Be aware of forced heirship rules

Buying in France

Be aware of forced heirship rules

There are several ways of acquiring property in France, with advantages and disadvantages, both legal and fiscal, when it comes to inheritance.

Depending on each individual's matrimonial situation, the structure of ownership might be different.

Arabic residents are probably familiar with the English system having bought property in the UK. French law operates in a different way to English law and how property is dealt with on death and Inheritance Tax issues are somewhat different.

Prior to buying a property in France you should make sure that you are buying using the most appropriate method for your individual circumstances.

The main ways of owning a property in France are:

Sole Ownership

Buying a property in France is considered as an immovable asset which will be governed by French inheritance and tax laws. France is one of the many countries in which certain family members have reserved rights to inherit. This includes forced heirship rules ("reserve hereditaire"). If at the time of your death you are French resident, then all your worldwide assets (except for immoveable assets) are subject to the forced heirship rules. If you are not domiciled in France, those rules only apply to real property located in France.

The rights attach only to a share of the estate, known as the reserved portion. The rest of the estate is known as the disposable portion; this portion can pass according to the deceased's Will. The reserved portion must go to the protected heirs. If there is one living child, the reserved portion is half of the estate. If there are two children, the reserved portion is two-thirds. 3 or more children, it is three-quarters of the estate divided in equal portions. If a child predeceases leaving children of his or her own, those children will step into the shoes of their deceased parent.

Regime of Community Universelle

When buying under this structure, you are purchasing the property in joint names, you will own it in France in a way similar to the English tenancy in common. The concept of joint ownership under which the property automatically passes to the survivor on death does not exist in France. As mentioned previously, France has succession law which can force French assets to devolve to your own children in preference to the surviving spouse.

There are ways around these problems, and for most married couples the simplest and most economic solution is to buy in joint names and sign a French Community marriage contract, in French a 'Communaute Universelle'. By adopting this regime, the surviving spouse inherits and the asset does not have to pass to the children.

When the first spouse dies, the surviving spouse inherits the entire property. Thus, there is no forced heirship shares passing to the children or parents. The downside of this form of ownership is that, at the first spouse's death, the children of the couple will not be taking advantage of the tax exemptions for assets passing to the children. Therefore, in the long run, at the surviving spouse's death, and if the surviving spouse still owns the property, the overall tax liability will likely be higher with this form of ownership because of the loss of tax exemptions.

Tontine

The "tontine" clause can only be inserted in the deed at the time of the purchase of the property and by joint ownership. It provides that the surviving spouse or partner (you do not need to be married) will be deemed to have owned the entire property from the beginning and takes it all. It is not advisable to use this structure for couples with children from previous relationships (as children could claim their forced heirship share). However it is important to note that the sale of the property when both parties to the tontine clause are alive is only possible if both consent; if one declines to sell, the other cannot force the sale. Only a court order can order the sale.

This structure is quite often use for unmarried and/or same sex couples who wish to transfer the ownership to their partner. Be aware that a 60 percent inheritance tax will be payable because partners are non blood relatives.
Buying through a French SCI.

Because the community property regime described above is not advisable for couples with children from a prior marriage (as children could claim their forced heirship share), an alternative is to take title through a French entity called a Societe Civile Immobiliere or SCI.
An SCI is a transparent French entity that effectively takes the shape of its owner, (i.e: in the absence of an election for corporate tax, if it is owned by individuals, it is subject to personal taxation (which is arguably more favorable) and if owned by a corporate entity it is treated as a company for French tax purposes).

One advantage of taking title through an SCI is the possibility of avoiding forced heirship rules even if the shareholders of the SCI have children outside of their current marriage. If you own shares in a company which owns a French property, you do not own the property as an individual, the company does. All you own are the shares in the company. Therefore when one of the shareholders die, the ownership of the house does not change; it is the shares which change ownership. Shares are considered as moveable assets and pass in accordance with the succession law rules of the country where the individual i domiciled. Therefore, Arabic residents can avoid forced heirship on their shares in an SCI that owns French real property.

It is important to note that while French inheritance rules can be amended, French inheritance tax ("IHT") will apply but if there is a valid commercial debt reducing the net value of the property within the applicable nil band rates, no French IHT will be charged.

Charles Russell LLP is a top 50 City legal practice with a head office in London and additional offices in Geneva and Bahrain.