Replacing a usufruct with a life annuity

When and why a usufruct is replaced with a life annuity

When transferring a property during one's lifetime, the transferor often reserves a reserved usufruct (Vorbehaltsnießbrauch): he remains the economic user, may continue to live in the property or collect the rents, even though ownership has already passed to the next generation. Over the years, the wish may arise to lift this encumbrance again. One option is not to give up the usufruct without compensation, but to replace it with a life annuity.

Typical occasions are:

• Intention to sell: A usufruct registered in the land register reduces the achievable price and severely narrows the circle of buyers. If the usufruct is replaced with a life annuity beforehand, the property can be sold unencumbered and usually at a higher price.
• The usufructuary's need for liquidity: Those who can or want to no longer use the right themselves, for example after moving into assisted living, receive through a life annuity a plannable, lifelong stream of payments instead of an abstract right of use.
• Clarification and clear arrangements: Within the family or where several parties are involved, later disputes about use, maintenance and income can thus be avoided.

Replacement with a life annuity is only one of several options. A one-off payment, a gratuitous waiver or leaving the usufruct in place until death (§ 1061 BGB) are equally conceivable. Which option fits depends on the objectives, the personal situation and the tax consequences.

Valuing the usufruct: capitalised value under § 14 BewG

Before a life annuity can be agreed, it must be established what the usufruct is worth. For tax purposes, a lifelong usufruct is recorded via its capitalised value (Kapitalwert). The basic formula is: annual value × multiplier (§ 14 BewG).

The annual value is the economic benefit the right yields per year – in the case of a rented property, in simplified terms, the annual net yield (§ 15 BewG). An important upper limit applies here: under § 16 BewG, the annual value may at most reach the amount that results when the tax value relevant to the property is divided by 18.6.

The multiplier depends on the statistical remaining life expectancy of the usufructuary, that is, on their age and sex. The Federal Ministry of Finance publishes the relevant multipliers annually in the Federal Tax Gazette. For valuation reference dates from 1 January 2026, they are based on the 2022/2024 mortality table of the Federal Statistical Office and are calculated with an interest rate of 5.5 percent. Rule of thumb: the younger the beneficiary, the higher the multiplier and capitalised value; the older, the lower.

An appropriate, market-oriented assessment of the property and its earning power is therefore the basis of any sound usufruct valuation. The values stated here are general information; the factors applicable in the individual case must each be checked for currency.

From capitalised value to life annuity: the conversion

Once the capitalised value of the usufruct is established, it is economically converted into a life annuity (Leibrente) for the replacement. In simplified terms: the capitalised value is divided by an annuity present-value factor, which yields the annual annuity payment.

The annuity present-value factor depends – similar to the multiplier under the Valuation Act – on the age of the beneficiary and the start of the annuity, but it is not necessarily identical to it, because the specific contractual arrangement is decisive. The legal classification is important:

• True life annuity: The payments are dependent on life and constant; they end with the death of the beneficiary.
• Term annuity or instalment payment: A payment limited to a fixed period or made in instalments is treated differently for tax purposes.

Often a value-protection clause is additionally agreed so that the annuity does not lose purchasing power over the years. In addition, due date, method of payment and the handling of any sale of the property should be clearly regulated. The exact amount and structure of the annuity should be calculated and reviewed by experts – for example by a notary and a tax adviser.

Tax aspects: taxable portion of the life annuity under § 22 EStG

For the recipient of the life annuity – that is, the former usufructuary – the annuity is generally not subject to income tax in its full amount. With a lifelong life annuity, only the so-called taxable portion (Ertragsanteil) is taxed (§ 22 No. 1 sentence 3 letter a double letter bb EStG).

The taxable portion is a fixed percentage that depends on the age completed by the beneficiary at the start of the annuity and is taken from a statutory table. Examples: with an annuity start at age 60 the taxable portion is 22 percent, at age 65 it is 18 percent and at age 70 it is 15 percent. The older the beneficiary is at the start of the annuity, the lower the taxable share. Only this share is – after deduction of any allowances – subject to income tax.

For the party effecting the replacement, who receives the encumbrance-free ownership, the annuity payments may, depending on the arrangement, have to be treated as acquisition costs for acquiring the unencumbered property. With a property previously rented out, it should additionally be noted that, according to recent case law of the Federal Fiscal Court, a usufructuary's waiver for consideration may under certain circumstances lead to taxable income. The income tax treatment depends heavily on the individual case and should be clarified for tax purposes in advance.

Gift tax: when the consideration is not adequate

Replacement with a life annuity is intended as a transaction for consideration: the value of the annuity is meant to correspond to the value of the relinquished usufruct. If both values match, there is essentially an exchange of asset positions and no gift.

It becomes problematic if the consideration is not adequate. If the present value of the annuity is significantly below the capitalised value of the usufruct, the usufructuary may partly make a gift to the favoured owner. Conversely, an excessive annuity may be a benefit to the usufructuary. In both cases, the difference may, as a gratuitous benefit, trigger gift tax under § 7 para. 1 No. 1 ErbStG.

Particularly within the family, for example between parents and children, a comprehensible, market-appropriate valuation is therefore central. Personal allowances can cover part of it, but do not replace a clean valuation. The gift tax consequences should be calculated before notarisation, as they can be considerable depending on the degree of kinship and the value.

Notarial form and deletion of the usufruct from the land register

The usufruct is a real right registered in the land register. Its replacement and deletion therefore follow land register law. It only expires of its own accord upon the death of the beneficiary (§ 1061 BGB); for an early cancellation, further steps are necessary.

Required under § 875 BGB are the declaration of surrender by the usufructuary and the deletion in the land register. In practice it works like this:

• The parties conclude a replacement or cancellation agreement that governs the life annuity, its amount, value protection and due date. Because of the property connection, notarial recording is regularly required.
• The usufructuary issues a deletion consent in the form required under land register law (notarial certification).
• Once the consideration has been rendered, a deletion-ready receipt is often used, on the basis of which the land registry deletes the usufruct.

Only upon deletion in the land register is the property actually free of encumbrances. To safeguard both sides, the payment of the annuity and the deletion of the right are sensibly linked together in the contract.

Risks, structuring and the role of a neutral valuation

Replacing a usufruct with a life annuity is a demanding arrangement in which civil-law, tax and economic questions converge. The most important risks are:

• Mispricing: An annuity that is too low or too high can lead to a gift and thus to gift tax.
• Wrong tax classification: Whether a true life annuity, term annuity or one-off payment – the consequences for income and gift tax differ considerably.
• Owner occupation or letting: With rented objects, special income tax consequences must be observed.
• Timing of the sale: If the property is sold after the replacement, speculation periods may play a role.

The sound basis of each of these decisions is a neutral, market-appropriate valuation of the property and – building on that – of the usufruct. As an owner-managed brokerage at Königsallee 61 in Düsseldorf, founded as Wolfgang Richter GmbH and with more than 60 years of experience, we prepare a well-founded assessment of the property value for owner families and accompany – if desired – a subsequent discreet sale. The legal and tax structuring of the replacement itself belongs in the hands of your notary and your tax adviser. This article is general information and does not replace advice in the individual case.