Reunion Is.: Inheritance

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Inheritance tax and law

French private international law uses the standard double rule on inheritance: the law of the deceased’s domicile applies to moveable assets, and the law of the location of the property applies to immoveable assets.

French inheritance law is restrictive. A defined proportion of the estate, the réserve legale, must be given to specified categories of heirs: firstly, to the children and issue, and if no children or issue, then parents or, finally, grandparents if there are no surviving parents. The amount they can claim will take into consideration the value of gifts given during lifetime.

The situation as regards héritiers réservataires:

• If you are survived by one child, you can give away by will no more than half your French property.
• If you are survived by two children, this limit drops to one third.
• If you are revived by three or more children, you can only give away a quarter of your French property.
• If you have no children, other members of your family may qualify as legal heirs and so enjoy mandated rights to a proportion of the property. A husband or wife is not considered a legal heir and has no right to the legal reserves.

If you and your wife buy the property jointly, then the situation is again different – the above shares are based on a share of half the property, the other half remaining in the possession of the surviving spouse.

The surviving spouse. The rights of a spouse were strengthened by the Law of 3rd December 2001. But for these rights to be valid, the couple must not be divorced or in the process of being legally separated.

• If the deceased spouse leaves descendants (children and grandchildren, etc) who are also the descendants of the surviving spouse, then the surviving spouse has a choice – he or she can have either one quarter of the property outright, or a life interest in the property (i.e. the use of it during their lifetime). The right to temporary accommodation is immediately applicable. To enjoy a lifelong right to accommodation, the surviving spouse must express this desire within one year of the death.
• If the descendants who survive are not all the descendants of the surviving spouse (e.g. children from a previous marriage)...there is no choice - the surviving spouse inherits one quarter of the property.
• If there are no descendants, and only the mother and father survive, the surviving spouse inherits half of the property; the rest goes to their parents-in-law. In this and the former cases, a married person may deprive his/her spouse of these rights. The right to lifelong accommodation can only be deprived a will executed by two notaries or one notary in the presence of two witnesses. The purpose of this restrictive provision is to prevent a married person from taking such a serious decision lightly.
• If there are brothers and sister or their descendants (but no parents or descendants), the surviving spouse inherits the whole property, with exceptions for certain assets.
• If there are only grandparents, great grandparents or other relatives (but no parents, siblings or descendants), then the surviving spouse inherits the whole property. In these two cases, the testator cannot deprive the surviving spouse of everything; she must inherit one quarter of the property.

The remainder of the estate, the quota disponible, can be left as the owner wishes. It is possible to ignore these provisions but the héritiers réservataires can always bring a claim for their entitlement.

A Société Civile Immobilière (SCI)

Note that holding property through a Société Civile Immobilière (SCI) allows the investor, foreign or otherwise, to own shares, rather than real estate directly – so that the SCI shares, which are considered movable property, are not subject to French inheritance law (though they are subject to French inheritance taxes). They can be left to the heirs of the deceased according to the inheritance laws of the latter’s place of residence.

There are some inheritance tax advantages of an SCI too - children and parents can be included in a real estate acquisition (such as the purchase of a second home or vacation home). Later on, the parents’ share of the property can be gradually transferred to children or grandchildren in small increments, with a tax burden that is spread out over time. However, note that if furnished property held through an SCI is rented out, it loses its tax transparency, and is taxed like a company.

Inheritance tax

If you die resident in France, French inheritance tax is payable on all your assets. Otherwise, inheritance tax is payable only on assets located in France.

French inheritance tax is paid by each beneficiary, pro rata to the value of net assets received after deduction of all liabilities.

• The estate (as a whole) benefits from a basic tax-free band of €50,000.
• Then there is a tax-free allowance, which depends on the relationship of the person involved; a spouse's personal allowance in 2005 is currently €76,000; this is reduced to €50,000 for parents and children, €57,000 for bothers and sisters under certain conditions., €57,000 for unrelated couples who have signed a Pacte Civile de Solidarieté (PACS) agreement, €50,000 for handicapped inheritors, and €1,500 for all other inheritors.

Using a very basic example, in a situation where a spouse and two children have each inherited one-third, and the value of the inheritance totals €150,000, the taxation position will be as follows:

• €150,000 less €50,000 tax free = €100,000 potentially liable to tax
• €100,000 ÷ 3 = €33,333 potentially taxable each, but the spouse has a tax-free band of €76,000 and each child benefits from a tax free band of €50,000, so there is no inheritance tax to pay

The balance in excess of the allowance is taxed at progressive rates from 5% up to a maximum of 40%, depending on who the inheritor is:

Other beneficiaries

After the tax free bands, brothers and sisters are charged 35% when inheriting less than €23,000; 45% when inheriting more. Relatives up to the fourth degree are charged 55%, and those more distant and unrelated persons are charged 60%.

If a house left was the deceased person’s principal residence for at least two years, the inheritors benefit from an additional allowance of €46,000 each, if various conditions are met.

It is normal for couples to hold property together, in equal shares. In this case, when one dies, inheritance tax is only payable on half the value of the property.

Gift tax

Liability to French gift tax is very similar to French inheritance tax. Gifts can be made tax-free up to the amounts which can be inherited tax-free, once every 10 years. In addition any transfer of cash by parents or grandparents to children or grandchildren, and even great-grandchildren over 18 years old, are exempt of any gift tax up to €20,000.

A popular way to reduce French inheritance tax is for property owners to give away their house to their children while retaining the lifetime right (usufruct or usufruit) to remain in occupation and to draw any income (such as rent). The state helpfully discounts the value of the gift by 40% (if the parents are under 50) and by 30% (if the parents are between 50 and 60), if they gift while retaining usufruct rights. Parents can transfer a lot in this way. If a house is owned in equal shares and is gifted to three children, each parent benefits from the €50,000 zero-tax rate and each child gets a tax-free allocation of €50,000 so €200,000 can pass per parent, i.e., (since the value of the property is reduced by 40% if the parent is under 50) property worth €300,000 is gifted tax-free per parent.

In the contrary case, any gift which was made before 30 June 2005, which did not include any reservation such as a French life interest (usufruit), benefited from a 50% tax allowance, if the donor is under 65, and 30% if the donor is aged between 65 and 75 years.

However for inheritance purposes, when cash is given away 30, 20 or 1 year before the deceased’s death, it is notionally regarded as part of the deceased’s French estate, and the forced heirship rules apply.

Reunion Is. - more data and information

• How high is income tax on residents in Re Union Is.?

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