French law and purchasing a house or apartment in France
When a British citizen purchases a house or
apartment in France, he usually regrets the fact that the transfer
of the property is subject to French law. The latter provides for
forced heirship in favour of the owner’s children – a constraint
that does not exist in British law.
The marital regime
Law applicable to the succession
Property investment partnerships and their tax disadvantages Peter
Smith, a British national, married Pamela Stowe, who thus became his
second wife. The marriage took place in Saint-Jean-de-Luz on 21
October 2003 without a pre-nuptial agreement. The couple resides in
England. Mr Smith would like to purchase a second home in France and
set up the transfer of this property in favour of his wife. He has
three children from a previous marriage and owns both real and
movable property in England.
Determining the applicable law
In such a case, the situation is said to include elements of foreign
origin: foreign nationality and foreign residence of the persons
concerned. Before proposing a few solutions, we must analyse the
situation and determine the effect of these elements of foreign
origin on the law that applies to the marital regime and to the
future succession. The marital regime The French notaire must
determine the applicable conflict rule and, based on that, must then
identify the law governing the marital regime (régime matrimoniale,
i.e. the set of legal rules that applies to spouses and their
property).
The Hague Convention
The spouses were married after 1 September 1992, the effective date
in France of the Hague Convention of 14 March 1978 regarding
conflicts of laws pertaining to marital regimes. The determination
of the law which applies to the marital regime must therefore be
made based on the terms of this convention.
The law of the spouses’ primary residence Pursuant to Article 4 of
the Convention, failing designation of the law prior to the
marriage, the marital regime of the spouses is governed by the law
of the habitual residence subsequent to the marriage. The spouses
are therefore subject to British law. The place where the marriage
occurred has little significance. The fact that the law recognised
as applicable is that of a country which did not ratify the
Convention is also irrelevant. In British law, the notion of marital
regime does not exist, and the basic principle governing the
financial relations between spouses is that of absolute separation
of property. Law applicable to the succession Article 3, paragraph 2
of the French Civil Code stipulates that real property located in
France, even if it belongs to foreigners, is subject to French law.
Other assets (bank accounts, securities, furniture and so forth) are
considered as being located in the place of the deceased’s last
residence.
French and British law
Real property acquired in France should therefore be transferred
according to the rules of the French Civil Code. The rights of the
surviving spouse to said property will be those arising from the law
of 3 December 2001, codified in Articles 756 et seq. of the French
Civil Code. Real property located in England will be transferred
according to British law, as will all movable property regardless of
its location, provided that the deceased resided in England at the
time of his or her death.
Gifts between spouses Gifts of future property between spouses are
not prohibited by British law. In accordance with French law, the
forced heirship of children must be respected. The surviving spouse
may therefore receive benefits, but only within the limits of the
disposable portion between spouses.
Change of marital regime In French private international law, change
of marital regime is subject to the law governing the original
regime – in our example, this is British law However, British law is
very permissive: the spouses could therefore change regime and
governing law, opting to be ruled by French law and the French
regime of their choice without judicial approval, given that British
law does not provide for any regime. This change of regime and
governing law will apply to all their property, whether it is
located in France or in England. This may not be the choice made by
the Smiths, who may simply wish to settle the legal status of the
property located in France.
A limited change of regime The Hague Convention allows a rather
strange transaction. It involves a sort of “dissection” of the
marital regime: the real property in France would be subject to
French law, while the rest of the parties’ estate would continue to
be subject to British law. During the course of the marriage, the
spouses may change the law which applies to their marital regime and
adopt i) the law of the country of which one of the spouses is a
citizen at the time of the designation, ii) the law of the habitual
residence at the time of the designation, or iii) the law of the
place where the real property acquired or to be acquired is located.
The real property in France would be jointly owned Article 1397-3,
paragraph 3 of the French Civil Code, derived from the law of 28
October 1997, therefore allows spouses to choose the marital regime
of their choice directly within French law. For example, they could
decide to establish joint ownership of the property located in
France and include in this arrangement a clause whereby the property
would pass to the surviving spouse. This would not require judicial
approval since it entails application of the Hague Convention and
Article 1397-3, paragraph 3 of the French Civil Code, which
authorises such a decision between spouses.
Forced heirship of the children The clause establishing joint
ownership, even if limited to the home located in France,
constitutes an avantage matrimonial (i.e. a benefit not subject to
inheritance tax). The children born of Mr Smith’s first marriage can
claim their forced heirship by bringing a divestment action (action
en retranchement, i.e. the right to claim the avantages matrimoniaux
received by the surviving spouse). The way to prevent the children
from bringing this action would be to adopt them, since after the
adoption, the children from a spouse’s first marriage will be
considered as “born of both spouses”. Unfortunately, British law,
which is applicable to the conditions of the adoption, allows
adoption of minor children only. Adopting the spouse’s children will
thus not always be possible. Property investment partnerships and
their tax disadvantages As stated above, the transfer of personal
property, with regard to succession, is subject to the law of the
deceased’s last place of residence. Under French law, shares in a
company or partnership interests are considered movable property.
If, upon the death of the pre-deceased spouse, the latter resided in
England, this property may be transferred in accordance with British
law, which does not include the notion of forced heirship. One
possibility, therefore, is to advise Mr Smith to create a property
investment partnership and to make a will bequeathing the shares to
his spouse.
Estate taxes in France Article 4-g of the Franco-British Convention
of 21 June 1963 regarding inheritance taxes stipulates that shares
of a property investment partnership are taxable in the place where
the real property is “used”, namely in France.
Income tax in England British tax law regards property investment
partnership as joint stock companies and taxes the advantage derived
from the gratuitous provision of the residence by the company to its
partners as income tax in England. This income may exceed the real
market rental value (Income and Corporation Taxes Act of 1988,
Articles 145 and 146).
Preference given to a change of marital regime These two serious tax
consequences prompt notaires to advise their clients to make a
partial change to their marital regime rather than automatically
resort to a property investment partnership. However, in making the
decision, one must take into consideration the value of the real
property located in France, which may be less than the €76,000 tax
allowance. The impact of the taxation in England must also be
weighed against the notional income from the real property in
France.
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