Guide to French succession law and inheritance tax issues ­ Chez Riviera
     
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Oct 1, 2014 

Inheritance Law

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Inheritance issues should be given careful consideration when purchasing property in France. Your Notaire is on hand to deal with any questions that may arise regarding succession law and the relevant taxes, where applicable. There are many ways to structure ownership of assets in France to minimise and/or avoid succession law and tax issues down the line.

There are options available that avoid the taxes associated with French inheritance law and these options are inexpensive and easy to arrange.

If you have queries you would like to be dealt with before your visit to France or you are looking for advice on complex succession law issues, Pretty's solicitors are an English firm that can assist buyers in this regard. They have kindly given us permission to use this guide which is useful as an introduction to the area. Contact us for more information

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An Introductory Guide to French succession law and French inheritance tax

Introduction to French succession law
These notes address some issues which may otherwise arise if you die owning property in France. It is intended to address the general principles applicable in structuring the ownership of your French real property. Many of the points in this Guide have been greatly simplified and should not be regarded as an exhaustive statement of current law, nor should they be relied on as such. Please Contact us for specific advice. In England, you can usually leave your assets to whomever you choose. In France, things are very different. Whatever your Will might say, it can be overturned by your héritiersréservataires (protected heirs). In the majority of cases these will be your children. Your surviving spouse is a protected heir to a certain extent. Other relatives or unmarried partners are not protected heirs. So you cannot cut your children out of your will under French law. Children include adopted children, and children of earlier relationships (in relation to the estate of their parent, not the step-parent). Children conceived whilst one (or both) of their parents is married to someone else, have the same rights as other children to inherit. The age of the children is of no relevance.

How French succession law applies
If at the time of your death you are domiciled (habitually resident) in France under French
law, then all of your worldwide assets (except for land and buildings or other 'real' property outside of France) are subject to the rights of protected heirs. If you are not domiciled in France, the protected heirs legislation only applies to real property located in France. What constitutes 'domicile' for these purposes is an issue that needs to be addressed on a case by case basis.

Shares are not classed as real property, even if the company owns real property.
Consequently in limited circumstances a possible way to avoid the rules of French succession law applying to the estate of a non-French domiciliary is to place all French real property into a corporate structure. However there are potential disadvantages to this form of ownership of which you may need to take account. You should therefore only consider this form of ownership structure with full advice beforehand to ensure it is the most suitable option. There can be a number of potential tax problems arising from such structuring.

Disposable and reserved portions
In France, an individual's assets on death consist of the reserved portion (reserve légale) and a disposable portion (quotité disponible). The reserved portion must go to the protected heirs, regardless of the wishes of the deceased. If there is one living child (or a deceased child with living issue) the reserved portion is half of the estate. If there are two such children the reserved portion is two-thirds of the estate divided equally between them. If there are more, it is three-quarters of the estate divided equally between them.

In the case of a son or daughter predeceasing the testator, the share otherwise attributable to the deceased child will be distributed equally among the children of that deceased child. If there are no such children the share is distributed between the surviving children of the testator as if the predeceased child never existed.

Under a new law in force on 1st January 2007, in the event that there are no children, but there is a surviving spouse, then the spouse is able to take all of the deceased's estate, in preference to the deceased's parents, which was previously the case.

As an example, if you own a French house, then on your death your share in the French house must pass to your protected heirs under French law. That your Will attempts to leave the French house to your surviving spouse is irrelevant. It must pass - at least as for a set minimum amount - to your children (or grandchildren) who receive their reserved portion. So, if there are two children, at least two-thirds of your property, the reserved portion, must pass to them equally. If you die domiciled in France, these rules apply to your real and personal property in France and your personal property elsewhere in the world. Your real property is defined as all the land and buildings you own, as mentioned above.

If therefore, an Englishman domiciled in England with two children owns a property in
France and his two children must inherit at least two thirds of his property, only the
remaining one third, the disposable portion, can pass to his wife under his Will. That would be the case even if his Will said that everything he owned would pass to his wife. The gift to his wife will be reduced unless the children renounce their rights.

Under the new law mentioned above, there are potentially circumstances where people can renounce future interests, or defer their right to an inheritance. There are various
possibilities, including the right to enter into a formal agreement with the family under which you can, as a potential beneficiary, forego any inheritance to which you may have an entitlement in the future (for example in favour of your own children). It is also possible to renounce your interest in favour of a step-parent, but such that the interest would revert to you on death of that step-parent.

There are specific formalities to address for such issues, and as such it would be important to consider carefully the procedures as well as the aim, to establish if such an option would be suitable.

Another area of concern is where a couple buy a property in France, and one or both of them dies leaving minor children domiciled in England. For various technical reasons, it can prove difficult to sell, mortgage, let or otherwise dispose of the property until the youngest child turns 18. It would be necessary to apply to the English court to obtain authority to dispose of property. Although authority can usually be obtained provided that it can be shown that the sale is in the interest of the child concerned this is expensive and time-consuming and to be avoided if possible.

Another difficulty is where a couple remarry, having children from previous marriages who do not get on with their new stepfather or stepmother. On the death of the first of the couple, the survivor ends up owning the property together with the children of the partner's former marriage.

Possible methods of avoiding these difficulties include purchase en tontine and purchase via an SCI, although this is not always the case. If a property is owned en tontine the entire property will pass to the survivor, as if it were owned in the survivor's sole name from the moment of purchase.

So where a couple had two children each from previous relationships, the children of the first to die would receive nothing on the death of their parent, the property passing to the survivor. On that survivor's ultimate death, that person's two children would take at least ⅔ of the property. Only the remaining ⅓ could pass to the children of the first to die, by virtue of a French Will, however this would not be beneficial for inheritance tax purposes. Since they are not direct descendants of the second spouse to die, there are no protected succession rights - these children are not "héritiers réservataires". Furthermore they will pay very high rates of inheritance tax on anything which they inherit from their step-parent, who is a "stranger in blood" to them (i.e. not a blood relative).

Lifetime gifts
For the purposes of calculating the disposable and reserved portions, all gifts can be added back into the estate regardless of how long before death the gifts were made, and regardless of the intention of the gifts. Having calculated the reserved portion, if the value of the estate is inadequate, then a clawback claim can be made against the gifts. The claim is made against the most recent gift first, and so on. Gifts could include gifts made into trust. In other words, gifts made years before the donor dies could be reclaimed under French law.

Marital property rights
Marital property rights are a complex matter. Basically though, under French law a marrying couple enter into a matrimonial contract which will affect the way their property is owned. Different forms of contract exist. This section deals with the main types of contract.

Separation of property (séparation des biens)
Under this system, any asset registered in one spouse's name is considered to be
owned by that spouse. Any assets registered in joint names are considered to be
owned equally. A couple married in England (or in most other common-law countries
such as the United States) is considered to be married under this regime in French law
in default of a specific marriage contract, as these do not exist under English law. It
means that on the death of one spouse, the protected heirs can make a valid claim
against:

- all assets registered in the name of the deceased spouse; and
- 50 per cent of the assets registered in joint names.

These rules can give rise to many problems. For example, the surviving spouse of an
English marriage has no right to continue living in the marital home if it is registered
in the sole name of the deceased spouse. The surviving spouse of an English marriage
has no right to other assets registered in the name of the deceased spouse if they reside permanently in France. Indeed, it is the children (including those of earlier marriages of the deceased spouse) who have all rights.

Universal community (communauté universelle)
This system involves all of the assets belonging to the couple (usually with the
exception of certain personal items such as clothing) being placed in joint or
community ownership. A British married couple can enter into such a contract. They
may also choose to include a special clause (clause d'attribution intégrale au conjoint
survivant) which allows all the assets to pass on the first death to the surviving spouse
without the payment of French inheritance taxes, thus effectively avoiding French
succession law.

Fairly recent changes to the French civil code (applying European Law provisions of
the 1978 Hague Convention on marital regimes) have made it much simpler for
couples married outside France to change their matrimonial regime without the legal
formalities which are required for French couples. However it should be noted that a
change of matrimonial regime is not effective against the rights of children of
previous relationships and may have adverse tax consequences for the children of the
marriage concerned (similar to tontine ownership).

Joint ownership of property
There are two ways jointly to own French property:
- en indivision (tenancy in common); and
- en tontine (which is similar to a joint tenancy under English law).
It is very important to appreciate the significant differences of these methods of ownership.

One disadvantage of joint ownership is that, in order to sell, all the parties must agree.

Ownership en indivision
You each own your half (or other percentage) of the house, which on your death
devolves according to French succession law. In other words, the protected heirs
(children or parents) have rights over and above the surviving spouse against the
deceased's share. This is how most French lawyers put your property into joint
names in default of specific instructions to the contrary, although it can have major
disadvantages.

Case study
Mr and Mrs A are married, with one child. Mr A had previously been married and had
three children from that marriage. Mr A dies. Mr A's Will left everything to Mrs A.
However, Mrs A learns that the jointly owned house is held en indivision. French
succession law overrides her late husband's Will; his half of the house has to be
shared as to three-quarters to Mr A's four children, and a quarter to Mrs A. In other
words, Mrs A ends up owning her half plus a quarter of the remaining half; a total of
five-eighths.

Thus, Mrs A now owns her house together with her child and the children of her
husband's former marriage. Furthermore, under French law, any person owning a
part share en indivision can force a sale on the other part-owners, or ask to be bought
out.

Mrs A can improve her position by taking a life interest (usufruit) over the whole
property instead of or in addition to owning a quarter of her husband's share of the
property. In so doing, she prevents the children from selling against her will because
the French Civil Code states that the court may not at the request of the remainderman
(the children in this example) sell the freehold of a property charged with a life
tenancy against the wishes of the life tenant.

None of this would have arisen had the property been placed jointly owned en
tontine. On Mr A's death, his share would have gone automatically to Mrs A. It is
possible for the children to seek redress from the courts, if they believe that they have
been intentionally defrauded from their inheritance, but such an action can be
expensive and non-French children rarely do so.

Ownership en tontine
Mr and Mrs A's example can be avoided by purchasing the property en tontine. This
clause can only be inserted at the time of purchase. It cannot be added in afterwards.
This is rarely used in France other than by British couples, and you may have to be
very insistent with the Notaire who may regard it as a fraud against your children,
even though it is perfectly legal. Under a tontine, the surviving spouse is deemed to
have owned all the property from the beginning and takes it all.
The survivor then has complete freedom to dispose of the property as he or she
wishes.

However the sale of a property when both parties to the tontine clause are alive is only
possible if both consent; if one declines to sell, the other cannot force the sale. In the
event of a matrimonial dispute, a court can have difficulty making an order in relation
to the property because so long as both parties to the tontine are living, there is
uncertainty as to who is the owner. A court could therefore only order a sale by both
parties.

The French inheritance tax position is as follows:
- If there is a large difference in the ages of the parties to the tontine, (or if there
are other reasons whereby one party has a reduced life expectancy, or if the
parties contribute unequal shares of the purchase price) the French tax
authorities might try to classify the tontine as a gift and then apply taxes (see.
below).
- On the death of the first spouse, no French inheritance tax is payable if the
value of their half share of the property does not exceed €76,000. Otherwise
inheritance tax is payable as usual.
- On the death of the second spouse the children of that spouse will inherit. If
they are children of both spouses they will, in effect, have "lost out" as they
will receive their tax-free allowance (abattement) only in the estate of the
second parent to die instead of receiving an allowance in the estate of each
parent.

The situation is not the same with an unmarried couple: while the tontine would still
work to pass the property to the survivor, the inheritance tax position would not be as
for a surviving spouse.

Unmarried couples
Unmarried couples may also experience problems. The property would pass on the first
death in accordance with the law on gifts to non-relatives which currently means that the
survivor would pay inheritance taxes at a rate of 60% with a tax-free allowance of just
€1,500.

PACS
A recent develpment in French law is the Pacte Civile de Solidarité, the so-called PACS.
This affects the way non-married couples in a stable relationship can own their property, e.g. they will be allowed to succeed to a tenancy in the name of the partner where that partner dies or deserts the home. It also allows them to be jointly liable for debts incurred by either of them for their daily and household needs. Entitlement to French Social Security and other rights will also be guaranteed when entering the PACS.

Where the parties have been linked for at least two years they can enjoy more generous
inheritance tax and lifetime gift allowances. Currently the first € 57,000 is not taxed, the next €15,000 is taxed at 40% and any sums above that at 50%.

It should be noted that the PACS does not confer any additional inheritance rights on the
surviving partner and other steps such as tontine ownership will still need to be taken to
ensure that the property passes to the survivor on the first death. Only French residents or French nationals can complete a PACS.

Currently France does not recognise an English Civil Partnership Act agreement, and
consequently a same-sex couple may experience a number of potential problems that we would be happy to discuss, when coming to buy a property in France.

Wills
If you die without an English or a French Will, your estate devolves under the French laws of intestacy, which may not be in line with what you would have wished. If you leave children and grandchildren, they will receive all of your assets, except that your spouse has a life interest (and can use the income) in one quarter of the estate. If there are no children, then the assets will pass to surviving parents, grandparents, brothers, sisters, aunts etc. The only person not well protected is your spouse.

However, under the provisions of a law passed in early December 2001 which came into effect in July 2002 the position of a surviving spouse is somewhat improved. These apply to successions opened from 1 July 2002, and are as follows:

- If you leave children and/or grandchildren, they will receive all of your assets, except
that your spouse may choose between taking an usufruit (life interest, discussed
further at paragraph 8 below) in the whole of the estate, or the absolute ownership of
one quarter of the estate. The usufruit will include the right to use the property and to
take any income (e.g. rental income) generated by it. However the usufruit can, at the
request of any of the héritiers réservataires or the surviving spouse himself, be
converted to a rente viagére (a rent or annuity paid for the remainder of the surviving
spouse's lifetime).

- If there are no descendants, (héritiers réservataires) the surviving spouse will take the
entire estate.
- The rights of a surviving spouse do not apply if the couple are divorced or legally
separated.

Depending upon your wishes it may be advisable to make a Will to dispose of your French assets, although a valid cannot override the rights of the héritiers réservataires . It is usually advisable to have two wills if you have assets in the UK and in France. Trying to prove a French Will in the UK, or an English Will in France may mean that the process will be slower and more expensive. The concept of probate does not exist in French law and property passes 'automatically' on death to the heirs. However in practice if real property is ever to be sold, mortgaged or otherwise disposed of it is necessary for the relevant documents to be drawn up to evidence the new title.

If there is an inheritance tax liability a 'déclaration de succession' must be filed within 6
months of the death (12 months if the deceased died domiciled outside France) to avoid
possible tax penalties.

If French property is disposed of under an English will the French estate cannot be dealt with until English probate has been obtained.

You should always use a lawyer experienced in French law to make your French Will; do not try to make a home-made Will as such documents usually turn out to be defective. If your Will is only to cover your French assets, this must be made crystal clear in the new Will; otherwise it may read as being your "last will and testament" covering all assets worldwide. It is also important that the two Wills do not overlap, and that one does not revoke the other, thus creating a partial intestacy.

Company purchase
If you own shares in a company which owns a French house, you do not own a house in
France, the company does. All you own are the shares in the company. Therefore, when you die, the ownership of the house does not change; it is the shares which change ownership, and succession law applies to these shares as items of personal property, so that they will pass in accordance with the succession law rules of the country where you are domiciled, or permanently resident up to the time of your death.

However it is important to note that while the strict French inheritance rules can normally be avoided, so that the shares can be left to anyone, French inheritance tax is still payable on them as if there were a legacy of French real property to that beneficiary. Thus if the beneficiary is not related to the deceased he or she will have to pay inheritance tax at 60% against the value of the proportion of the property that the shares represent.

One should also be aware that there is a strong risk of the owners (if they are UK resident) being taxed under English law as "shadow directors" upon the rental value of the property. This tax would arise in the UK as a "benefit in kind", taking into account the period that the property is available to the directors - that is for so long as it is not rented out to a third party.

UK resident purchasing in a UK company
The simple advice is commonly that this option would not be worthwhile. In limited
circumstances it can be acceptable. There are many tax disadvantages to this, notably that a UK company cannot be 'fiscally transparent' and therefore will always be subject to corporation tax. There are often adverse capital gains tax consequences when the property is sold. You will also be subjecting the company to dual accounting and tax declaration obligations.

UK resident purchasing in an offshore company
Generally, this is also inappropriate except as a means of avoiding French succession law rules. The tax position is similar to buying in your own name as long as you can prove to the Inland Revenue that this company is not managed and controlled, in reality, by you. It may be difficult to prove this.

Assuming the company is not managed and controlled by UK residents, there still remains an annual tax equivalent to three per cent of the value of the house payable to the French tax authorities each year, which tax can in certain circumstances be avoided. Shareholders who have the use of the property may be liable to tax on the "benefit in kind".

UK resident purchasing in a French company
The use of a commercial company, which will be subject to French corporation tax, will have consequences similar to those for a UK company.

An SCI (société civile immobiliére) is fiscally transparent, so that liability for tax on the
company's income and gains falls on the shareholders. The main advantages of using an SCI, if a company has to be used at all, are that:
- French succession law is avoided if the shareholder dies domiciled in England;
- the company is not subject to the annual minimum payment of French corporation tax
and the shareholders benefit from the favourable tax treatment of capital gains
realised by individuals.

The company will have to complete an annual tax declaration and will incur some
administrative expenses, although this declaration can on occasions be dispensed with.

Introduction to French inheritance tax

The rules
French inheritance tax is paid by each beneficiary (and not by a deceased's estate) pro rata to the value of net assets received after deduction of all liabilities.
If you die domiciled in France, French inheritance tax is payable by each beneficiary on their share of your worldwide assets. If you die domiciled outside France, then only your assets in France are liable to French inheritance tax.

Exemptions
The following amounts are (currently) not taxable:
€ 76,000 To widow or widower
€ 50,000 To ascendants and descendants
The exemptions apply equally to gifts, and are available in full every 10 years.
In addition, and in relation to successions only, a further €50,000 global allowance is
available for immediate family members, defined as being the widow or widower,
descendants and ascendants of the deceased.
As an example, if the estate is worth € 500,000 and there are three children:
Estate value: € 500,000
Widow's allowance € 76,000
Three children (3x 50,000) € 150,000
Global allowance € 50,000
Taxable € 228,000

The rates
French inheritance tax is due on the registration of the déclaration de succession. But delays or payment by instalments can be obtained from the French Revenue, if necessary, although interest will be charged.

French inheritance tax varies from 5 per cent to 60 per cent. The rates are as shown in the tables below.

Surviving Children and Parents
The current rates of French inheritance tax payable by surviving children and surviving
parents are as follows:

Band of value Rate of tax
First €50,000 Tax free
Less than €7,600 5%
€ 7,600 to € 11,400 10%
€11, 400 to € 15,000 15%
€15,000 to € 520,000 20%
€ 520,000 to € 850,000 30%
€ 850,000 to € 1,700,000 35%
€ 1,700,000 upwards 40%

Surviving Spouse
The current rates of French inheritance tax payable by a surviving spouse are as follows:

Band of value Rate of tax
First €76,000 Tax free
Less than €7,600 5%
€ 7,600 to € 15,000 10%
€ 15,000 to € 30,000 15%
€ 30,000 to € 520,000 20%
€ 520,000 to € 850,000 30%
€ 850,000 to € 1,700,000 35%
€ 1,700,000 upwards 40%

Other beneficiaries
Brothers and sisters are currently taxed at a rate of 35% if the band of value they inherit is less than € 23,000 (45% if more) with a tax-free allowance of €5,000. Relatives to the fourth degree are charged at a flat rate of 55% with a tax-free allowance of € 5,000. Relatives above the fourth degree or other beneficiaries who are not related to the deceased by blood or marriage pay a flat rate of 60% with a tax-free allowance of €1,500.

Lifetime Gifts
Lifetime gifts may be a tax-efficient way of disposing of your assets. Rates of tax and
abattements are generally the same as for inheritance except that the abattement of € 5,000 available to brothers and sisters, more distant relatives and unrelated beneficiaries in successions does not apply to lifetime gifts. However there are additional reductions available in relation to lifetime gifts notably that the tax is reduced by 50% if the donor is aged under 70 years and by 30% if the donor is aged between 70 and 80 years.

Usufruct (Usufruit)
One popular method to reduce the impact of French inheritance tax is for the property owners to give away their house to their children whilst retaining a lifetime right (usufruit) to remain in occupation. The person owning this lifetime right is also entitled to any income (such as rent) that the property may produce. The younger the donors, the more effective is this technique.

The usufruct is valued on a sliding scale. Similarly, the value of the freeholder (in the
example above, the children receive the freehold) is on the same sliding scale. In French this is known as the nue-propriété. The valuations depend on the age of the life-interest holder. The older the donor, the greater the value of the freehold. Calculations of inheritance or gifts tax are based on the value of the nue propriété. No taxes are payable when the property reverts to the "nue propriétaire" on the death of the life-interest holder.

It is important to note, though, while in some instances there can be a substantial reduction in the exposure to inheritance tax, there can nevertheless be some fiscal disadvantages to such a structure. This all depends on your personal circumstances, and a specific analysis of your situation would be advisable, to establish if this option would be right for you.

Disclaimer
This guide is intended simply as a summary of some aspects of French succession law and French inheritance tax. Many of the points have been greatly simplified and should not be regarded as a complete statement of the law. For further information do please give us a call on 01473 232121 or e-mail france@prettys.co.uk.

© Prettys Solicitors January 2007

Prettys Solicitors
Elm House
25 Elm Street
Ipswich
Suffolk IP1 2AD
Tel (01473) 232121
Fax (01473) 230002
Contact : france@prettys.co.uk

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