I OWN A PROPERTY IN FRANCE

There are a number of tax issues facing a UK national who buys and owns property in France. The precise tax situation will depend on:

Whether you wish to use the property simply as a holiday home, or are buying to let commercially.
Whether you aim to sell the property at some stage in the future, or intend to leave it to your children or other family members.
Whether you intend at some stage to move permanently to France, or will continue to be UK based.

One issue that eventually affects everyone, whatever their circumstances, is the tax which is charged on death – in the UK this is termed Inheritance Tax, while in France it is commonly known as droits de succession. For convenience, we will refer to both as IHT.

OWNING PROPERTY IN FRANCE – THE LONG-TERM ISSUES

For a UK national buying a second property in France, the immediate tax and legal issues often seem more than enough to contend with. This might explain why many purchasers give little or no thought to the long-term implications of owning property in France – it is tempting to assume that it will be no different from buying a second home in the UK.

Although tempting, that assumption is both untrue and potentially dangerous when it comes to death and taxes. French laws on inheritance, and the associated tax regime, are very different from those that are familiar to British citizens. French law (the Code Napoléonique) imposes very specific requirements on how real estate is inherited, so that it is not always possible to ensure that the right people inherit the property. In particular, a surviving spouse can be severely disadvantaged.

Furthermore, rates of French IHT can reach as high as 60%. Although there is relief against double taxation, so that UK citizens will only pay French tax on their French assets and UK tax on their UK estate, the overall inheritance tax bill will often be unnecessarily severe.

Planning solutions can help by ensuring that the value of a second home or investment property in France owned by a UK resident is excluded from both the Napoleonic laws on inheritance and the charge to French inheritance tax. These will depend on individual circumstances, and can be assessed in a planning meeting arranged by contacting us through the Cut My Tax website.

SOME QUICK FACTS

The Daily Mail “asked two leading accountancy firms, PricewaterhouseCoopers and Ernst & Young, to calculate how much inheritance tax would be due on a £500,000 estate passed to a son or daughter in ten countries. Only in bureaucratic, tax-laden France is the bill greater than in the UK”.

In the UK, wills and inheritances are governed by the “common law”, which emphasises flexibility and common sense. France is governed by the Code Napoléonique, which emphasises the continuity of the family line, and specifies in great detail who must inherit.

French law has traditionally offered relatively little support to unmarried couples and the divorced, who can find themselves and their children unfairly treated by the inheritance laws.

Joint ownership of property is uncommon in France, and the law makes it difficult to arrange ones affairs in the ways familiar to UK citizens.

FRENCH INHERITANCE LAWS

Under the Code Napoléonique, the interests of the children are always the main priority for inheritance. The succession laws, which apply to all real estate situated in France regardless of the nationality of its owner, provide that:

If the deceased is survived by one child, at least half of his real estate must be inherited by the child; if he is survived by two children, at least two thirds must be inherited by the children; and if he is survived by three or more children, at least three quarters must pass to the children.
If a child predeceases the parent, that child’s share is divided between any surviving issue of the child.
If the deceased leaves no descendants, at least a quarter of the real estate must pass to any living parents or grandparents in the paternal line, and at least a quarter to any living ancestors in the maternal line.

All of the above provisions apply regardless of whether the deceased leaves a will – any will that defies these provisions is unenforceable. If there is no valid French will, the laws on intestacy specify exactly how the real estate will be inherited.

If there are surviving children/grandchildren, they receive all of the deceased’s estate; otherwise, the estate passes to any surviving parents, grandparents, brothers, sisters, aunts, uncles etc. Until 2002, there was only very limited protection for the surviving spouse, who could claim at most a life interest (usufruit) in a quarter of the estate.

Since July 2002, the surviving spouse has the right to a life interest (usufruit) in the whole property or an absolute right to a quarter of the estate. This resembles more
closely the normal English way of handling inheritance.

OWNERSHIP OF PROPERTY

The English system of joint tenancy, where on the death of one spouse the survivor automatically inherits, is poorly represented in French law. The closest equivalent is ownership en tontine, which is more restrictive (it can only be inserted at the time of purchase, not subsequently), less flexible (rearrangement of interests, eg in a divorce, is virtually impossible) and ill-understood by many notaires, who regard it as a potential fraud against the children.

The combination of the tontine system with the French inheritance and intestacy laws can be particularly unfair where one spouse (or both) has children from a prior marriage. It is entirely possible for the children of one spouse to be entirely disinherited.

FRENCH INHERITANCE TAX

The French Inheritance Tax (les droits de mutation à titre gratuit or more commonly les droits de succession) is payable by anyone, regardless of their nationality or residence, who inherits property situated in France.

The rate of tax payable will depend on how closely related the beneficiary is to the deceased. Children, parents and widows/widowers pay a maximum of 40%. Siblings pay a maximum rate of 45%, while other close relatives pay at a 55% flat rate. Distant relatives and anyone not related by blood pay a flat rate of 60%.

Until recently, unmarried couples suffered especially from the high rates applying to blood strangers. Now it is possible for couples in a stable relationship (over two years) to apply for the pacte civile de solidarité or PACS. This legal status, which is only available to couples fiscally resident in France, enables the top rate of inheritance tax to be pegged at 50%.

For French property valued in excess of €750,000, the French inheritance tax liability is likely, depending on circumstances, to exceed the UK liability – for properties in excess of €1.7 million, the French liability will almost invariably be higher.