COMPASS IMMOBILIER: French inheritance law part 3

LEAVING PROPERTY TO A CHARITY

This is a possibility for certain individuals who are not subject to the protected minimum interests outlined above. Any charity should be carefully chosen, however, as it should be registered and recognised as a charity in France to avoid adverse inheritance tax implications.

USE OF TRUSTS

The trust, familiar to many of us from Anglo-Saxon legal systems, is an alien concept in France. If one is considering using a trust in respect of French property, specialist advice should be sought because they can lead to the settlor’s wishes not being respected and adverse taxation outcomes. Given that a trust is not recognised in France as being a legal ‘person’, it is not possible to purchase a property in the name of trust.

COMPANIES

The purchase of real estate in France through a company, particularly the French property holding company known as an SCI (société civile immobilière), has been very fashionable in the past and can be suggested as a vehicle for minimising taxation and avoiding certain rules of French inheritance law.
They can be suitable for people in particular situations: for example unrelated people purchasing property together who wish for greater flexibility for future alterations to the title and a more business-like arrangement; or for those who wish to disinherit a child and who are definitely not intending to become French resident. Unmarried or same sex couples may also find them useful, particularly to retain control of the property and possibly minimise inheritance tax.

They may not, however, prove to be advisable in a certain number of cases where a better result may be achieved via other arrangements. The type of company used should be given careful consideration as there are a variety of taxation and practical issues involved.

Using a company for property ownership evidently increases the costs and administrative burden.

Copyright All Rights Reserved Victoria Headdon, Compass Immobilier

COMPASS IMMOBILIER: French inheritance law part 2

UNMARRIED OR SAME-SEX COUPLES

The inheritance position of unmarried or same-sex couples can be even more complex. A tontine clause is possible between an unmarried or same-sex couple but the inheritance tax implications are potentially significant. A company structure may be worth consideration to avoid certain of the complications that can arise with direct ownership without a tontine clause, allowing the surviving partner to retain control and possibly to alleviate the burden of inheritance tax.

INHERITANCE TAX

This operates in a manner very different to other countries. The tax is calculated on the basis of the amount that each person inherits and how he or she is related to the person who has passed away. Therefore, spouses; children and parents; and siblings are all subject to different inheritance tax treatment. Regard should always be had to the inheritance tax implications of any arrangement to select that which is most suitable.

Previously, a spouse benefited from an inheritance tax free band of 76,000 Euros with tax above this amount payable on a sliding scale of between 5% and 40% with the majority of most of the payment likely to fall within the 20% bracket which is the widest. However, a general spousal exoneration from inheritance tax has been introduced, although gifts remain taxable under the old rules (the applicable tax free band has now been increased to 79,533 Euros with a revision of the sliding scale).
Children and ascendants (i.e. parents) now benefit from an inheritance tax free band of 156,974 Euros each with tax above this amount payable on a sliding scale broadly similar to that aforementioned between spouses, although slightly less generous.

Brothers or sisters benefit from a tax free allowance of 15,697 Euros each and then pay tax at 35% on the first 24,069 Euros worth of property that is inherited and at 45% thereafter. Relatives up to the fifth degree of relationship pay tax at 55%. Nieces and nephews benefit from a tax free allowance of 7,849 Euros each. For other relatives there is a small tax free band of 1,570 Euros.

Upon property passing between people who are not related by blood or marriage, inheritance tax is payable at 60% (with a small tax free band of 1,570 Euros); this poses particular concern for unmarried or same sex couples. There are ways of minimising the inheritance tax liability, for example by an unmarried or same sex couple who meet the conditions entering into a special contract known as a PACS. There is now a general exoneration from inheritance tax for PACS partners too, although gifts continue to be taxed under the rules relating to spouses (tax free band of 79,533 Euros with tax payable above that on a recently updated sliding scale of between 5% and 40%). For those couples who have entered into other forms of partnerships, such as the UK Civil Partnership, these are now given legal recognition in France and they will benefit from the same tax treatment as those couples who have a PACS i.e. exoneration from inheritance tax for the surviving partner.

Copyright All Rights Reserved Victoria Headdon, Compass Immobilier

French inheritance law - part 1

INHERITANCE

French inheritance law and taxation differ substantially from many other countries, especially Anglo Saxon law countries. It is important to address this issue at the purchasing stage because what is contained in the acte authentique will often determine what ultimately occurs in relation to the inheritance of the property. Individually tailored advice should be sought as the best solution will depend on a variety of factors, including family circumstances, place of domicile and the value of the property. It is for this reason that this guide does not seek to provide blanket inheritance advice. A summary of certain of the main issues is provided hereafter.

LIMITS TO TESTAMENTARY RIGHTS:
Certain of an individual’s closest relatives benefit from protected minimum interests in a share of property owned by that person i.e. children; grand-children if the children are pre-deceased. As of 1st January 2007 parents and other ascendants have lost their protected inheritance status and can now be disinherited. These protected beneficiaries are known as réservataires (forced heirs). A will that derogates from the protected rights of a réservataire cannot be fully applied. For example, in the presence of children simple wills benefiting the surviving spouse will not achieve the desired objective and the children will remain the prime beneficiaries. The interests of a réservataire thus supersede those of a spouse, unless express measures are taken to ensure that the spouse is the only beneficiary.

BENEFITING SPOUSES:
As mentioned above, a spouse will not always automatically inherit. His or her rights will depend in part upon how the purchase is structured e.g. what is stated in the deed of completion in relation to how the property is owned between the spouses, and also upon the family situation of the other spouse. Despite recent legislative changes improving the inheritance rights of a surviving spouse, care needs to be taken to ensure that they are adequately protected. The two principal methods for passing property to the surviving spouse are the ‘tontine clause’ and a change of matrimonial regime to adopt the French regime of ‘universal community’. The tontine clause is inserted into the acte authentique and means that upon the death of one spouse, the survivor is the sole owner of the property. The change of matrimonial regime to adopt the French regime of ‘universal community’ involves signing an act, usually immediately before completion, altering the law governing the matrimonial regime. The main advantage of such an act is that the surviving spouse will inherit property owned under the regime but without any inheritance tax liability (although this is now also the case with the tontine clause following the recent introduction of the spousal exoneration from inheritance tax). There is a fee attached to this mechanism due to the fact that a separate act is required. It is always important to consider the impact that such mechanisms will have on the ultimate inheritance of the property. For example, if one spouse has children from another relationship, these children could effectively be disinherited by such provisions. Those children can take legal action to overturn a change of matrimonial regime which would substantially prejudice the rights of the surviving spouse so the tontine clause may offer greater protection in such a situation due to the fact that it is more difficult to overturn. An alternative is for the beneficiaries of the deceased spouse to inherit and for the survivor to be left with a life interest known as an usufruit. This will ensure that the survivor benefits from exclusive use and possession of the property for the remainder of his or her lifetime. As well as ensuring that the respective families inherit equally, this method can have an inheritance tax advantage for a couple with children due the maximisation of the tax free allowances that it offers.

Copyright: Victoria Headdon, Compass Immobilier