There are a number of advantages toselling a life annuity, including an annuity to supplement your pension or, more generally, your income.
A life annuity is a contract in which the debtor (purchaser) undertakes to make periodic payments to the creditor (seller). This life annuity is paid for the life of the annuitant (or a third party). It is therefore a random contract: the price finally paid cannot be determined at the time of the contract, as it will depend on the lifetime of the annuitant. If there is no uncertainty, the contract is void. This is the case, for example, if the creditor dies within twenty days of the date of the contract as a result of an illness that he or she had contracted previously(Art. 1975 C. civ.).
This type of property sale is an important political issue and should therefore be promoted in the years to come. Indeed, this tool makes it possible to finance the assets of the elderly, which currently represent no less than 700,000 billion euros. The growth in this population and the difficulties they may encounter in maintaining their lifestyle or coping with a new dependency situation justify the interest in life annuities.
Paradoxically, this type of property transaction remains marginal in France. The reason may lie in a lack of knowledge on the subject. Many professionals are still unfamiliar with life annuities, and will avoid offering them. What's more, selling a life annuity involves broaching the delicate subject of death, and this particular form of property transfer has a negative image in the collective mind because of the example of Jeanne Calment and the film "Le Viager" starring Michel Serrault!
Lastly, using a life annuity can be seen as a way of excluding your heirs and depriving them of a home. However, the fact that people are living longer means that this is no longer the case, because in the vast majority of cases, the heirs already own the property when the estate is opened. What's more, if everything goes according to plan, the deceased's estate will be made up of cash equivalent to the price of the property. As long as the creditor does not squander the arrears he receives, there is no reason to feel that he is depriving his heirs.
Once you have overcome these psychological hurdles, selling or buying your house or flat as a life annuity is a real property strategy that can be a win-win situation for both the seller (1) and the buyer (2).
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Benefits of life annuity property for the seller
a. First of all, the main advantage of selling a life annuity is to supplement your income with an annuity. We are constantly reminded of the problem of pensions, and it is through tools such as life annuities that individuals will be able to find solutions adapted to their situation.
Under the terms of article 1976 of the French Civil Code, the life annuity may be constituted at a rate to be determined by the contracting parties. However, for valuation purposes, it is advisable to consult a notary or an estate agent. It is also possible to provide for indexation or mortgage registration to guarantee the annuity.
b. Life annuities offer many possibilities. The creditor can continue to live in his home(occupied life annuity) without changing his habits. However, if they no longer need to use their property, they can opt for a free life annuity. In this case, the buyer (the debirentier) will have immediate use of the property. The annuity requested may be higher than for an occupied life annuity.
It may also be possible to arrange for the annuity to be paid on the lives of several people. When drafting the contract of sale, it may be worth inserting a clause offering the vendor the option of leaving the property during his or her lifetime, which will result in an increase in the annuity when the property is vacated. This increase will be correlated with the rental value. This clause may prove useful: a creditor living in an isolated house may prefer to move closer to the town centre in a flat.
c. Selling as a life annuity provides immediate cash flow if a bouquet (a sum of money paid at the time of the contract) is included. In this case, the annuity will be smaller.
d. The creditor will no longer have to pay property tax (except where usufruct is reserved) or, more generally, the costs incurred by a landlord.
e. Finally, the annuity received is tax-advantaged depending on the seller's age:
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If under 50: 30% allowance
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Between the ages of 50 and 59: 50% allowance
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Between 60 and 69: 60% allowance
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From age 70: 70% allowance
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Advantages of a life annuity for the purchaser
Notwithstanding a precisely calculated annuity (based on the market value of the property, the life expectancy of the annuitant and the deprivation of enjoyment), the purchaser of a property using a life annuity is taking a gamble. He or she may win, lose or even make a neutral transaction if the annuitant dies at the age used to calculate the annuity. Despite these risks, life annuities are not without their advantages for the purchaser.
a. It allows the debirentier to build up a property portfolio with a smaller contribution than the property being acquired.
b. Financing the property by means of an annuity avoids the need for a bank loan, with all the associated disadvantages (formalities, fees, etc.).
c. The terms of payment of the annuity can be adjusted according to the purchaser's income (this should be arranged when the deed is drawn up). This is a matter for negotiation.
d. In the case of an occupied life annuity, the debtor can make a reduction in the value of the property that can be set off against the tax authorities. If he is liable for wealth tax (impôt de solidarité sur la fortune - ISF), he may apply a discount to the property depending on the age of the annuitant.
e. Still in the case of an occupied life annuity, there will be none of the problems associated with renting. What's more, the annuitant will normally show greater respect for the property than an ordinary tenant.
For more information, see our article "Life annuities and capital gains".