French Property Law
Promesse de vente (French Property Sale contract)
Joint Ownership
French property can be owned in different ways under French law. The method of owning the property is extremely important for inheritance and tax consideration. The methods can be either a Classic Joint Ownership, or a Clause en Tontine or through an SCI - Société Civile Immobilière.
Classic Joint Ownership
The default for joint French property purchases is an assumption of the acquisition being made equally and separately by the purchasers. For example, two owners will purchase 50% of the property divided between them (en division) and can be free to choose how to deal with the property in their respective wills – (see Inheritance Law). Naturally, any subsequent purchaser will ensure that all owners sign any further sales deed.
Clause En tontine - Retroactive survivorship right
A provision can be made in the contract to effectively turn the purchase into a retroactive survivorship right. The clause en tontine usually states that in the event of the death of one of the owners the purchase will be considered to have been completed to the survivor. Legally the decision of who ones the property is delayed until the death of one of the owners and this bypasses other Inheritance Law aspects.
If you are considering an en tontine provision, ensure that the lending institute is comfortable with such a provision. Additionally, in order to later sell or otherwise use the equity in the property, all owners must unanimously agree. If relations break down, one party may block the other.
It must also be considered that Inheritance Tax will still be due in the event of an en tontine ‘transfer’. This is compounded when two unrelated parties purchase together, the tax due will be the maximum 60%. The Tontine method of ownership can also be challenged by interested parties (children of the owners). The French courts tend to protect the interests of the family in such an occasion.
Although, from the outset, the clause en tontine may appear an attractive option it is only beneficial in certain circumstances. In comparison with the SCI (below) it offers less freedom and if the allocation of the SCI shares are planned carefully, the clause en tontine would be less tax efficient.
French Property Holding Company (SCI)
Mainly because of freedom with inheritance law, non-residents often choose to own property through holding companies and select a "Société Civile Immobilière" (SCI). The costs of incorporating an SCI are in the region of £1,800 (€2,500).
French Inheritance Law is restrictive. SCI shares are considered as a “moveable” asset and as such are governed by the law of the deceased’s domicile at the date of death. Hence, holding shares in a property company rather than owning the property directly can avoid enforced heirship laws and other restrictions on testamentary freedom.
Although the freedom of the SCI regrettable does not prevent French Inheritance Tax, allocation of shares can be made with tax in mind. Depending on the circumstance, the SCI is manageable in the main with majority votes. As the manager of the company retaining 51% of the shares can make general running decisions, there is therefore scope to make advance estate planning decisions to limit tax. The merits of such a structure must be considered on an individual basis to consider the most desirable and cost effective means of estate planning.