Law

Es­tate plan­ning dur­ing your life­time gives you more con­trol of what hap­pens to your French prop­erty af­ter your death, as Christophe Dutertre ex­plains

French Property News - - Contents - Christophe Dutertre is a French no­taire at France Tax Law Tel : 020 8115 7914 franc­etaxlaw.com

Should you pass on your as­sets to your chil­dren while you’re still alive?

Clients of­ten con­tact me to ask about pass­ing on their es­tate, either in an­tic­i­pa­tion of or af­ter a death. Known as the ‘succession reg­u­la­tion’, reg­u­la­tion (EU) No. 650/2012 of 4 July 2012 has pro­vided var­i­ous in­her­i­tance so­lu­tions, in­clud­ing the op­tion for Bri­tish cit­i­zens to make a pro­fes­sio juris and choose their na­tional law rather than French law in or­der to set­tle their French real es­tate.

Par­ents may wish to pass on their as­sets to their chil­dren while they are still alive, per­haps to help them buy a prop­erty or to avoid con­flict be­tween heirs af­ter a death, or sim­ply to en­sure the smooth trans­mis­sion of a fam­ily prop­erty.

Take the ex­am­ple of a mar­ried Bri­tish cou­ple with two grown-up chil­dren. They own a French prop­erty and would like to re­duce in­her­i­tance tax on their death. A French prop­erty is com­prised of the life in­ter­est ( usufruit), which is ba­si­cally the right to use the prop­erty, and the bare own­er­ship ( nue-pro­priété), or right to hold it. To­gether they com­prise the full own­er­ship ( pleine pro­priété).

With or with­out a will, the prop­erty would prob­a­bly end up be­ing owned by the sur­viv­ing spouse (half in full own­er­ship, half in life in­ter­est) and the chil­dren (half in bare own­er­ship). The sur­viv­ing spouse could give away his/her half share and also re­tain a life in­ter­est.

How­ever, if the spouses agree to dis­pose of their prop­erty im­me­di­ately, they could gift ( do­na­tion en­tre vifs) the prop­erty to their two chil­dren. For this pur­pose, French law of­fers mul­ti­ple for­mu­las, each with civil and tax pe­cu­liar­i­ties, depend­ing on whether the own­ers are French na­tion­als or from over­seas.

When es­tate plan­ning, the most com­mon gift is an ‘ in­ter vivos’ do­na­tion ( do­na­tion en­tre vifs) be­fore a no­taire (gov­erned by ar­ti­cles 931 and fol­low­ing the civil code). In a case where one spouse is French and the other is English, they can, if they wish, sub­mit this gift (and the deed to be com­pleted) un­der UK law (by ap­pli­ca­tion of the ROME I reg­u­la­tion of 17 June 2008 ap­pli­ca­ble in France since 17 De­cem­ber 2009).

How­ever, given the lo­ca­tion of the prop­erty in France and the com­plex­ity of a dif­fer­ent leg­is­la­tion, plus the po­ten­tial pres­ence of any laws which can’t be ex­cluded (even by a clause of de­ter­mi­na­tion of the ap­pli­ca­ble law or loi de po­lice), ap­ply­ing ar­ti­cle 4-1 of the reg­u­la­tion would be prefer­able and French law will be the law ap­pli­ca­ble to the con­tract. Al­ter­na­tively, the set­ting up of a com­pany struc­ture, such as an SCI ( so­ciété civile im­mo­bil­ière), might bet­ter meet the re­quire­ments of the spouses. Our cou­ple have sev­eral choices, as de­tailed below.

In­ter vivos do­na­tion of full own­er­ship of the prop­erty The cou­ple can choose to give the prop­erty di­rectly to their two chil­dren. Each spouse gives half of their share of the prop­erty to their two chil­dren. On com­ple­tion, gift tax will be payable af­ter de­duct­ing the tax-free thresh­old per child from each par­ent (€400,000 in to­tal). The re­sult will be the ‘exit’ of the prop­erty from the par­ents’ es­tate, the chil­dren be­com­ing re­spon­si­ble in full for ex­penses on the prop­erty.

Gift by re­tain­ing a life in­ter­est Par­ents con­sid­er­ing a gift of an im­mov­able as­set (i.e. prop­erty) to their chil­dren may wish to keep a life in­ter­est in it, either to keep us­ing it (as a pri­mary or se­condary res­i­dence) or to gen­er­ate an ad­di­tional in­come (by let­ting it out). The main ad­van­tage of this op­tion is that it con­sid­er­ably re­duces the scope of gift tax, al­beit not trans­fer­ring the prop­erty tax-free to your chil­dren.

The prop­erty’s value and the age of the par­ents will be an im­por­tant fac­tor in this equa­tion. The value of the life in­ter­est is as­sessed by a scale set out in the French tax code. With­out go­ing into lots of de­tail, the younger you are, the higher your life in­ter­est.

In our case above, if both par­ents are in their 40s, their life in­ter­est, for tax pur­poses, will rep­re­sent 60% of the full value of the prop­erty, leav­ing them 40% to trans­fer to their two chil­dren. With an over­all tax thresh­old of €400,000, the par­ents could trans­fer a prop­erty worth €1m tax-free.

The par­ents will have achieved the dou­ble ben­e­fit of trans­fer­ring the prop­erty tax-free while main­tain­ing the use of it and/or re­ceiv­ing an in­come.

In both cases, the par­ents have the right to pro­tect their in­ter­est and re­strict the chil­dren from dis­pos­ing or mort­gag­ing it by in­sert­ing clauses in the deed of gift.

Gift of a tem­po­rary life in­ter­est This is less com­mon but may al­low, in the short term, to pro­vide tem­po­rary assistance to chil­dren by grant­ing them the life in­ter­est of a prop­erty. The aim is not to trans­fer the prop­erty it­self, but its use or the in­come it could pro­vide. This in­cludes a sce­nario where par­ents wish to pro­vide their

A French prop­erty is com­prised of the life in­ter­est (usufruit), the right to use the prop­erty, and the bare own­er­ship (nue-pro­priété), or right to hold it – to­gether they com­prise the full own­er­ship (pleine pro­priété)

chil­dren with an ad­di­tional in­come for a pe­riod of time, be­cause the chil­dren have fi­nan­cial dif­fi­cul­ties or need an in­come while at univer­sity, for in­stance, or sim­ply to pro­vide a home in which to live.

Es­tate plan­ning and com­pany struc­ture Set­ting up a civil or pat­ri­mo­nial com­pany has a par­tic­u­lar ad­van­tage for par­ents who wish, dur­ing their life­time, to pre­pare their es­tate plan­ning for their chil­dren, while con­tin­u­ing to man­age their as­sets.

If it is a real es­tate as­set, the par­ents can set up an SCI ( so­ciété civile im­mo­bil­ière) which holds their im­mov­able as­sets, and then they give their chil­dren some of the shares. The par­ents, or one of them, will be ap­pointed man­agers of the com­pany, with the chil­dren only hav­ing con­trol over some of the de­ci­sions for the prop­erty made dur­ing a board meet­ing.

Par­ents may also want to keep the in­come gen­er­ated by as­sets they trans­fer to their chil­dren, in or­der to en­sure a cer­tain level of re­sources through­out their life­time. The set­ting up of an SCI com­bined with sep­a­ra­tion of own­er­ship (life in­ter­est/bare own­er­ship) will be ad­van­ta­geous. Two ex­am­ples can il­lus­trate th­ese sce­nar­ios:

Par­ents bring the bare own­er­ship of all or part of their real es­tate to an SCI formed with their chil­dren, keep­ing a life in­ter­est over the as­sets. There­fore, they are the only ben­e­fi­cia­ries of any in­come, de­spite giv­ing shares to their chil­dren.

The par­ents bring full own­er­ship of the prop­erty to the SCI and then give the bare own­er­ship of the shares equally to their chil­dren. This scheme of­fers the par­ents flex­i­bil­ity in the draft­ing of the ar­ti­cles of as­so­ci­a­tion of the com­pany and split power and man­age­ment rights be­tween the share­hold­ers.

In both sce­nar­ios the prop­erty passes to the chil­dren tax-free on the par­ent’s death. Those chil­dren own­ing an SCI will be able to do ex­actly the same with their own chil­dren later on.

Fi­nally, I’d like to men­tion the re­cent de­ci­sion made by the Com­pul­sory Levies Coun­cil (CPO). This or­gan­i­sa­tion fo­cuses on ver­i­fy­ing whether the sys­tem of levies on house­hold cap­i­tal is con­sis­tent with the ob­jec­tives it pur­sues. It re­cently rec­om­mended that some taxes should in­crease, no­tably in­her­i­tance tax, and some tax thresh­olds should be re­duced, if not can­celled. It could even trig­ger a com­plete ‘re­fur­bish­ment’ of the in­her­i­tance tax sys­tem in France, im­ple­ment­ing a new in­her­i­tance tax sys­tem that will en­cour­age prop­erty own­ers to dis­pose of their as­sets be­fore death and re­view their es­tate plan­ning.

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