Our property law recognises a distinction between ownership and limited real rights in immovable property.
Ownership constitutes the most complete form of entitlement over property. Limited real rights, on the other hand, constitute legal entitlements that permit a person to exercise certain powers over the property owned by someone else. These rights are “real” because they are enforceable against third parties and are registered against the property’s title deed. But they are “limited” because they do not confer full ownership. Limited real rights can be created by agreement during the property owner’s lifetime or can be created in the will and testament of a Testator (person making the will). In this article, we will focus on the testamentary creation of limited real rights and the effects thereof on deceased estate property transfers, as well as the potential effect on estate duty.
Different types of limited rights exist in our property law. Common examples of limited rights are as follows:
Usufruct
A usufruct gives a late estate heir the right to use, occupy, enjoy and profit (generate income) from a property while not owning the property. A usufruct is granted for a specific period or for lifetime use by the heir. Such a usufruct comes to an end when the specific period for which it was granted lapses or when the usufructuary passes away. Full ownership then vests in the heir who inherited the property (called the ‘bare dominium holder’).
Example: A testator bequeaths his immovable property to his son John Doe, subject to a lifelong usufruct in favour of the testatrix as the surviving spouse.
Habitatio
Habitatio confers on its holder the right to dwell in the house of another together with his or her family without detriment to the substance of the property.
Example: A testator bequeaths his immovable property to his son John Doe, subject to a lifelong habitatio in favour of the testatrix as the surviving spouse.
Usus
Usus gives the user the right to use the property for a specific period or during his/her lifetime, for their own needs or for the needs of their household. Usus differs from a usufruct because the user can only take enough to provide for their needs and cannot generate income, benefit or profit from the property during the duration of this limited right.
Servitude
A servitude refers to the right to use a portion of a property that belongs to someone else for a specific purpose.
Example: A beneficiary may be granted a right-of-way on someone else’s property to access their own land. In the context of a will, a servitude can be used to help manage shared or inherited property.
Fideicommissum
A fideicommissum is a conditional limitation on ownership, compelling transfer to another heir on the fulfilment of the condition. A property is transferred to an heir with the obligation that it must later pass to another person (the ultimate beneficiary). The first beneficiary cannot sell or otherwise dispose of the property during his/her lifetime.
Example: The testator bequeaths his farm to his son John Doe, subject to the condition that the farm is transferred to John Doe’s eldest son after his death.
A usufruct, habitatio, usus and servitude is generally transferred to the limited right holder by means of a notarial deed. The will and testament of the testator is the mandate (reason for the creation of the real right), and the date of the transaction will be the date of death of the testator. The notarial deed is signed by the owner of the property, the person in whose favour the notarial deed is created (limited right holder) and the notary public. The notarial deed is then lodged at the deeds office and registered by the registrar of deeds.
There are 3 exceptions to the general rule when it comes to the creation of a usufruct, usus and habitatio. These limited rights are created in the power of attorney to pass, transfer and bring forward as a condition in the Deed of Transfer (Title Deed) when the exceptions apply. This means that the usufruct, usus and habitatio will not be created and transferred by way of a notarial deed but rather reserved as a condition in the power of attorney and carried forward to the Title Deed.
The exceptions are as follows:
1. When created in favour of the transferor (owner).
2. When created in favour of the transferor or his/her spouse or the survivor of them if the parties were married in community of property.
3. When created in favour of the surviving spouse, if the transfer is passed from the joint estate where the parties were married in community of property.
A fideicommissum is created in the power of attorney to pass, transfer and bring forward as a condition in the Deed of Transfer. If the holder of this limited right passes away, the property is transferred to the ultimate beneficiary in terms of the fideicommissum condition that was brought forward in the Deed of Transfer and not in terms of the will and testament of the limited right holder that passed away.
The testamentary creation of limited real rights are critical tools in estate planning. These rights allow a testator to separate the use and enjoyment of property from ultimate ownership. By doing so, a testator can provide for one beneficiary while preserving the inheritance for another. While highly effective for succession planning, these rights have significant tax consequences, particularly in relation to estate duty and capital gains tax (“CGT”). In this article, we will focus on the estate duty implications of these rights. However, it is important to note that each right may also have CGT consequences, which should be considered as part of an estate planning strategy.
Usufruct
A usufruct can help reduce estate duty in the first-dying spouse’s estate, as the value of the usufruct passing to the surviving spouse is generally exempt under section 4(q) of the Estate Duty Act 45 of 1955. However, the value of the usufruct is included in the surviving spouse’s estate and becomes subject to estate duty upon their death. If the testator creates a usufruct in favour of someone other than the surviving spouse, estate duty is payable on the value of the usufruct in the testator’s estate.
Habitatio
For estate duty purposes, if the bare dominium is left to an heir or trust, the value of the bare dominium is included in the testator’s estate for estate duty. When the holder of the right of habitation dies, the right ceases to exist and is not part of their estate. It therefore does not affect the deceased holder’s estate duty.
Usus
At the death of the person who granted usus, the value of the right is included in their estate for estate duty purposes. However, since usus does not confer ownership or income-generating rights, its value is typically lower than that of usufruct, leading to a reduced estate duty liability compared to granting full ownership or a usufruct. Upon the death of the usus holder, the usus right terminates automatically, without triggering estate duty in the usus holder’s estate.
Servitudes
For estate duty purposes, the creation of a servitude generally has minimal impact because the servitude usually does not confer ownership or generate income. The value of the servitude may only be relevant if it has a measurable economic value, for example, if it allows the holder to benefit financially from the property.
Fideicommissum
For estate duty purposes, a fideicommissum is treated similarly to a usufruct. Consequently, the principles discussed above under usufruct also apply to a fideicommissum. The valuation of the interest, as well as the corresponding estate duty obligations, is determined using the same approach as for usufructs.
In conclusion, comprehensive estate planning is crucial to ensure that all legal, financial, and tax considerations are fully addressed. A carefully structured plan allows an individual to achieve their testamentary intentions effectively while optimising tax efficiency, safeguarding the estate and maximising the benefits for intended beneficiaries.
Talk to our estate planning advisors in our Estate Planning Team who will guide you through all the intricacies of appropriate estate planning and also the correct use of limited real rights in your estate planning.
Disclaimer: This article is the personal opinion/view of the author(s) and does not necessarily present the views of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever, and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken based on this content without further written confirmation by the author(s).
