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A life annuity is a contract in which the purchaser(debirentier) makes periodic payments to the vendor(crédirentier).

This life annuity is paid during the lifetime of the seller (or a third party). As this is a random contract, the price finally paid cannot be determined at the time of the contract, as it depends on the seller's lifetime. As well as an annuity, the price may include a bouquet, which is a fraction of the price paid in cash on the day of sale. The higher the bouquet, the cheaper the annuity.

The uncertain nature of life annuities means that there are certain special rules for calculating capital gains.

Capital gains tax is a 34.5% tax based on the difference between the cost price and the sale price of the property (subject to certain adjustments and exemptions). Determining the cost price or sale price of a property can raise a number of questions in the context of a life annuity.

A distinction should be made between two situations in which life annuities and capital gains on property may come together.

On the one hand, we will look at the sale of a life annuity property subject to capital gains tax and, on the other, the sale of a life annuity property also subject to capital gains tax. In this way, we will see how the cost or sale price of a life annuity property is assessed in order to determine the amount of the capital gain.

Life annuities and determining the sale price for calculating capital gains tax

The aim here is to determine the sale price to be used for calculating the capital gain on a property sold as a life annuity. Where a sale is made in return for an annuity, the sale price used is the capital value of the annuity, plus any bouquet (a sum of money paid in cash), without interest being taken into account.

The sale price used for capital gains purposes is therefore the price stated in the deed of sale, on which registration duties were calculated and which enabled the annuity to be converted.

Even if the life annuity sale involves a staggered payment schedule, capital gains tax is paid at the same time as the sale by the notary, who deducts the amount due from the sale price.

Life annuity and determining the cost price for calculating capital gains tax

Where the vendor, who is liable for capital gains tax, has acquired the property as a life annuity, the cost price to be used for calculating the aforementioned tax is the capital value of the annuity,
increased, where applicable, by the bouquet. This is the value expressed in the title deed, which was also used to calculate registration duty when the seller became the owner.

There are, however, a number of exceptions to this principle.

Firstly, if the beneficiary of the life annuity has not died by the date of resale of the property for which he is the annuitant, the cost price may be determined by the annual instalments paid.

For the purposes of calculating the capital gain and in order to take account of the uncertain nature of a life annuity sale, it has been decided to authorise the taxpayer to substitute, at his or her request, for the capital representing the annuity assessed at the time of acquisition, the total formed by the arrears actually paid and the capital representing the annuity still to be paid at the date of sale. The same option is available to taxpayers who, having sold a property acquired under the same conditions, retain responsibility for servicing the life annuity. Given that, in this case, the remaining annuity is not valued in the deed of sale, the taxpayer will have to indicate in his application the elements that served as the basis for the valuation of the annuity added to the purchase price.

Secondly, this mitigating measure is also likely to apply where the annuitant is no longer alive at the time of the sale of the property. In this case, the purchase price is the amount of the arrears actually paid plus, where applicable, the fraction of the purchase price paid in cash.

Capital gains on property are subject to deductions depending on the length of time the property is held. If the property is held for 30 years or more, the seller is entitled to a 100% allowance and is therefore effectively exempt. Note that no capital gains tax is payable on the principal residence.

How should the holding period for a life annuity property be assessed? The answer is simple. The starting point for the holding period is the date of the life annuity purchase. It does not matter whether the vendor recovers the right of use or usufruct reserved for the creditor at a later date.