage, but kept its right of possession to himself for life. However, in 2016 as he turns 80, he decides that he no longer wants to keep the possession right.  At the time in 2016 when Antti gives it up, the cottage's fair market value is €350,000.

Value of the right at transfer date: age coefficient 5 × 3% × €350,000 = €52,500.  Mika being the owner of the summer cottage must pay the gift tax, which under the first bracket on a gift worth €52,500 in 2016 equals €5,120.

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