Capital Gains Tax
Ownership of Marital Property
Separation of Property (Séparation des Biens)
Universal Community (Communauté Universelle)
There are few restrictions on foreign ownership of land and property however, very careful consideration should be afforded to the method and route of ownership. The French Government imposes draconian rules relating to succession laws / forced heirship and wealth and capital gains taxes.
If a French property is owned by a non resident then individual wealth tax is payable at a rate of 0.55% in excess of €800 000 and is scalable up to 1.8%. If a French property is owned via a designated offshore jurisdiction company or a company deemed to be outside the approved territories, wealth tax is imposed at the rate of 3% per annum.
French capital gains tax applies mainly to secondary residences but more specifically to non resident individual owners of French property. This tax is imposed if the capital gain is realised within 15 years of initial ownership although there are small allowances after 5 years of ownership. The current rates of capital gains tax are levied at the rate of 16% for French and other EU residents and 33.3% for non EU residents. In certain cases there is an additional levy of 10% relating to a social security charge on the net gain.
In many common law countries like the United Kingdom and the Unites States people can generally leave their assets to whoever they choose. In France the laws are completely different and, regardless of the wishes contained within a properly executed Will, the wishes can be overturned by the protected heirs (Heritiers Reservtaires).
Even if a foreign Will exists the French rules on succession take precedence regardless of any treaty or convention that France may have with another country.
Foreign Testators should therefore be aware that any property that they own in France will be subject to French succession laws and to Inheritance Taxes upon their deaths.
French Succession law focuses on the concept of Bloodline, thus protecting the rights of protected heirs, which include children, grandchildren and in some case, parents before the rights of the surviving spouse (a surviving spouse is a protected heir if there are no living descendants or ascendants.)
Protected heirs are entitled to a reserved portion (Reserve Legale) of the deceased’s estate. For example, where there is one child of a marriage either through blood or adoption that child will be entitled to half of the deceased’s estate, where there are two children two-thirds, and where there are three or more children, three quarters.
In the case of a son or daughter pre-deceasing the testator the share otherwise attributed 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 had not existed.
If there are no children or grandchildren, but there are surviving or ascendants i.e. living parents or grandparents in both the parental and maternal lines, the reserved portion equates to half of the estate. If there are ascendants in only one line, it is a quarter of the estate.
The rights relating to marital property are complex. Under French law a marrying couple normally enter into a matrimonial contract which will affect the way their property is owned. There are two principal forms of contract.
With 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 most common-law countries such as the United Kingdom or the United States is considered to be married under this regime in French law in the absence of a specific marriage contract, (which does not exist under Common law). It means that on the death of one spouse, the protected heirs can make a valid claim against all the 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 serious issues. For example, the surviving spouse of a foreign marriage has no rights to continue living in the marital home, in France, if it is registered in the sole name of the deceased spouse. The surviving spouse of a foreign marriage has no rights to other assets registered in the name of the deceased spouse if they reside permanently in France. In fact it is the children including those of earlier marriages of the deceased spouse who have all rights.
This involves all of the assets belonging to the married couple being placed in joint or community ownership. A foreign married couple can enter into such a contract and they may also choose to include a special clause (clause d’attribution intégrale au conjoint survivant) which allows all the assets to pass on to the surviving spouse without the liability to French inheritance tax, thus effectively avoiding French succession law.
Recent changes to the French civil code 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.
There are fundamentally two ways of jointly owning French property:
Each own half or a percentage of the house, which on death is devolved according to French succession law. The protected heirs then have the rights over and above the surviving spouse against the deceased’s share. This is how most French lawyers put property into joint names in the absence of specific instructions to the contrary, although this method can create disadvantages where there are children from previous marriages of the deceased.
The problems associated with ownership en indivision can be avoided by purchasing the property en tontine. This specific clause may only be included at the time of purchase and although rarely used in France other than by foreign couples, is perfectly legal. Under a tontine, the surviving spouse is deemed to have owned the property from inception and therefore the surviving spouse is fully protected and has complete freedom to deal with the property as he or she deems appropriate.
It should be noted however that when a property is purchased using the en tontine clause the consent of both parties is required in the event of a sale and this may give rise to problems in the event of a marital breakdown.
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 may classify the tontine as a gift and then apply taxes on the death of the first spouse.
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 only receive their tax-free allowance (abatement) only in the estate of the second deceased parent instead of receiving an allowance in the estate of each parent.
Unmarried couples may 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.
If a property is brought by a sociéte civile immobilière and the shareholders are the married couple, the couple do not own the property directly, but only the share in the company. Upon death, it is the ownership of the share that will change, not the ownership of the property. As shares are considered to be personal property rather than real property, it is the law of succession in the country of domicile that will be applied, therefore allowing the property to pass according to a foreign will.
Use of sociéte civile immobilière for property ownership is fairly common practise in France, and because it is fiscally transparent it is not subject to corporation and capital gains tax in the way that a normal incorporated company would be. However this is a relatively complicated and expensive way in which to own property, and Inheritance tax is still chargeable upon death of a shareholder.
There are advantages to this method, most notably the fact that the higher rate of 3% annual wealth tax would not apply although the British tax authority may impose a “benefits in kind” tax if the owners are UK resident.
Generally, this avoids French succession law rules but does not avoid the 3% annual wealth tax.
The laws relating to the ownership of French property are extremely complex and it is therefore recommended that individuals seeking to purchase French property should obtain the advice of an expert. OCRA Worldwide has access to such expertise and for further information please contact either our Isle of Man, or London offices.
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