French Succession Planning; the pitfalls of buying a property in the wrong structure.

As an expatriate moving to France or buying your dream holiday home, the last thing most of us would think about is succession planning. Inheritance laws in France are complex, most expats would assume when we make a Will as in the UK, our assets will pass on to whomever we wish. Sadly this is not the case in France, who have forced successions laws where the children could automatically inherit even if a Will is in place. For example if a Will written in the UK does not tally with French succession law it could be ignored.

This law can be very detrimental especially when one wishes to leave their part of the family home to the surviving spouse. Where children are involved from past marriage or current marriage the law known as the ‘Droit de Succession’ dictates how much of the estate is left to the offspring depending on how many children you have!

1 child 50 -50 split, 2 children 66.66% left to the children and 33.33% to the spouse, 3 children 75% left to the children and 25 % to the spouse. There is a €100,000 inheritance tax allowance per child, from each parent and thereafter a progressive tax from 5- 20 % up to a €552,324 threshold.

There is no inheritance tax between spouses, thankfully this was abolished in 2007. Though if couples are not married or in a civil partnership or PACS the inheritance charge is 60% for anything passing to each other with only a very small allowance!
Even if couples have no children French law dictates that other family members will inherit in the line of forced succession with the living spouse and siblings each receiving a 50/50 split. Even biological children who have been adopted have a right under succession law to their biological parents’ estate. Therefore subsequent succession planning is essential to avoid any unnecessary surprises.
So what options are there if one wishes to pass on their part of the family property or holiday home to their partner?
Surprisingly there are various alternatives available, but the most favorable ones are best set up before your property is purchased. Therefore careful preplanning with your financial advisor and notaire is recommended.

At Beacon Global Wealth Management as part of the financial planning process we would normally provide information on any of the following holding structures for a property purchase, which is dependent on each client’s situation, followed by the client instructing a notaire to discuss and implement a chosen structure.

A Usufruit

This arrangement can be set up at purchase or placed in a Will at a later date, it is best described as a lifetime interest/tenant. Part of the freehold interest (nue-propriete) of the property from the deceased spouse, will be left to the children and the living spouse retains the right to remain in the property or rent it out until death. The life tenant cannot spend or sell the asset that comprises of the usufruit.
A ‘usufruit’ is especially useful if you own or are purchasing the house in joint names but want to protect the spouse in the event of death and protect the children’s inheritance allowances from both parents.
If one wishes to sell the property where a Usufruit has been created, the contract can be terminated with all parties’ agreement or the ultimate beneficiary namely the children, buying the Usufruit from the surviving spouse. Another option would be to convert the Usufruit into a rente Viagre, which is like a lifetime annuity.
Another benefit of this contract is the beneficiaries will have a reduced inheritance tax bill on the value of the nue propriété (freehold) from the first person’s death.
Where no WILL has been set up and a spouse dies intestate and there are no other relevant contracts in place, a spouse is given two options they can either take a quarter in the estate or a Usufruit over the entire estate, as long as the beneficiary’s agree. If no choice is made, the survivor is presumed to have opted for the full Usufruit this is then automatic by law.

A ‘Clause en Tontine’

This clause can be inserted into the property deed at acquisition, if this option was chosen when you already own the asset there would be property transfer taxes to pay.
Similar to (en-indivision) joint ownership as we recognize it in the UK, this clause ensures that the survivor will become the sole owner of the property on the co-owners death.
In theory, the Tontine Clause may sound an ideal solution, but there are some points to be aware of.
Firstly a Tontine is only suitable for married couples, or the unmarried partner will be left with an unsavoury 60 % tax charge.
Unlike in the UK where either party in joint ownership can force a sale on the asset any time, only on absolute agreement of both owners can a sale take place, or on the death of the other holder.
There is a greater exposure to inheritance tax where there are children involved from the marriage as only one set of parents tax exemption will be passed down, an example of this would be where there are two children, they will only receive a €100,000 each exemption from one parent, if there was no Tontine Clause in the place they would have received a 400,000 euro tax allowance.
Another consideration is if there are children from the deceased spouse, those children will not be entitled to inherit anything where a Tontine clause has been placed within the property deed.
If you cannot enter into a French civil partnership or are not married, you can purchase an asset indivision and grant a life interest in the property to the surviving partner.
SCI or ‘Societé Civile Immobiliere’

This can be a great structure to consider holding a property in for couples who are not married or are non-French residents. This arrangement is better to create on the property purchase, as set up after the purchase there will be property transfer charges and any profit on the growth in value since purchase capital gains tax would be payable.
For people who own holiday homes in France, their property would normally be classed under French inheritance law as fixed assets. However, in an SCI company the beneficiaries own the shares, these are classed as movable assets hence do not come under French inheritance law for non-residents and the owner may dispose of the assets however they wish and according to the inheritance laws of their country of domicile.
By having ownership in shares it enables more than one house to be held, as the SCI is simply a shell company to hold assets.
Where two people buy the property, it is on the proviso that neither party holds an interest in the freehold, each has shares that allow them half of the life interest plus half of the reversionary interest on a basis which overlaps.

On the death of one of the owners, the life interest and reversionary interest from both parties are compounded into the freehold ownership, which passes onto the living partner.
An SCI is also established to accomplish gradual passing of family wealth to children, the shareholding of the SCI can be changed over time so that children of the family can receive by way of a gift, using the French gifting allowances of 31,865 Euros per adult child which is permitted every 15 years, this can also reduce any liability to inheritance tax.
A reduction of 20% is applied to the value of the main residence for inheritance tax purposes, for this to be valid the spouse or children must have lived there.

The financial advisers trading under Beacon Wealth Management are members of Nexus Global (IFA Network). Nexus Global is a division within Blacktower Financial Management (International) Limited (BFMI). All approved individual members of Nexus Global are Appointed Representatives of BFMI. BFMI is licensed and regulated by the Gibraltar Financial Services Commission and bound by their rules under licence number FSC00805B.
And the information on this page is intended as an introduction only and is not designed to offer solutions or advice. Beacon Global Wealth Management can accept no responsibility whatsoever for losses incurred by acting on the information on this page. We are not Tax Advisers; independent tax advice should be sought relevant to each person’s circumstances.

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