Inheritance tax and law
October 21, 2008
The Global Property Guide looks at inheritance from two angles: taxation, and what inheritance laws apply to foreigners leaving property in France: what restrictions there are and whether making a will is advisable.
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, the surviving spouse. The amount they can claim will take into consideration the value of gifts given during lifetime. However, under some very specific conditions, the beneficiaries can give up all or part of their rights in advance.
The situation as regards héritiers réservataires:
- If the deceased is survived by one child, he can give away by will no more than half of his French property.
- If he is survived by two children, this limit drops to one third
- If he is survived by three or more children, he can only give away a quarter of his French property.
- If the deceased has no children, a husband or wife is considered a legal heir and has rights to one fourth of the French property of the deceased.
If a married couple buys 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 several laws over the last years. But for these rights to be valid, the couple must not be divorced.
- 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 (three-fourths if only one of the parents survives); 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.
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, unless they have previously given up their rights.
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.
If an individual dies a resident in France, French inheritance tax is payable on all his 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.
- There is no longer any inheritance tax between spouses for unrelated couples who have signed a Pacte Civile de Solidarieté (PACS) agreement.
- There is a tax-free allowance, which depends on the relationship of the person involved: €151,950 for parents and children, €15,195 for brothers and sisters, additional €151,950 for handicapped inheritors, and €1,520 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 €450,000, the taxation position will be as follows:
- The spouse is exempted from inheritance tax and thus receives €150,000 tax-free (€150,000 ÷ 3).
- The children: €450,000 ÷ 3 = €150,000 potentially taxable each, but each child benefits from a tax-free band of €151,950 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%:
INHERITANCE TAX RATES FOR SURVIVING CHILDREN AND PARENTS
|TAXABLE INHERITANCE (€)||TAX RATE|
|Up to €7,699|
|€7,699 to €11,548|
|€11,548 to €15,195|
|€15,195 to €526,760|
|€526,760 to €861,050|
|€861,050 to €1,722,100|
After the tax free bands, brothers and sisters are charged 35% when inheriting less than €23,299; 45% when inheriting more. Relatives up to the fourth degree are charged 55%, and those more distant and unrelated persons are charged 60%.
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.
Liability to French gift tax is very similar to French inheritance tax. Gzifts can be made tax-free up to the amounts which can be inherited tax-free, once every 6 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 €30,390 provided that the donor is less than 65 years old.
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 60% (if the parents are between 41 and 50) and by 50% (if the parents are between 51 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 child gets a tax-free allocation of €151,950 so €455,850 can pass per parent, i.e., (since the value of the property is reduced by 60% if the parent is under 51) property worth €1,139,625 is gifted tax-free per parent.
Moreover, should gift tax be due, a reduction is applicable depending on the age of the donor and on the rights that are given:
- The parent retain the lifetime right:
- 35% reduction when the donor is less than 70 years old
- 10% reduction when the donor is between 70 and 80 years old
- The parent does not retain the lifetime right:
- 50% reduction when the donor is less than 70 years old
- 30% reduction when the donor is between 70 and 80 years old
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.
Thanks to David Cohen from Martínez-Echevarría, Perez and Ferrero Law Offices
What inheritance laws apply in France?
Inheritance law in France depends upon the type and location of property.
The main source of inheritance law in France is the Civil Code. The last update of inheritance rules is contained in the "TEPA" law of 21st August 2007. French inheritance laws are applicable to everyone who owns property in France, with no differences with respect to the citizenship, nationality, or religion of the deceased:
- Real estate: French inheritance law is always applicable to immovable property located in France which is personally owned by persons in their own names.
- Non-real estate: The inheritance law of the country of the last main address of the deceased person (where he/she spent at least 6 months and 1 day in the last year of life) is applicable to moveable property in France
- Real estate can be bought through a French non-trading company called "SCI" (Société Civile Immobilière): The property is divided into shares held by two or more associates. Following the death of one associate, the property is still owned by the company. Only the company shares go through the inheritance process, and not the property. As a consequence, such property is considered as moveable, and follows the inheritance law of the last main address of the deceased.
- If French citizens inherit property abroad, or foreign citizens inherit property in France: The local national law is applicable. If a foreigner's local law state that French law applies, then French inheritance rules must be respected. In such a case, the lawyer, notary, or judge in charge of the inheritance takes only French law into consideration.
French notaries and local courts handle inheritance proceedings.
The jurisdiction closest to the location of the real estate (or closest to one of the properties, should there be more than one) hears inheritance trials in France. The Court in charge of inheritance conflicts in France is the "Tribunal de Grande Instance". Cases involving French citizens and foreigners are not considered differently.
If there are no conflicts, inheritance is a straightforward process, and inheritance trials are rare in France. An inheritance file must be closed and all goods transferred within 6 months after the opening of the file with the notary. Some delays may occur if an underage child is involved. The proceedings are suspended until the children's judge decides if the child can receive the inheritance.
If the deceased is intestate (dies without a will) certain portions of his/her estate in France are reserved for specific reservatory heirs, as follows:
- The spouse has a choice between (i) ¼ ownership of the estate or (ii) no ownership, but lifetime use of the property, including all rental income from real estate. In the second case, the spouse bears all charges and taxes related to the real estate.
- If the deceased has one child, he/she is reserved ½ of the estate. If the deceased has 2 children, they are reserved 2/3 of the estate. If the deceased has 3 or more children they are together reserved a maximum of ¾ of the estate.
- If the spouse chooses lifetime use only, then the whole estate of the deceased is divided equally between all his/her children.
- If one or more children are pre-deceased at the time of the inheritance process, then the children of the pre-deceased (i.e. the grandchildren) have the same inheritance rights as their parents. The estate is distributed as if the pre-deceased children were still alive, but their shares are received by their own children.
- If no spouse or children survive the deceased, then the reserved portions are distributed in the following order of preference: parents, brother and sisters, and then nephews and nieces.
If an inheritor cannot legally own property in France, or if the inheritor cannot pay inheritance taxes, then the property must be sold, at its normal price on the market. First, the notary pays the taxes and then distributes the balance between the reservatory heirs. The time scale for this process is normally 6 months. Although the law does not allow this deadline to be extended, an extension for non legal reasons, is generally accepted.
It is unusual to make a will in France.
It is unusual for a French person to make a will, because French inheritance law already protects his/her family; however, a will must be made to transfer property to a non-reservatory heir, or if the amount of moveable property (e.g. money, or company shares) to be transferred is considerable.
It is absolutely necessary to be aware that as far as real estate located in France is concerned, the making of a will can never deprive the reservatory heirs of their inheritance rights. The reserved portions are always distributed first. Only the residual portion of the estate (that which remains after distribution of the reserved portions) can be bequeathed to non-reservatory heirs.
The most common way to make a will in order to dispose of property located in France, is to write the will (in French) on blank paper and add a signature to the text. The will is put in an envelope by a notary, who registers it in the French will database. Such a will must be made in France. To dispose of immovable property in France, the will can be made in the country of residence of the testator, according to his/her local laws; however, such a will is only valid in France after an official translation into French.
Donations of property can only be made within the limits of the reservatory quotations.
Donations of property are possible at any time during the life of the owner, but the reservatory heirs cannot be deprived of their inheritance rights, and donations can only be made within the limits of the reservatory quotations. For example, if a person has 3 children, then he/she can only donate to one child the same amount as the portion reserved for the 2 other children. A donation that leads to a reduction in the shares of the reservatory heirs can easilty be be cancelled by a judge.
It is possible to make a donation in cash in order to purchase real property. For example, a parent may donate money to his/her child, and include the child as a co-owner of the property; however, one restriction applies. Such a donation is not possible if the property is encumbered by a mortgage. Donations between spouses are free of tax. Donations between a parent and his/her children not exceeding 150,000 € per child every 6 years are also exempt of tax. Any balance above 150,000€ is taxed.
Ownership of property depends on the title deeds and matrimonial status.
French law always looks first at "who is on the title deed" to determine the ownership of real property. The process of property registration is straightforward but the service of a lawyer is recommended for foreigners, because not all notaries speak English, and few have enough time to explain in English each and every step to be taken by the buyer or inheritor of the property. The title deed is delivered to the owner of the property a few months after its signature at the notary's office. At the time of signature of the title deed, attestations of ownership are delivered, in order to replace the deed for a few months. During this period, the deed is registered in Land Registry Offices, then returned to the notary's office, and finally the owner receives an official registered copy.
The matrimonial status of married couples determines the way ownership shares in property are divided. A married couple must determine if their property is on a co-ownership basis ( e.g. 50% - 50%) or under the regime of universal community of property (i.e. the surviving spouse maintains the ownership of the entire property, and the inheritance process is transparent to the children).
Inheritance by children is decided by a judge.
Should part or all of the property go to an underage child, the Children's judge will have to decide if the child can accept the inheritance. The restriction is that no debt must be pending on the property. If a mortgage reimbursement still applies to the child's share after the inheritance process, then the judge refuses in 99% of cases. In case of acceptance, a guardian is designated to protect the interests of the child.