Right of Residence and Usufruct: What Owners and Their Descendants Need to Know

What is a usufruct?

Usufruct is regulated under Swiss law in Art. 745 ZGB and grants the beneficiary full enjoyment of someone else's asset. In the context of a property, this means: The person entitled to usufruct may not only live in the house themselves, but also rent it out and keep all rental income.

What the usufructuary is not allowed to do: sell the property. They must preserve the asset so that it can revert to the owner once the usufruct expires.

Who pays which costs for the usufruct:

By statute, the usufructuary bears the costs for ordinary maintenance, mortgage interest, insurance premiums as well as taxes and dues. The new owners—usually the children—are responsible for extraordinary renovations, but in this arrangement they do not bear any running housing costs.

For tax purposes it remains with the usufructuary: He declares the deemed rental value or the rental income as income, and reports the taxable value of the property as an asset. In return, he may deduct the mortgage interest and maintenance costs.

The usufruct is neither transferable nor inheritable. It expires at the latest upon the death of the beneficiary.

What is a right of residence?

The right of residence according to Art. 776 ZGB is a more limited form of easement. It allows the beneficiary exclusively to live in the building or parts thereof himself. Rental to others is not permitted. Anyone with a right of residence who temporarily moves to a nursing home cannot use the property as a source of income during this time.

In return, the obligations are fewer: The holder of the right of residence pays for ordinary maintenance and for running ancillary costs such as heating, electricity, and water. The mortgage interest, insurance premiums, and extraordinary renovations, on the other hand, are borne by the new owners. However, this can also be regulated differently in the agreement on the right of residence.

For tax purposes the holder of the right of residence must declare the rental value of the rooms they occupy as income (imputed rental value). Wealth taxes on the property, however, are to be paid by the owner.

The right of residence is also not transferable or inheritable.

How are right of residence and usufruct established?

Both rights are created by registration in the land register. For this, a contract notarised by a public official is required, to be concluded before a notary. The contract records the scope, duration, and modalities of the right. Without registration in the land register, neither the right of residence nor the usufruct has legal effect.

What does this mean for the mortgage?

This is where planning becomes most complex for many families. The transfer of a property together with the establishment of an easement has a direct impact on the financing structure.

Who is listed in the credit contract, who in the land register?

This is a question that often causes uncertainty in practice, as registered property owner, borrower (debtor), and pledgor do not have to be the same person in this context. In principle, Swiss law distinguishes here three clearly separate roles:

The registered property owner is the person listed in the land register as the owner of the property. After the transfer, these are the children. The previous owner loses this status, even if they still hold the right of residence or usufruct.

The borrower (debtor) is the person who is liable to the bank for repayment of the mortgage and who has signed the loan agreement. This is the person whose affordability is assessed by the bank.

The pledgor is the person who provides the bank with the land charge, i.e. the mortgage note, as collateral. Usually, this is the registered property owner, but it does not have to be.

In the normal case, all three roles coincide: whoever owns the house has also taken out the mortgage and provided the collateral. In a transfer with an easement, however, different scenarios arise, depending on what the bank will accept:

Scenario 1: Children take over the full debt. The children become property owners, borrowers, and pledgors at the same time. The parents are completely removed from the loan agreement. This requires the bank's express consent. The bank will thoroughly reassess the affordability of the children, using a notional interest rate of 5 percent. If the affordability check is positive, this is the cleanest solution for all parties.

Scenario 2: Joint and several liability. If the bank refuses full debt assumption by the children, for example because their income does not meet affordability, the parents remain as debtors in the credit contract. The children become registered property owners, but not formal borrowers. Both parties are jointly and severally liable to the bank. This is the safest solution from the bank's perspective, but for the family it is an unsatisfactory interim solution that requires a clear internal arrangement.

Scenario 3: Third-party pledge arrangement. Here, the mortgage debt remains with the parents as borrowers. The children become property owners but sign the loan contract only as pledgors, not as debtors. They provide the bank with collateral on the property as security, without being personally liable for the debt. This requires the bank’s consent for such a third-party pledge arrangement. In practical terms, this means: if the parents can no longer pay the mortgage interest one day, the bank can realize the collateral, i.e. foreclose on the property, even though the children are the owners. The third-party pledge arrangement should therefore be contractually secured with an appropriate right of recourse agreement between family members.

The following overview shows who takes on which role in each scenario:

Ultimately, the bank decides which scenario is possible. In any case, it assesses the creditworthiness and affordability of the borrower(s) and the security of the collateral. That’s why an early discussion with the bank is essential before starting legal steps at the notary.

Important practical tip on order of entries: Anyone planning an easement together with a property transfer should pay close attention to the order of entries in the land register. If mortgage certificates are entered prior to the right of residence or usufruct, the lending value of the property remains unchanged from the bank’s perspective. If, however, the easement is entered first, the bank calculates the market value already taking the encumbrance into account, which may reduce the lending base and therefore the available mortgage amount.

Value reduction with encumbered properties: Banks are generally cautious when granting loans for properties entered with a right of residence or usufruct. The reason is obvious: An encumbered property is harder to sell in the event of foreclosure because the easement generally remains in place. This significantly reduces the pool of potential buyers and thus the realizable value as collateral.

Affordability and responsibility: With a usufruct, the bank usually reviews affordability primarily for the usufructuaries, i.e. the parents. Since they are legally obliged to pay mortgage interest, their income and assets must be sufficient to cover ongoing interest. The children as property owners are still at risk: Through their role as pledgors or joint debtors, the bank can access the property if the parents default. This risk situation should be clarified and contractually regulated in advance between the parties.

Tax Considerations and Inheritance Law

The early transfer of a property with right of residence or usufruct can significantly reduce the tax burden. The value of the easement reduces the taxable gift value, which is particularly relevant where inheritance and gift taxes apply, for example for distant relatives or unmarried partners.

The capital value of the right of residence is calculated as the net annual rental value multiplied by a capitalisation factor set by the canton. The deduction for maintenance depends on the age of the building, and is between 10 and 20 percent.

Inheritance law: If a property is transferred to a child during the owner's lifetime, the mandatory shares of the other children must be preserved. What counts is the value of the property taking into account the easement granted. Encumbering compulsory shares with a usufruct is generally not permissible; the only exception is favouring the surviving spouse in accordance with Art. 473 ZGB. Anyone with multiple children and transferring the property to one should regulate the equalisation obligation toward the other heirs early and in a binding way.

When is which model more sensible?

The choice between right of residence and usufruct depends on the family's life situation and financial objectives.

Usufruct is generally the better choice when the parents also want to rent out the house or apartment—either because they move to a nursing home or need rental income as an income source. If the parents are in a strong financial position and can cover ongoing expenses themselves, usufruct also offers them more flexibility and independence.

The right of residence is more suitable if the parents only want to live in their home themselves and the next generation is willing to take over the ongoing financing costs. It eases parents’ operational burden and is financially more advantageous for them.

In many cases, both instruments are combined—for example, a right of residence for parts of the building and a usufruct for other areas.

Your checklist before making a decision

Before proceeding with a property transfer involving an easement, you should clarify the following points:

1. Obtain extract from land register: Which existing mortgage certificates and encumbrances are registered?
2. Determine market value: What is the current value of the property, and how is it changed by the easement?
3. Talk to the bank: Will the bank agree to the assumption of liability by the descendants and on what terms?
4. Check affordability for the successor: Can the new owner carry the mortgage long-term according to the bank's affordability rules?
5. Check tax consequences: What gift taxes apply in the relevant canton, and how does the easement affect the taxable value?
6. Ensure equal treatment in inheritance law: Are there other heirs, and how is the equalisation obligation regulated?
7. Plan the order of land register entries: Mortgage certificates should be registered before the easement.
8. Arrange public notarisation: Right of residence and usufruct must be recorded by public notary.

Conclusion

Right of residence and usufruct are valuable estate planning tools that allow home ownership to be passed on early without having to give up one’s trusted home. For financial planning, the rule is: The effects on lending value, affordability, and banking relationship are significant and must be discussed early on with the lender. A poorly chosen order of land register entries or an unresolved assumption of liability could jeopardise the whole transaction.

As every family situation is unique, independent advice is recommended which considers legal, tax and financing aspects together. At hypothek.ch we help you to ask the right questions and find the appropriate experts.

Legal notice

This article is for general information and does not replace individual legal or tax advice. Right of residence and usufruct raise questions of inheritance law, tax law and mortgage financing at the same time. We recommend that you consult a notary as well as a tax advisor before making a decision. For financial planning purposes, we at hypothek.ch are of course available to you as an independent contact point.

Sources: VZ VermögensZentrum, Voser Rechtsanwälte, PostFinance, RealAdvisor, MoneyPark

Legal basis: Art. 745 ZGB (Usufruct), Art. 776 ZGB (Right of residence), Art. 778 ZGB (Costs right of residence), Art. 473 ZGB (Spousal benefit)