“My partner and I are looking to buy a property in France. We are not married and my partner will be the provider of funds to buy the said property. I have one child and he has two all adults. He is 70 and I am 62.
We are concerned about the huge inheritance taxes in France and my partner has suggested that the property be bought in his sons’ names with provision for me to live in the property if he predeceases me.
Is this a viable option and if so how would we set it up?”
You are absolutely right to consider the ownership structure of any property you buy in France. It will dictate not only who has rights over the property (occupation, who can sell, etc.) but also how it will be taxed on your death.
If your partner intends to leave the property to his children, as he is providing the funds to buy it, he may be looking to buy it in his sole name. This will impact on you - not only will it give you no right to occupy the property, but if your partner were to leave an interest in the property to you on his death, you would pay French inheritance tax at a flat rate of 60% after deduction of a very small allowance (currently €1,594). This is because you are unrelated, and there is no spouse exemption available. If you are in a position to sign a French PACS agreement (pacte civil de solidarité) you can significantly improve the tax position, but it wouldn’t prevent your partner’s sons from paying IHT at 60% if they inherit direct from you – again because you are unrelated.
So, to avoid an onerous French IHT bill, you will want to try to avoid a direct inheritance from you to your partner’s sons, or from your partner to you.
French IHT can still be payable on the French property even though the way in which succession laws are applied has changed significantly from 17 August 2015, when the EU Regulation 650/2012 (commonly known as Brussels IV) came into full application. It sets out the rule that the succession (not tax) laws of your country of last habitual residence will govern the distribution of the whole of your estate unless you declare in your Will that you want the laws of the country of your nationality to apply instead. So if you are British nationals with your closest connection being with England, you could declare for English law to apply (giving testamentary freedom) instead of the French rules that protect the inheritance of children. A detailed review of your Wills is certainly recommended, and your residence status will have some bearing on what choices you have.
As to how to structure the property ownership to cater for your use during your lifetimes, your partner’s suggestion indicates a French ownership structure known as usufruit. You would be granted the right to occupy the property during your lifetime, with your partner’s sons having the ’bare‘ ownership of the property, known as nue-propriété. It can be a French IHT efficient structure, by preventing a direct transfer from you to his sons. They would become the full owners on your death, or the death of the survivor of you and your partner.
With the application of Brussels IV it might not be the case that your partner can grant you an usufruit in his Will, to arise on his death, but rather to set it up on purchase - making use of the French legal structure by achat en demembrement. It is recommended you get professional advice on this, and indeed all your options on purchase, as there are advantages and disadvantages to all options. For example, do you get on with your partner’s sons enough not to worry about the impact of potential disputes between you? What happens if a son dies before you? The advice should incorporate both French and English law advice, as the usufruit structure has no identical one in English law and it must be understood how it will be treated and, importantly, taxed in both countries. Whether you intend to use the property as a holiday home or main residence may also have some bearing on your position, and indeed how the succession laws will be applied.
Your circumstances are not straightforward, but they are not uncommon. It can be difficult to ’get the best of both worlds‘ in terms of protection of occupation of the property during your lifetimes and planning for mitigation of IHT for the next generation. Compromise is often needed.
First published in French Property News Q&A