Apartments and Villas for sale in Nice

Reprinted with the kind permission of Prettys Solicitors
Elm House, 25 Elm Street, Ipswich, Suffolk IP1 2AD, United Kingdom
Tel: +44 (0) 1473 232121

These notes address some issues which may otherwise arise if you
die owning property in France. It is intended to address the general
practice and procedure involved when selling 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.

• Introduction to French succession law
• How French succession law applies
• Disposable and reserved portions
• Lifetime gifts
• Marital property rights
  
  • Separation of property (séparation des biens)
  • Universal community (communauté universelle)
• Joint ownership of property
  • Ownership en indivision
  • Ownership en tontine
• Unmarried couples
• PACS
• Wills
• Company purchase
• UK resident purchasing in a UK company
• UK resident purchasing in an offshore company
• UK resident purchasing in a French company
• Introduction to French inheritance tax
  • The rules
  • Exemptions
  • The rates
  • Lifetime Gifts
  • Usufruct (Usufruit)

Introduction to French succession law

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 héritiers réservataires (protected
heirs). In the majority of cases these will be your children. Your
surviving spouse is a protected heir if you have no living descendants
or ascendants. 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 its 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-third’s 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.

If there are no children or grandchildren but there are surviving
ascendants (ie, living parents or grandparents) in both the maternal
and paternal lines, the reserved portion is half of the estate. If
there are ascendants in one line only, it is a quarter of the estate.
This reserved portion goes to those surviving ascendants.

Under a new law in force 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 estate, in preference to the
deceased’s parents.

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.

If there are two children, at least two-thirds of your property
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.

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, the other one third being capable of
passing to his wife under a 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 the 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 is possible to apply to 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 2/3 of the property. The remaining 1/3 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
entrenched 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, which does 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 rights 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
  rights 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 is devolved 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 also has the choice of 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 her
  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. The surviving spouse takes 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 property does not exceed €126,000. 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.

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 development 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 will be somewhat improved. These will 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 hèritiers rèservataires
  or the surviving spouse himself, be converted to a rente viagère (a
  rent or annuity paid for the remainder of the surviving spouse’s
  lifetime).

• If there are no surviving descendants but there are surviving parents or other ascendants they will be entitled to their rèserve as detailed above. A surviving spouse will be entitled to the remainder of the estate.
• If there are no descendants or ascendants 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. A valid Will cannot override the rights
of the héritiers réservataires but can override the rights of
other heirs (including a surviving spouse). 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 there
were a legacy of French real property to that beneficiary. Thus if the
beneficiary is not related to the deceased he 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. 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 immobilière) 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 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 sucessions only, a further €
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 installments 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:

Surviving Spouse

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

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 65 and 75 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.

Example

A married couple of under 50 years of age each give half of the freehold
of their French house (worth €900,000) to their three children. The
value gifted is 50 per cent of €900,000 or €450,000. Each child
therefore receives one third or €150,000. However, because the freehold
is subject to the lifetime occupational right of the parents, the
French tax authorities will reduce the value of the gift by 40 per cent
(in relation to the parents age), i.e. to €90,000 each child. There is
no tax payable as each child can receive €92,000.

After 10 years, the €92,000 limit is available again. Assuming
that the house is still worth €900,000, the other half is now given
equally to the three children. As the parents are now under 60 years
old, the reduction is 30 per cent (not 40 per cent). Each child
therefore receives one third x 50 per cent x €900,000 x 70 per cent,
i.e. €105,000. The tax on €105,000 per child is €650 a total of 3 x 650
= €1,950. This tax is reduced by 50% as the donors are aged under 70
years i.e. to €875.

Thus, the €900,000 has been given to the three children at a cost
of just €875. However, the surviving spouse will retain a life interest
and can always live in the house.

This example is based on the children taking the maximum tax-free allowance from each parent on each occasion.

Valuations

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.

Conclusion

This report 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.

© Prettys Solicitors, August 2006