Further consideration has to be given to the interaction between French rules and regulations and taxes and those that may apply to your business and/or personal structure in the UK. For instance, it is likely to be necessary to register for income tax and VAT in both England and France.
Spouses may, at the time of buying their French residential property, enter into a communauté universelle (marriage contract) with an attribution intégrale provision, allowing a surviving spouse to access all communal assets without paying any inheritance tax upon their partner’s death. This is made possible by the Hague Convention of 1978 on “The law applicable to matrimonial property regimes”.
The adoption of this regime need not affect all the assets of the couple in France, but can be specifically restricted to their residential property. As a result of entering into such an agreement, the spouses hold a joint tenancy over the property and on the death of one of them, the property vests automatically into the survivor. This clause works outside the rules of the law of succession, and consequently, the right of children to a statutory reserved share does not come into play.
There is, however, a qualification that has become increasingly important with the growth of blended families. If one of the spouses has a child from a previous marriage or relationship, this child cannot be kept out of his statutory reserved share by his parent entering with the non-parent into a communauté universelle with an attribution intégrale provision.
This is meant to protect the child’s position in the event of the survivor being the non-parent, as in such a case, the non-parent will become the sole owner of the property and, given the absence of blood ties between the child and the non-parent, the child will have no legal right to a statutory reserved share in the estate of the non-parent at death.
The default purchase structure of French law as regards non-resident purchasers of French property, including those married in England without any particular marriage contract, is the relationship known as indivision (similar to “tenancy in common” under English law). The relationship between purchasers in indivision is governed under the French Civil Code, but the co-purchasers are free to vary these default provisions by entering into their own agreement between co-purchasers. This should ideally be done prior to purchasing the property and the agreement must be in French and formally entered into.
When purchasing the property under a pacte tontinier (joint ownership), it must be remembered that in France, property bought in common by spouses (or non-spouses, for that matter) is deemed to have been bought under a “tenancy in common” and not a “joint tenancy”. The upshot is that at death, the share of of the deceased tenant in common will not vest automatically in the survivor (joint tenancy), but will form part of his estate and devolve according to the rules of the French law of succession. In order to bring about joint ownership of the land, the spouses, or partners, buying directly, have the choice of adopting a communauté universelle with an attribution intégrale clause or opting for a pacte tontinier.
This agreement has the effect of creating joint owners of the property, with the whole of the property vesting in the survivor at death. The whole process taking place quite outside the rules of French law of succession and therefore being unaffected by them. Until recently this method of purchasing little used, as it lacked inheritance tax efficiency, but this should now change: in September 2007, as a result of the amendments introduced to French inheritance tax by the government of then-President Nicolas Sarkozy, inheritance tax on death was abolished between spouses.
PACS (Pacte Civil de Solidarité)
This is an agreement between two unrelated people living together. This is a helpful arrangement and couples can decide how they share their assets in the event of separation and death, but a PACS does not eliminate the need to make arrangements (a Will) for inheritance purposes. It can only be entered into by French residents and must be registered at the local Tribunal (Court).
Using a Company Incorporated in the UK
The tax treatment of capital gains on the sale of a French residential property held by a UK incorporated company, subject to UK corporation tax, is not a favourable one. This is the case even though the members of that company are physically resident in the UK who, had they bought the residential property in their own name (or by way of a French “land” company), rather than through a UK corporate vehicle, would have enjoyed taper relief with exoneration from capital gains tax after 15 years of ownership.
It must be emphasised that this unfavourable treatment does not stop at capital gains, but extends to other aspects of French Revenue law. Thus, a French residential property held by a UK corporate vehicle subject to UK corporation tax is expected by the French Inland Revenue to be managed in a business-like manner, and as such not to be occupied for free by the shareholders. Such free occupation may lead in due course to a tax demand made against the company that will be based on the value of the notional rent which should have been collected by it from the shareholders for such occupation.
Furthermore, the residential property held by such a company is liable to a annual levy equal to 3% of the market value of the property. A UK company may escape this levy by virtue of the Double Taxation Relief Treaty between France and the United Kingdom 1968, but only if within two months of the purchase of such a property the UK company enters into an undertaking with the French Inland Revenue to disclose on demand a list of all its property assets, and the residence for tax purpose of its shareholders. Otherwise, in order to claim the exemption, the company will need to submit an annual form claiming this exemption.
Using a French “SCI”
It is possible to purchase a property through the medium of a French incorporated “civil” company, known as a société civile immobiliere. The advantage of using such a vehicle is that the shares therein have the status in law of being movable property, and as such, on the death of the holder, will pass according to the law of succession of his domicile and not according to the law of succession of the country where the property is situated, that is to say France. So if the British shareholders of such a company do not take up a French domicile, their shares, at their death, will pass according to the law of succession of their British domicile, which does not have any statutory “reserved rights”. It must be pointed out that this arrangement is tax neutral in France and since 2008, has not risked attracting tax in the UK provided certain criteria are met.
This method of purchasing can also be used between unmarried partners, provided that there is no more than 10 years difference in age between the partners. It is important at this point to examine the incidence of French law of succession upon residential property held by unmarried couples.