Usufruct

Usufruct is a legal right to use property that belongs to someone else and to take the income or produce it yields, such as rent or crops, while leaving the property itself intact. The holder, called the usufructuary, enjoys the asset almost as an owner would, but cannot sell it, destroy it or change its substance. The owner keeps what civil lawyers call bare ownership and gets full rights back when the usufruct ends.

The idea comes from Roman law and survives in the civil codes of France, Spain, Italy, Brazil and Louisiana, among others. Common-law systems reach similar results with life estates and trusts. In Islamic finance the right to the benefit of an asset, known as manfa'ah, is the thing that is sold in an ijarah lease, which makes usufruct central to leasing and to many kinds of sukuk.

Think of a family orchard. A grandmother gives the orchard to her grandson but keeps the right to live beside it, pick the apples and sell them at the market for the rest of her life. The grandson owns the land on paper, yet for now he cannot sell the fruit or cut down the trees. When the grandmother's right ends, everything passes fully to him.

Her right to use the orchard and keep its fruit is a usufruct. She must look after the trees and hand them back in good shape. Islamic finance applies the same thinking when a bank buys an asset and sells only its use for a period, much as a landlord sells a tenant the use of a flat.

Roman jurists split full ownership into three bundles: usus, the right to use a thing; fructus, the right to its fruits or income; and abusus, the right to dispose of it. Ususfructus combined the first two and left the third with the owner.

Modern civil codes kept the concept almost unchanged. Article 578 of the French Civil Code defines it as the right to enjoy things owned by another, as the owner would, but with the duty to preserve their substance. A usufruct granted to an individual ends at the latest on that person's death, and under Article 619 one granted to a company or other legal person cannot last more than thirty years. It is a common estate-planning tool: parents give children bare ownership of a home while keeping the usufruct.

• Use and income. The usufructuary may occupy the property, rent it out and keep the rent, or collect dividends on shares held in usufruct.
• Preservation. The usufructuary must maintain the asset, pay routine upkeep and avoid changing its use or substance.
• No disposal. The usufructuary cannot sell or mortgage the underlying property, though in many systems the usufruct itself can be transferred or charged with a lien.
• Return. When the usufruct ends, the bare owner recovers full ownership automatically, without paying for it.

Tax authorities must value each part of split ownership. France uses a fixed scale in Article 669 of its General Tax Code that sets the life usufruct as a share of the full value depending on the usufructuary's age, from 90% below age 21 down to 10% from age 91. The calculation is:

• $U$ is the value of the usufruct.
• $p$ is the percentage from the scale for the usufructuary's age, written as a decimal.
• $V$ is the full market value of the property; the bare ownership is worth $V - U$.

For a house worth €400,000 whose usufructuary is 65, the scale gives 40%. The usufruct is $0.40 \times 400{,}000 = 160{,}000$ euros and the bare ownership is $400{,}000 - 160{,}000 = 240{,}000$ euros, so a gift of bare ownership is taxed on €240,000.

Classical Islamic jurisprudence treats the benefit of an asset as property in its own right that can be sold for a price. An ijarah is defined as the sale of that benefit for a known period and rent, while ownership, and the risks of ownership, stay with the lessor. This lets a financier earn a return from rent rather than from riba, the interest prohibited under Sharia. The terms must be clear to avoid gharar, or excessive uncertainty.

The AAOIFI standard on investment sukuk lists certificates of ownership of usufruct among its recognised types, covering both existing assets and assets to be built or services to be delivered. In practice:

• Ijara sukuk. In an ijara sukuk, a special purpose vehicle holds an asset or its usufruct and leases it to the originator, passing the rent to investors.
• Forward leases. Usufruct of an asset not yet built can be leased in advance alongside an istisna' construction contract.
• Head leases. Some issuers lease out the usufruct of land for a fixed term rather than selling it, which matters where land cannot easily be transferred.

Whether investors own the asset or only its usufruct affects their position if the originator fails, a point behind the split between asset-based sukuk and asset-backed ones.

A usufruct is wider than a plain right of use, which in civil law lets the holder use a thing but not take its income. It differs from an ordinary lease because it is a property right rather than a contract, so it binds later buyers of the asset. It also differs from a waqf, in which the owner permanently dedicates an asset and its benefit to a charitable purpose. In finance it is one way to split an asset's income from its ownership, as equipment leases such as container leasing split use from title.

• French Civil Code (Légifrance)
• Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)