What do you want to know?
Why buy or sell life annuity?
The life annuity consists in selling a property to a third party in exchange for the payment of a periodic life annuity (monthly, quarterly or annual).
This annuity can be accompanied by a bouquet, that is to say a sum of money paid in cash at the time of signing the deed of sale.
In France, there are two types of life annuity sales
The free life annuity
and the busy life annuity.
The life annuity sale allows:
To receive capital and / or income until death
To keep the enjoyment of your home
To benefit from tax advantages
The life annuity consists in acquiring a property, but without necessarily occupying it immediately, unlike a traditional acquisition. In fact, the purchaser can only occupy the accommodation when the seller dies if it is an “occupied” life annuity.
The purchase of a property in life annuity allows:
Access real estate at a discount
To buy real estate without bank credit while having a payment step
To benefit from tax advantages
The acquisition & the life annuity sale:
a long-term strategy
What is a life annuity?
The life annuity is a form of real estate sale: a generally elderly person sells his house in return for a life annuity, possibly retaining the right to live there.
The life annuity sale is based on the principle of randomness.
Indeed, neither the seller nor the purchaser know at the time of signing the deed of sale for what amount the property will be acquired, since this amount depends on the date of the seller's death. A life annuity sale in which the hazard is absent can be canceled.
(This is particularly the case if the seller, ill at the time of signing the deed of sale, dies within 20 days.)
The terms that govern the life contract of a buyer and a seller are detailed in the preliminary contract and the notarial deed.
The acquirer (called the Debitrator ) pays the seller (the Annuitant ) a fixed sum, the bouquet, the day of the signing of the authentic deed and a monthly or quarterly annuity (free agreement of the parties). It is effective on the day of the signing of the notarial deed and ends on the death of the Seller.
The different life annuities
The free life annuity: The purchaser disposes of the property. The sale price is higher than for an occupied life annuity since the seller decides to vacate the accommodation and the purchaser can have immediate enjoyment of it.
The seller, through this type of sale, is freed from all charges and work, rental vacations, management of unpaid rents.
He receives a monthly pension until his death.
The purchaser can then use the accommodation on a personal basis or rent it to obtain regular income allowing him to pay the life annuity to the seller.
The free life annuity is quite rare and represents around 5 to 10% of transactions
The occupied life annuity:
It represents more than 90% of goods sold in life annuity.
The seller retains the enjoyment of his home, he remains the holder of the right of use and habitation until his death. Unlike a usufructuary, he is not authorized to rent the property, he can only live there.
Right of use and habitation
The holder of this right has the possibility of living in the property with his family (parents…), but only if there is cohabitation.
Indeed, it is not possible for the buyer to "lend" this accommodation to family while living in another place.
This right allows its holder (the user) to use property belonging to another person, for example by living in it personally. He can also receive the fruits (income), but only up to his needs and those of his family.
This right is consequently more restricted than a usufruct. The owner of the property will grant this right in consideration of the person. The user must then behave as if it were his own building.
When this buyer dies, the family will have to leave the property. In the event of extreme old age or illness, it is not uncommon for the seller to have to leave the property.
In this case, a clause is provided, which states that the buyer must pay an additional annuity of% of the rental value of the property when signing the contract. This clause also takes effect if the seller does not wish to take advantage of his right of use and habitation.
Type of property to buy & sale price of the life annuity
Any type of property can be purchased as a life annuity: apartment, house, mansion, building land, etc.
However, the bulk of the market relates to medium-sized goods, generally 2 to 3 rooms, located in the Paris region or in the south of France.
These are two geographic areas that associate a large proportion of elderly people and the presence of many investors.
The parties are free to set the selling price (market price, depending on supply and demand), however it results from a complex calculation involving several factors:
the value of the property: it is necessary to call on a real estate expert to assess the property and determine the market value.
the seller's right of use and residence: application of an occupancy allowance to the value of the accommodation, inversely proportional to the seller's age.
The rate of return of the property: it is advisable to quantify the shortfall for the purchaser on the rental value of the property by estimating the amount of the theoretical rent in relation to the duration of the life expectancy of the seller.
the annuitant's age and life expectancy, which can be estimated using INSEE mortality tables or those of insurance companies.
the possible reversibility of the annuity in favor of a second annuitant.
Once the sale price has been determined, the distribution between bouquet and life annuity is freely established between the parties (neither one nor the other is obligatory).
Life annuity clauses
Life annuity clauses
Guarantees are included in the sales contract and their main purpose is to protect the seller. Thus, several clauses can be written:
The resolutory clause or seller's privilege: it allows the annuitant to recover the property if you stop paying him the annuities;
The bouquet retention clause if the sale is terminated, in particular in the event of non-payment of the life annuity;
The indexation clause: it allows the annuity to be revalued based, for example, on an index published by INSEE. This clause in favor of the seller can be particularly useful if it is estimated that the life span will be spread over a long period in a sector where real estate is undergoing strong growth.
Taxation
For the acquisition in life:
No property income to declare unlike a landlord owner
Limited IFI value
Reduced notary fees and tax costs, because they are calculated on the "occupied" value of the property (market value - occupancy allowance)
For life annuity sale:
The sale of the main residence benefits from an exemption from tax on the real estate capital gain noted.
Life annuity taxed in part
IFI value limited to the right of use
Reduced inheritance tax since the property is no longer part of the seller's patrimony
The life annuity generates reduced taxation. A progressive reduction is applied according to the age of the seller and the type of annuity.
Tax scale for life annuities:
70% if the seller is under 50 years old,
50% if the seller is 50 to 59 years old,
40% if the seller is between 60 and 69 years old,
30% if the seller is over 69 years old.
Note that: the bouquet generally represents 20 to 30% of the value of the property, or even more if the seller needs capital or less if he prefers a large life annuity. Once the amount of the bouquet has been determined, the balance of the sale price is converted into a life annuity.
The periodicity of the annuity is freely fixed by the parties. It is usually monthly.
The notion of hazard
The hazard is a necessary condition of a sale in life. If there is no uncertainty, the contract can be canceled. Hazard and life annuity go hand in hand.
The life annuity is by nature a random contract, since the total price paid will depend on an unknown element: the date of the seller's death.
The essential characteristic of the sale in life is that the duration of payment of the annuity is not known in advance and the total amount of the investment either.
For the investor, the main risk associated with this hazard is the seller's longer than expected lifespan.
If there is no randomness, the contract of life annuity sale is zero.
The life annuity sale contract is also void if:
the annuity is paid out on the head of a person who dies within 20 days of the date of sale,
the seller was suffering from a disease from which he was suffering at the time of the sale (art 1975 of the civil code). It does not matter whether the buyer was unaware of the existence of this disease or not.
The bouquet paid generally corresponds to 20% or 30% of the price of the property on the market.
Mortality tables, similar to those used by insurers, are then applied to calculate the annuity. From these tables are calculated the dividing coefficients which make it possible to obtain the annuity.
The value of an annuity is therefore estimated according to the scales of the mortality table established by INSEE, Insurance Companies such as CNP Assurances (formerly called the Caisse Nationale de Prévoyance).
The principle of calculating the life annuity is that
if the seller dies at the end of the average life expectancy, he is paid the full price of his home.
If he lives longer, the buyer pays more than the value of the home and therefore gets a bad deal.
If, on the contrary, the seller dies before the end of his life expectancy, the buyer ultimately pays less than the real value of the property.
A reduction in the annuity may be provided for in the event that the life annuity relates to two annuitants and one of them dies.
The annuity is calculated according to the value of the property and the rate of income excluding capital inflation.
For an occupied life annuity, it is necessary to deduct from the value of the property the amount of rents that would normally be received for an equivalent property (in particular the same area and same location).
The amount of the life annuity is set in the deed of sale and must take into account several elements:
the real estate value of the property
seller's age
the payment of a bouquet and its amount
the free or occupied status of the property sold as a life annuity.
In addition, a property sold as an occupied life annuity necessarily experiences a discount in its land value in order to compensate for the deprivation of the right of use and of habitation suffered by the purchaser which runs until the death of the seller.
Warning: The undervaluation of the price of the property can lead to a tax requalification or an action for nullity on the part of the seller and even his heirs.
The seller of a life annuity benefits from a life annuity from the signing of the deed of sale.
In addition, the life annuity knows an advantageous tax regime.
Indeed, although the life annuity is subject to income tax, it benefits from a reduction the amount of which varies according to the age of the seller at the time of the 1st payment of the annuity.
Thus, only a fraction of the life annuity is taxed, according to the following terms:
70% for a 1st under 50 years old
50% for a 1st payment from 50 to 59 years old
40% for a 1st payment from 60 to 69 years old
30% for a 1st payment over 69 years old.
The bouquet is exempt from tax.
Finally, the seller does not have to pay the property tax or the work voted by the building manager, for example, even if he continues to occupy the property.
On the other hand, if he occupies the property, the seller continues to pay the housing tax.
When a property is sold in life, the capital gain is taxed in the year of the sale. The tax calculated on the capital gain varies depending on the situation.
There are thus two cases.
The first corresponds to the sale of the main residence. Indeed, under article 150 U of the CGI, the capital gain resulting from the sale of the main residence is exempt from tax. There is therefore no need to calculate the sale price.
Second, in the context of the sale of a second home, the capital gain is calculated from the price set in the deed of sale. The latter is composed of the amount of a possible bouquet and the capital value of the annuity.
However, if the annuitant has owned the property for at least 22 years, he does not have to pay the corresponding portion of income tax. In addition, he is totally exempt from capital gains tax if he has owned the property for at least 30 years.
Advantages & Disadvantages of acquiring a life annuity
Advantages & Disadvantages of the life annuity sale
Life annuity
Example of lifetime acquisition
1
Initial situation
Philippe & Mélanie are a young couple. They already have a house and want to invest in real estate again without resorting to credit.
With their respective savings, they would have a contribution of € 200,000.
Their monthly savings capacity is € 3,000.
Jack, meanwhile, is 80 years old. He owns an apartment estimated at € 422,000.
He wants to continue living in his home, but needs 100,000 € to ensure his lifestyle and his passions;
As such, he therefore plans to sell his apartment as a life annuity.
2
The acquisition in life annuity example
For an “occupied” life annuity, taking into account Jack's age, his life expectancy, the selling price of the apartment must be reduced by an occupancy allowance estimated at 28%, ie € 122,000.
The “occupied” life annuity sale price would therefore be € 300,000 (= 422,000 - 122,000) split between:
the bouquet desired by Jack of 100,000 €,
and a life annuity, paid until his death estimated at € 23,000 or € 1,900 per month
3
Final situation
If Jack dies within 8 or 9 years of the purchase (estimated life expectancy), Hélène and Baptiste will become full owners of the apartment at no additional cost!
Note that Jack's bouquet is not subject to any taxation and that these annuities are not fully taxed (allowance depending on age)
