French Succession Planning: The Pitfalls of Buying a Property in the Wrong Structure

Succession Planning in France for Expats

If you are an expatriate moving to France or buying your dream holiday home, succession planning is likely not your first priority. However, inheritance laws in France are complex, and many expats assume that creating a Will, as done in the UK, will ensure that assets pass on to whomever they wish. Unfortunately, this is not the case in France. French succession laws, or “forced succession laws,” dictate that children may automatically inherit, even if a Will is in place. For instance, if a UK Will conflicts with French succession law, it could be ignored.

Detriments of Forced Succession Laws

This law can be especially problematic if you wish to leave your share of the family home to a surviving spouse. When children are involved, whether from a previous or current marriage, the law known as “Droit de Succession” determines how much of the estate is left to them, depending on the number of children you have:

• 1 child: 50% to the child, 50% to the spouse.
• 2 children: 66.66% to the children, 33.33% to the spouse.
• 3 children: 75% to the children, 25% to the spouse.

There is a €100,000 inheritance tax allowance per child (from each parent), followed by a progressive tax of 5-20% up to a threshold of €552,324.

Inheritance Tax Between Spouses

Thankfully, there is no inheritance tax between spouses, as this was abolished in 2007. However, for unmarried couples or those not in a civil partnership (PACS), the inheritance charge is 60% for anything passed between partners, with only a small allowance.

Even in the absence of children, French law dictates that other family members will inherit under the forced succession rules. The living spouse and siblings would split the estate 50/50. Furthermore, biological children who have been adopted retain rights to their biological parents' estates under succession law. Therefore, succession planning is crucial to avoid any unexpected outcomes.

Options for Passing on Property to a Partner

Surprisingly, there are various alternatives available, though it is best to establish them before purchasing a property. Careful pre-planning with a financial advisor and notaire is recommended.

A Usufruit

A Usufruit arrangement can be set up at the time of purchase or included in a Will later. It provides lifetime interest/tenant rights, meaning part of the freehold interest (nue-propriété) is left to the children, while the surviving spouse retains the right to live in or rent the property until death. The spouse cannot sell or spend the asset comprising the usufruit.

• Benefits: Protects the spouse's right to stay in the home while ensuring children's inheritance allowances from both parents.
• If the property is sold, the usufruit can be terminated with the agreement of all parties, or the children (as ultimate beneficiaries) can buy the usufruit from the surviving spouse.
• Another option is to convert the usufruit into a rente viagère, similar to a lifetime annuity.
• Beneficiaries will have a reduced inheritance tax bill on the value of the nue-propriété from the first person's death.
• If there is no Will, and the spouse dies intestate, the spouse may take a quarter of the estate or the usufruit over the entire estate, provided the beneficiaries agree.

A Clause en Tontine

A Clause en Tontine can be inserted into the property deed at acquisition. It is similar to joint ownership (en indivision) and ensures that the surviving partner becomes the sole owner of the property upon the co-owner's death.

• Points to consider:
  • Suitable only for married couples. An unmarried partner could face a 60% tax charge.
  • Unlike in the UK, a sale can only take place with both owners' agreement or upon the death of one owner.
  • There is greater exposure to inheritance tax if children are involved, as only one parent's tax exemption applies.
  • If there are children from the deceased spouse, they will not inherit anything where a Tontine clause exists.

SCI (Société Civile Immobilière)

An SCI can be a great structure for couples who are not married or non-French residents. It is best to set up this structure at the time of property purchase, as setting it up afterward may result in property transfer charges and capital gains tax on the growth in value.

• For holiday homeowners, French inheritance law treats property as fixed assets. However, in an SCI, beneficiaries own shares, which are treated as movable assets and do not fall under French inheritance law for non-residents. This allows the owner to dispose of assets according to their home country’s inheritance laws.
• Ownership in shares enables multiple properties to be held, as the SCI acts as a shell company for holding assets.
• Upon the death of one owner, the life and reversionary interests are compounded into freehold ownership and passed to the living partner.
• An SCI can also facilitate gradual wealth transfer to children, using the €31,865 gifting allowance per adult child every 15 years, which can reduce inheritance tax liability.

Additional Information

A 20% reduction is applied to the value of the main residence for inheritance tax purposes, provided the spouse or children lived there.

Beacon Global Wealth Management: The financial advisers trading under Beacon Wealth Management are members of Nexus Global (IFA Network), a division of Blacktower Financial Management (International) Limited (BFMI). BFMI is licensed and regulated by the Gibraltar Financial Services Commission under licence number FSC00805B.

The information provided here is intended as an introduction and not as formal advice. Beacon Global Wealth Management cannot accept responsibility for any losses incurred by acting on this information. We are not tax advisers; independent tax advice should be sought based on individual circumstances.