Look before you leap
It is perhaps a natural consequence of these economic times that when buying a home in France, investors tend to be more cautious when proceeding with their purchase. There is nothing to criticise in this. Buying a house in France exposes one to a whole new set of property laws and entirely different inheritance rules and tax. Here we will look at some of the fundamental points to consider when buying a house in France. In the coming months, we will concentrate in a little more detail on some of the points referred to here.
It is well known that a number of pre-contract searches are commissioned at the seller’s expense before a contract can be completed. The buyer must have full knowledge of these searches when completing the first contract. Yet these inspections are strictly regulated in their scope: depending on the age, type and location, they include an inspection of whether there is any lead in paintwork, whether any asbestos is present in the property, its internal size if it is an apartment; the state of the electricity and gas installations and so on. They will not, though, necessarily establish whether a crack in the side of the house may be a sign of some major underlying problem. A termite inspection report may reveal that there is no evidence of active termites but would not show if a previous attack had rendered some of the woodwork unstable. If you wish to have a survey carried out on your property, as you would when buying a house in Britain, there are many suitably qualified and experienced surveyors in France who would be able to provide you with similar independent reassurance. It is important, after all, to understand as much as possible about your new home.
Similarly it is important to understand how buying a second home in another jurisdiction will impact upon your estate planning aims. You may have written your Wills, to structure the devolution of your assets upon your death, knowing how important it is to protect your partner, your children and your family in the future.
As a starting point, it is important to note that the rules of French inheritance differ in many ways from the situation in Britain, and the way in which inheritance tax is calculated is also completely different. For example, inheritance tax is payable by each beneficiary personally, which differs from the UK, where the tax is generally paid out of the estate at a flat rate of 40% after one tax-free allowance of �325,000.
In France, each beneficiary potentially pays a different rate of tax, with different levels of tax-free allowance; the differences depend on the proximity between the deceased and the beneficiary. The most obvious example of this is how natural children and step-children are treated. Natural children have preferential rates of inheritance tax and allowances; step-children have to pay inheritance tax at 60%, after an almost negligible initial tax-free allowance.
There are however, some points on which French and English inheritance law agree. For example, anything inherited by a surviving spouse is not subjected to tax in either jurisdiction.
Another similarity is that France and the UK agree on which law will apply to which part of a deceased person’s estate: a house or land will pass in accordance with the rules of the country it is situated in; everything else (such as investments, chattels and so on) would pass subject to the law of the country in which the deceased was domiciled prior to death. This definition is not the same in every country – Spain, for example, treats estates in a different way. And there is a further problem as between France and the UK, while the potential split in treatment of assets depends on a person’s domicile prior to death, the actual definition of ‘domicile’ is not exactly the same. This can occasionally lead to complications.
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Probably the most important point about the rules of inheritance, however, is the fact that France has a system of fixed rights. Under these, children have a fixed minimum that they can inherit from a deceased person (and again children are treated differently from step-children). Therefore, a person leaving one child should in principle ensure that at least half of their estate passes to that child; where there are two children, then they should share equally at least two-thirds of the deceased estate; where there are three or more, they should share equally at least three-quarters.
For a good example of how this may affect families, imagine a situation where Mr A dies, leaving two children; his son, Stephen, from his first marriage, and his step-daughter, Debbie, the daughter of his now deceased second wife. Mr A lived in France, and in reality his house, worth some €300,000, was all he owned. It was always his intention to divide his estate equally between Stephen and Debbie. Stephen is his natural son, and in accordance with French law must inherit at least half of Mr A’s house, worth some €150,000. He will pay no inheritance tax, as the amount he inherits would come within his tax-free allowance.
On the other hand, Debbie is treated as a stranger in blood to Mr A, even though he brought her up as his own child (he did not adopt her), so she has no rights of inheritance. In the absence of a Will, Debbie would inherit nothing, and Stephen would therefore take everything as the nearest relative. Yet even if Mr A had written a Will requiring that the estate were split equally between the two, there would still be a substantial difference in what they would end up with. That is because, while Stephen would pay no tax, Debbie would have to find nearly €90,000 in tax.
This is only one of the many potential issues that can arise. And no mention has yet been made of the rights of the surviving spouse. Such rights do depend on the circumstances – whether there are children from a first marriage, whether any estate planning steps have been taken in advance, such as completing a change of matrimonial regime deed, ensuring inclusion of a tontine clause in the ownership structure, buying through a company and so on.
There are many potential concerns that may arise; and we will look in a little more detail at some of these in the coming months. In most circumstances, a suitable arrangement can be reached as to how best to structure the purchase. The important point, though, is to ensure that you consider in detail how you will structure the purchase – and that you understand why any particular option is the best for you. Similarly with the property transaction itself, it is vital to be fully aware of all the possible pitfalls that can occur. For instance, a translation of the contract into English may not go far enough – it would not, for example, tell you if the planning permission mentioned by the seller is still valid.
The assistance of a specialist solicitor, whilst not obligatory, can be incredibly useful to a British buyer. LF
Ashton KCJ is authorised and regulated by the Solicitors Regulation Authority (Recognised Body number 45826) and by the Financial Services Authority.
Disclaimer: This article is for general information purposes only and does not constitute legal or other professional advice. We would advise you to seek professional advice before acting on this information.