An increasing number of people either own or would like to own a second home abroad. There are however a number of complications both relating to the Taxes that have to be paid on the property and also what happens when someone dies. This leaftlet is intended to give some general information about buying, owning and selling property in France as well as what happens when someone dies. We would however stress that we are not experts in this area and you should obtain advice from an expert rather than relying on the information we are providing.
Buying a Property
It is usual for one person (a Notaire) to act for both the Seller and the Buyer. The Notaire is a public official and he will deal with the payment of Tax to the French authorities.
A contract is prepared by the Notaire. It is recommended that the conditions of sale are included in the contract and this will usually give a 7 day cooling off period. If you need a mortgage to buy the property you will probably be required to have life insurance. Also please be aware that this will increase the Notaire’s fees.
The Notaire checks that the Seller is able to sell the property and conducts all enquiries about the property. If the property is an apartment they will also ask questions of the Management Company. It is only when he is satisfied that all enquiries have been answered that completion can take place and even if a date is mentioned in the initial contract this may be delayed if there are any outstanding issues.
A transfer document is signed after exchange. If you are not able to be present in France for the signing of the Transfer deed you will be asked to sign a Power of Attorney. This should be prepared in both French and English so you can understand what you are signing. All money will be paid to the Notaire both for the price of the property, the Taxes and his fees. Property should be vacant on completion although it is best for the Buyer to inspect the property and make sure that it is empty.
Buying a property jointly
There are several options. A married couple can take advantage of French matrimonial law. This is the simplest for a married couple who will enter into a communauté universelle. On the death of the first spouse the property would be treated as automatically acquired by the second spouse. On the death of the second spouse the property would pass under the French Succession Laws. However this arrangement is not possible if either of the married couple have children from a previous relationship. Also a separate Deed is required to be made in front of the Notaire and again there will be additional costs.
Another possibility is to purchase en tontine. However this is not usually advisable. On the death of one spouse it is treated as if the surviving spouse had originally purchased the property in their sole name. This also delays French Succession Law but is very inflexible especially if there is a divorce or separation. In addition our Tax Authorities will treat the property as if in a Trust.
If the Buyers are not married the property will usually be purchased en indivision. This is similar to the tenancy in common arrangement that exists in England. Each of the owners will have a percentage of the property. On the death of one of the owners their percentage will be dealt with under French Succession Law.
Another possibility is to buy the property through a Société Civile Immobilière. This is basically a company where the owners will have shares in the property. This arrangement can be used where there is a married couple with children from previous relationships. The property now changes its nature. If one of the shareholders dies and that shareholder is domiciled and habitually resident in the United Kingdom the French Succession Laws will not apply and instead the English Succession Laws will apply. However this arrangement can be open to challenge. If one of the children could show that the company has been used solely to prevent French Succession Laws applying that child may be able to challenge the arrangement. If the company is managed in the United Kingdom which will usually be the case that company will be subject to United Kingdom Corporation Tax. There are some other issues to do with benefits in kind which are extremely complicated. Separate specialist advice therefore needs to be taken.
French Succession Laws
Even though this may only be a second home and you may live permanently in the United Kingdom it is important to understand that if you own a property in France (apart from where the company structure exists) the French Succession Laws will apply. Unlike the United Kingdom it is not possible for you to make a Will to specify who will have your property on your death. Instead the beneficiaries are laid down by Law. This arrangement will not apply to items such as cash invested in Banks and Building Societies or furniture but will apply to a house. The rules are quite complicated and tend to favour children (including adopted children) rather than the surviving spouse.
To provide an example if you have a married couple who have two children one third of the property will go to child one, one third to child two. The remaining third is the only part that the deceased owner is allowed to give away as they wish.
If a married couple have more than two children three quarters of the property will be allocated between the children and the remaining quarter can be left as you wish.
However it is possible for provision to be made for the surviving spouse through a usufruit though what happens here will depend on whether the person who has died has left a French Will or has not left a Will.
If there is a French Will the surviving spouse can choose either (a) to take 25% of the property outright and have the remaining 75% on an arrangement where they can use the property during their lifetime but after their death would pass to the children. If they wanted to sell the property the consent of the children would be required or (b) they can have a right to occupy the whole of the property for the rest of their lifetime.
Under English Law the Revenue would treat the property as within a Trust.
If there is no Will and there are children of the marriage the surviving spouse has a choice between either (b) above or taking 25% only of the property. They would not have the right to occupy the remainder.
There are however some new regulations known as Brussels IV. This will allow you to choose to make a Will that would comply with English Law and would follow English Succession Law to dispose of the French property on your death. It is possible to make a Will now under these Regulations but this will only apply if a person dies after the 17th August, 2017. The Will can be registered in France. If this option is chosen it is best to have two Wills one specifying what is to happen to the French property and the other one dealing with the rest of the English estate. It will then be possible to avoid including in the Will dealing with the French property any reference to Executors or Trustees or Trusts which would cause problems and also prevent delay.
Taxes
It is important to remember that the French Revenue Authorities take preference and Tax must be paid first in France.
Purchase
There is a Registration Tax which is similar to our Stamp Duty. This is usually 5% however on newer properties it is generally 1% with VAT added at 20%.
Taxes during ownership
(a) In France
(i) There are local Taxes – taxe d’habitation (paid by the occupant) and taxe foncière (paid by the owner). This is similar to our Council Tax.
(ii) Income Tax – this is assessed on the individuals in the house. There is a progressive rate of Tax. For non residents the minimum is 20% plus a contribution to Social Security which means the combined rate is 35.5% of the net income. Where a property does not generate income because it is not rented out there is some deemed Income Tax payable.
(iii) Wealth Tax – at the moment this is assessed on the net value of the wealth of the household as at the 1st January in each year. There is a threshold of 1.3 million euros over which there is a flat rate of 0.25%. If the net value is over 3 million euros the figure rises to 0.5% of the households wealth.
(b) In United Kingdom
Income Tax only applies. You must declare on your UK Tax Return all income achieved for the property and pay Income Tax. However the amount you have paid in respect of French Income Tax (not the Social Security contribution) can be off set against the United Kingdom Tax liability.
Tax on sale
(a) French Capital Gains Tax. This is at 34.5% currently made up of 19% for EU residents and 15.5% Social Security Contribution. If you have owned a property for more than 30 years there is a form of taper relief.
(b) United Kingdom Capital Gains Tax. Again the sale of the property and any gain must be declared on your United Kingdom Tax Return. You will have credit for Capital Gains Tax paid in France apart from the 15.5% Social Security element.
Taxes on death
(a) French Inheritance Tax. The beneficiary is responsible for paying the Tax not the estate. The rate payable depends upon the relationship between the person who has died and the beneficiary as well as the value of the inheritance. Any gift to a surviving spouse is exempt from Tax on death. This does not however apply to gifts during the lifetime of the deceased.
If part of the property is left to children part of the value of the gift is exempt currently around 100,000 euros. Above this sum there is a progressive rate of Tax with a maximum sum payable of 40%. If the gift is to an unrelated third party Tax is at 60% with only a small amount exempt (1594 euros).
(b) United Kingdom Inheritance Tax. The value of the French property at the date of death must be declared on the United Kingdom Tax Return. Any Inheritance Tax paid in France can be off set against the English liability.
Gift Tax
There are no exemptions for gifts that are made to a spouse during someone’s lifetime. There is a small exemption of around 80734 euros which is renewed every 10 years. If the amount gifted is above this sum there is a progressive rate of Tax similar to French Inheritance Tax payable by the direct descendants and the Tax is between 5% and 40%. The position in the United Kingdom is that there is generally no Tax on outright gifts at the time it is made but if someone dies within 7 years there may be a charge to Tax. Because the arrangements are so different if some French Gift Tax is paid it will not be possible to off set this against the Inheritance Tax that will then have to be paid in this country.
Process after a death
Non residents have to apply through a Notaire for Probate in Paris. The Notaire will need a death certificate and translation. He may also require a certificate explaining aspects of English Law. In particular this will be required if there was an English Will dealing with the French assets. The Notaire will also need details of the relationship between the deceased and the persons who will inherit. He will judge whether the Will conflicts with French Succession Law. Any mention of Trustees or Trusts in an English Will which intended to cover the French property will delay the process as Trusts are not a normal concept of French Law.
The Notaire will prepare a Declaration stating who will benefit. This will be submitted to the French Revenue Authorities and the Tax will be paid. Finally the Notaire prepares a document which proves Title to the assets in favour of the beneficiaries.
Our recommendations
You need to understand how you have purchased the property where you have purchased a property jointly. You need to understand who would benefit under French Succession Law. You then need to decide whether you are happy to leave matters under French Succession Law making a Will under French Law to deal with the part of the estate that you are allowed to dispose of. If you are not happy with the French Succession Law you need to consider making a separate Will under English Law to cover purely the French property using the Brussels IV Convention.
If you require any additional information please contact Jean Newton on 01905 726789 or email jn@parkinsonwright.co.uk.