When an English person purchases a real estate in France, he worries about what will happen to it after his death. Considering, French as well as English private international inheritance laws, the real estates are submitted to the law of the location of the property.
Thus, at the death of the owner of a real estate purchased in France, this immoveable asset will be submitted to French inheritance law. But French law, contrary to English law, has rules, which guarantee a reserved share in the estate to some heirs (children, or failing that, the father and the mother). To avoid this rule and to allow for example the surviving spouse to dispose of the real estate located in France, different methods exist such ad the “tontine”, the change of marital scheme, and, with reserves, the purchase by a civil company (SCI: Société Civile Immobilière), or, the capital contribution of the real estate to an SCI On the other hand, the “indivision” ownership can generate some difficulties.
What is a “tontine”
“Tontine” is a creation of French law comparable to “joint tenancy”. With a “tontine” agreement, the purchasers of a same real estate agree that the survivor will become the sole owner of the jointly held property. With this agreement, the surviving owner can’t be worried by the privileged heirs of the deceased (heirs with a reserved share). A “tontine” clause can be inserted in a purchase contract when the real estate is located in France and when French law is the law applicable to the contract. That will be the case, when, in pursuance of article 3 of the Rome Convention of 19th June 1980, the parties of the sale choose to submit the contract to French law. In pursuance of article 4 a) of the same Convention, a “tontine” clause can also be inserted when the real estate is located in France (in default of choice of the applicable law in the deed of sale).
Civil aspects of “tontine”
To be valid, “tontine” must not interfere with the marital scheme of spouses. In this respect, English spouses, married under the English legal marital scheme of separate estates can validly include a “tontine” clause in the purchase contract. In other respects, to be valid, “tontine” clause must be inserted at the moment of the purchase. This is the first difference with the joint tenancy, which can be included after the purchase.
After the death of one of the owners, the real estate is subject to a particular status. It’s not an undivided property. The owners cannot put an end to “tontine”, except by mutual agreement. This is a second difference with the joint tenancy, which can be stopped unilaterally.
In the same way, the real estate purchased with a “tontine” clause can’t be seized by the personal creditor of one of the owners, in fact, before the death of the other purchaser; this debtor has no right of property on this real asset. Finally if the “joint tenant” surviving spouse is not taxed, the insertion of a “tontine” agreement in the deed of purchase will submit to inheritance tax or to ad valorem duties (“droits de mutation à titre onéreux”).
Tax aspects of “tontine”
In principle, in pursuance of 1st line of article 754 A of Code Général des Impôts (general tax Code), the real estate inherited in pursuance of a “tontine” clause inserted in a deed of purchase is submitted to the inheritance tax. If the purchasers are not relatives, the survivor may be subject to 60 % inheritance tax. This rule applies even if the purchasers are English, and, from a tax point of view, resident in England. In fact, in pursuance of article 4 a) of the Anglo-French Agreement of 21st June 1963, France can tax a real estate located in France.
The change of marital scheme
Often, following a solicitor’s advice, English spouses, married under the separate estates marital scheme (separate ownership of property marital scheme), consider purchasing an immoveable property in France after a change of their marital scheme. They wish to adopt the French marital scheme of communal estate (joint estate of husband and wife comprising all property, present and future) with a clause awarding the joint ownership to the surviving spouse.
In this settlement, the property is not individually owned by one of spouses. It is a joint ownership property and the couple manages this communal estate. After the death of one of the spouses, the clause awarding the joint ownership to the survivor will be effective and the property will be owned by the surviving spouse.
The change of law applicable to the marital scheme
In application of article 6 of The Hague Convention of 14th March 1978 on applicable law of the marital scheme, a married couple under the legal English marital scheme can adopt the French marital scheme of communal estate. Article 6 provides that a married couple can change the law applicable to the marital scheme during the marriage and adopt, within some limits, the law of their choice.
The married couple’s choice
First, a married couple can choose the law of a state which one of them has the nationality. If one of the spouses is French, they can choose any French marital scheme, and, in particular, the communal estate with a clause awarding the joint ownership to the surviving spouse.
Then, if one of them has a customary residence in a specific state, they can choose the law of this state. So, if one of the spouses has a customary residence in France, they will be able to choose a French marital scheme. Finally, the spouses can choose, for immoveable properties, or some of them, the law where these real estates are located. They can also prescribe that the real estates acquired later will be submitted to law where they’re located.
Thus, if a married couple owns an immoveable asset in France, or on the point of purchasing, they can choose the marital scheme with a clause awarding the joint ownership to the surviving spouse.
Effects of marital scheme changing
In the two first cases, that is to say when one of the spouses has the French nationality or has his residence in France, the change of law is effective on the spouse’s entire assets, wherever their location. In the third case, only the real estates are affected by the change of law. So, when the real estates are located in France and when the spouses choose the marital scheme of community estates with a clause awarding the joint ownership to the surviving spouse, the latter will be the owner of the real assets and will dispose of it as he wishes. In this last case, if the applicable law of the estate is the French law, the common children of the couple (privileged heirs) will receive their reserved share at the death of the second spouse. But, always if French law is applicable to the estate, and if there are children who are not common in the couple, the privileged heirs of the deceased will can ask their reserved share immediately after the first decease.
An SCI (Société Civile Immobilière) is a kind of company of French Law. It has the advantage to be distinct from its members. The asset acquired by the SCI belongs to the company and not to its members. And the departure of one of them doesn’t lead to any kind of changes.
Interests to form an SCI
To avoid the French inheritance rules of the reserved share, one could suggest to British persons, domiciled in Great Britain to form an SCI in France. Either the real estate will be purchased by the SCI or brought to the SCI in exchange of shares. In that case the real estate is not a part of the heritage of the members. The estates of the members of the company will be composed by shares in the capital of the SCI, which are personal estate. But, in pursuance of French private international law, inheritance transmission of personal estate is subject to the law where the deceased was resident. If the deceased was domiciled in England, English law will be applicable. If he left a will with provisions in this way, his shares will be passed to the person of his choice: the French rule of the reserved share will not be applicable anymore.
Be careful of the law fraud
The use of a structure such as an SCI must not be damageable to the privileged heirs. If the intention of the deceased was to avoid the application of French law, it could be considered as fraudulent and sanctioned by French courts.
Tax aspects of an SCI
The Anglo-French agreements govern the fiscal rules applicable to the SCI The immoveable assets located in France and owned by an SCI are subject to French tax laws (income from real property tax, capital gain tax, rental tax, inheritance tax). An SCI is submitted to the tax transparency. Each member of the company must pay the tax in proportion of his shares in the SCI.
The risks of “indivision” ownership:
When an asset was acquired in “indivision” ownership, at the death of one of the spouses or more generally speaking, of one of the tenants in common, his share will be transferred to his heirs and not to his co-owners. Therefore, the “indivision” ownership can cause great difficulties. Particularly when there is a dispute between children and parents, when the parents have children from a previous marriage, or worst, when they have children who are still minors.