The provisions with regard to reserved heirs in French succession law can cause considerable difficulty, specially where a couple remarry, having children from previous marriages. On the death of the first spouse, the survivor ends up owning the property together with the children of the partner’s former marriage.
The main issue is that the current scheme does not particularly protect the surviving spouse. Different options could be set up in order to make sure that, on the death of the first spouse, the property passes to the surviving spouse and thereafter to the children on the death of the second spouse.
Change of marriage regime
One of the option is to effect a change of marriage regime or change of marriage contract (changement de regime matrimonial) with creation of a universal community between spouses on any current and future real estate property in France. Indeed, the universal community places the French property in a matrimonial fund, which passes automatically to the survivor. This can be limited to the actual property or encompass all present and future real estate French properties. The survivor spouse can then dispose of the property without anyone else’s consent being required.
The children will inherit upon the death of the second spouse and death duties are payable then if the share received exceeds the tax allowance for children which is currently about 159,325 €uros per child (figures updated in 2011).
However, please note that this regime may cause difficulties in the case of a divorce, when complications may arise, as the consent of both spouses is required to liquidate the community. There are limitations to the use of this solution, in particular where there are children from previous marriages.
Clause de tontine
Another option will be to effect a “Clause de Tontine”. This clause can only be inserted in the “Acte de Vente” (Title Deed of sale) at the time of purchase and cannot be added in afterwards.
This is a clause whereby provision is made for the property to pass in its entirety to the surviving owner’s. The surviving spouse is deemed to have owned all the property from the beginning and takes it all. He/she then has complete freedom to dispose of the property as he or she wishes.
However, a disadvantage is that the clause cannot be revoked, thus the property cannot be sold without both parties’ 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.
An other disadvantage is that it is only valid for the property currently being purchased, and does not cover property you might own in the future, otherwise it has the same effect as the change of marriage regime, due to the abolition of death duties between spouses.
Also, please note that with this option under the default rules of succession, the property would be inherited by the heirs of the surviving spouse, and not by the heirs of the first spouse to die, as the surviving spouse is considered to be the sole owner under the Clause de Tontine. As such, if the second person to die had no children of their own, and intended simply to leave everything back to the children of the first to die, then they will have been substantially disadvantaged – had they inherited from their natural parent, then preferential tax rates would have applied, yet by inheriting from their step-parent they would have to pay French inheritance tax at 60%.
Another option is to leave, through a gift, the whole of the estate to a spouse for life, or three quarters for life, with the remaining quarter absolutely. The remainder of the estate is then split between the children in accordance with the rules set out above.
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.
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.
In order to a avoid corporate tax, it is advisable to use French forms of company that are not treated as commercial trading companies. Most commonly known among these is the SCI (société civile immobilière), which 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 the UK
- 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.
However care needs to be taken from a UK perspective – the shareholders should check with their local tax office in the UK to establish how any revenue would be assessed to UK tax.