by Sue Busby, France Legal
There are a few simple steps you can take before you become the owner of French property and sometimes afterwards, to ensure that your French estate is dealt with in the way you wish during your lifetime and after death. French succession law is somewhat different to English succession law and its provisions may come as a surprise to English buyers who are used to the idea of testamentary freedom. Family situations are often complex these days, with second marriages, stepchildren and so on and provisions usually need to be made at the time of purchase to avoid difficult circumstances later on.
Since the European regulation on cross-border succession came into force in August 2015, it is possible to apply either the law of your nationality or the law of your habitual residence to your French estate. Thus, English law can be applied to your French property. This means that the problem of the heirship rules that apply in France can be avoided. However, caution is needed because the new law does not change the tax situation. French inheritance tax still applies, which can be prohibitive. For example, if you wished to leave part of your French property to your step- children, they would be taxed at 60% as they are not related to you. Great care must be taken to use the best of French and/or British solutions to suit the circumstances.
En Indivision and En Tontine
The first point to be aware of is what is meant by joint ownership. The usual method in France is that of indivision. This means that each spouse owns half the property, which is similar to the tenants-in-common situation in England. If a married couple want to buy a property together, they usually want the survivor to have ownership of the property after the first death. This will not automatically happen as the French are very protective of children in their legal provisions and will use the indivision method in preference to any other. Therefore, joint ownership en indivision means that when the first spouse dies, a portion of their French estate must go to that person’s children. The size of the portion depends on the number of children – half for one child, 2/3 for 2 children and 3/4 for 3 or more children. The remaining spouse therefore does not have freedom to do with the property as he or she wishes. If the children are those of the deceased from a previous marriage, then the survivor may be in the uncomfortable position of being in joint ownership with stepchildren.
These situations can be avoided by having a tontine clause inserted in the final conveyance deed (acte de vente). Ownership en tontine roughly equates with joint tenancy in English law and will mean that when the first spouse dies, the survivor will be considered as having owned the property from the start and thus the rights of the deceased’s heirs can be avoided.
Another important aspect to consider is that of inheritance tax. The tax-free allowances in France are not nearly so generous as in England. Even with a tontine clause, inheritance tax will still be payable on half the value of the property at the time of the first death. Consideration must therefore be given to the value of the property in relation to current inheritance tax rates and allowances to see if further precautions are necessary. The tontine clause can only be applied to real property ie the house so if you are moving to France you will need to take further steps to deal with your moveable estate, such as cash and shares.
A French Marriage Régime
When the French get married, they often sign a marriage contract which determines how their property is dealt with on death. The régime of communauté universelle de biens ensures that on the first death, all the property of the marriage is owned by the survivor with no inheritance tax to pay. English buyers can adopt a French marriage regime just in respect of their French property.
Those who decide to go and live in France permanently will find that their worldwide assets are then subject to French succession law and tax, as opposed to just the French real property. In these circumstances, it would almost certainly be worth adopting an appropriate marriage regime as the whole French estate can be included in the regime. However, where there are children from a previous marriage, the regime will be set aside if the children take action to enforce their succession rights. So Mr X and Mrs X have moved to France and want to leave all their property to each other and then to Mr X’s two children from his first marriage. They adopt the regime of communauté universelle. If Mr X dies first, then the children can take action so that the regime is ignored as far as two thirds of their father’s estate is concerned, as this is their legal reserve. However, if the children were willing to renounce their right to take action at this point, then the property would pass under the regime as intended with no inheritance tax. A law that came into effect in January 2007 allows the children to renounce their rights before the death of their parent and then exercise them after the death of their step-parent. This may be a very useful solution in certain circumstances.
The SCI – A French Property Owning Company
Another useful solution to some family situations is to set up an SCI. An SCI is a company set up for the management and letting of property. If the property is bought by the SCI, the members of the company own shares rather than property. As shares are considered to be personal property, not real property, then English succession law applies and the shares can be left in accordance with the deceased’s wishes. The SCI also gives the members a lot of flexibility as they can transfer shares freely between themselves and to others (usually with the agreement of all members only). This means, for example, that parents can gift shares to their children during their lifetime thereby avoiding hefty inheritance tax liability for them. However, the gift must be given at least 15 years before death. The company must keep accounts and hold an annual general meeting. As a means of avoiding succession law, this structure only works if the owners remain resident in the UK. There may also be some tax disadvantages in the UK so advice should always be taken.
Do you need a French will? When an owner of French property dies, the succession must be dealt with in France. If there is no will for the French property, the notaire will need to see the English will. A translation must be provided which satisfies the notaire dealing with the succession. This may have to be dealt with by an appropriately accredited translator causing difficulties and expense to the heirs. An English will would be accepted only insofar as it does not contravene French succession law or if there is a stipulation that English law should apply. It is usually advisable to have a French will for the French estate and to exclude the French property from the English will.
Owning property in France can be a pleasurable experience for the owners and their family but it is worth taking advice to ensure that your particular circumstances and wishes are taken into account.
© France Legal 2016