Avoiding a War of Succession
The new European Succession Regulation, or “Brussels IV”, came into force on 17th August 2015 to simplify these succession issues and allows for the deceased to elect to apply the law of his nationality to all the assets by citing it in his Will or a similar document.
Jack and Jill are resident and domiciled in the UK. They own a valuable house in France. They have two children by their marriage, and each has two children by previous relationships. Their English wills deal with all their worldwide assets, requiring the deceased’s property to pass to the surviving spouse, to the exclusion of the children. Stephen Smith advises that, regardless of their wills, the manner in which they jointly own the French property will not achieve that objective and should therefore be reviewed, and that the amount of French IHT (inheritance tax) payable can be influenced by wise decisions taken now. But his advice is ignored. The next day, Jack is killed when he trips over a pail of water. Ignore what follows at your peril.
Anyone with property in France should take expert legal advice about the inheritance and tax position. In Jack and Jill’s case, there are two aspects of vital significance. First, French realty (the house) is always governed by French law, regardless of their nationality, residence or domicile. Put simply, this means that spouses have no inheritance rights, which alone are given to their children – or their surviving parents if the deceased leaves no issue. Nor is it usually possible to disinherit a child.
Water under the bridge
The second important point is the method of owning French realty jointly with other persons.
Realty in England or other ‘common law’ countries can either be owned ‘legally’- principally via a ‘joint tenancy’ or a ‘tenancy in common’- or as an ‘equitable interest’ (e.g. via a trust). In England, most married couples tend to make wills which give their assets outright to their spouses if their children are minors, or if their children are adults to give their spouses life interests in the whole or part of their estates (with residue to their children), with power for the trustees to resort to capital should the surviving spouse or children need it.
In France, by contrast, trusts are not recognised and, of the two principal methods available, ownership en indivision produces approximately the same results as an English tenancy in common. For reasons outside the scope of this article, this is a method which, save in the most special circumstances, should be avoided by all English or other non-French buyers. Unfortunately, most French lawyers fail to warn their foreign clients of the inherent dangers involved. The other method (tontine) may be equated to property held in an English joint tenancy in that, on the death of one co-owner, the French realty vests automatically in the surviving co-owner. This is clearly not suitable for owners who are strangers to one another. But in many other cases, tontine ownership can be used not only to defeat French succession rules, but also, as explained below, to avoid the payment of French IHT. But it is impossible to convert to this method of ownership after completing a French purchase. However, even after completion, an indivision can be restructured to the owners’ advantage.
Unexpected shock <img1473|right>
As Jack and Jill bought their French realty en indivision , but ignored the opportunity to change their method of ownership, on Jack’s death Jill is left with the one half of the French realty she already owned, but must share the other half with four children, two of whom are not hers and whom she has never met. This can also cause great difficulties to Jill, especially if any of the children are minors, because any sale of the French realty must be postponed until the youngest infant is 18.
She is not pleased to discover this at a time when the last thing she needs is this kind of unexpected shock. She may well have assumed that, because Jack’s English will left everything to her, she now owns the whole of the French realty. She is mistaken, however, for French law overrides that will. And if the co-owners argue about the property (e.g. she wants to sell and the others don’t), the dispute must be heard in the French courts.
If Jack and Jill had bought en tontine none of this would have happened. Another way that Jack and Jill could have protected their property from French succession law was via an SCI (French property-holding company). Various – mainly tax – factors militate against owning French realty directly or indirectly in the name of a company based in England, or elsewhere outside France. Moreover, the French government levies a 3% annual tax on the fair market value of the property if an offshore company, trust or other entity holds it.
Closing the stable door
French IHT is not paid out of Jack’s French estate but by Jill (there is no surviving spouse exemption) and each of his four children in proportion to the net value of their inheritance. Jill has a 77,000€ (approx) tax-free allowance, the balance thereafter being taxed on a sliding scale of between 5% and 40% (most unmarried partners are taxed at the highest rate of 60% after deducting a small tax-free allowance of 1,500€ (approx)).
French wealth tax may also be payable if the value of Jack’s French estate is valued in excess of 717,000€ (approx). The rates of tax are on a slice basis, the lowest current rate being 0.5%.
Although in Jack and Jill’s case the French IHT bill cannot now be whittled down, simple lifetime tax-planning methods could have produced substantial savings. For example, gifts remain a popular way of reducing the sums you hand over to the French taxman on your death. The gift is valued at current rates rather than when you die, which has obvious tax advantages. If you give such gifts to your children the French IHT due by the child (after deducting a tax-free allowance of 46,000€ (approx) per child from each parent every 10 years) is further reduced by 50% if the parent is 65 or younger.
Single premium investment bonds, a type of life insurance, are another way of reducing French IHT. If you hold Luxembourg or Dublin-based products you will be subject to no tax at all provided you leave the money there until you die.
Other gift horses
Another popular gift structure in France is known as usufruit. You make a gift but keep the right to use the asset during your lifetime. So, Jack could have given his French estate to his children while still living there. In effect he would have been a sitting tenant, which would have reduced the value of the French realty along with the tax bill. Making gifts in France is not simple, however. If the value of your estate on your death is inadequate to meet the French succession requirements, the gift can be reclaimed from the beneficiary.
Après le déluge
In hindsight, there are at least three other methods by which Jack and Jill could have circumvented French succession law, French IHT and wealth tax. But that is another story, and their own saga does not end here. The consequences of dying intestate in France can severely prejudice your surviving spouse or partner. Although a French will is not strictly necessary if an English will complies with the rules of French succession law (which Jack’s does not), the administration of a French estate under an English will can give rise to complex and costly formalities. For example, the will must be translated into French and certified by a French court official, notarised, and its authority proven by lengthy French language affidavits of law. Unless you already hold all your worldwide assets in trusts, you therefore need to have separate wills for each country where you own property.
To simplify the process, and reduce the costs to Jill of winding up Jack’s French estate, it would have been preferable for Jack to execute an English will which excluded all reference to his French realty, and a French will limited to his French realty. Most English and French wills contain the clause “I revoke all former wills”. Beware the story of Miss Muffitt who lost her entitlement to French realty she would otherwise have inherited under Humpty Dumpty’s French will, because his English solicitor had drawn up a more recent English will, unwittingly cancelling the original French will. To avoid these and other possible problems, which can lead to costly disputes, it is important that the two wills are drafted in such a way that one does nor revoke the other.
To add insult to Jill’s injury, because of the very different procedures governing the administration of estates in England and France, the administration of Jack’s English will subverts French law. This is because, where someone dies domiciled in England but has property in France, English solicitors are tempted to apply for a UK Grant of Probate. This is usually because they do not understand French law or practice. Problems then arise if, by the operation of French law, the administration of Jack’s French estate is rendered invalid. For example, English executors have no powers to deal with Jack’s French realty, which automatically vests in his spouse and children when he dies. Therefore if a Grant of Probate is applied for in England an executor named in Jack’s English will could not be described as such in France. Immediately there is a conflict between the two systems, and legal conflicts have a habit of becoming expensive legal actions. Hey Diddle Diddle Solicitors are over the moon.
If Jack and Jill had taken timely advice from someone who knew how French and English law/tax operate in practice, the consequences to Jack’s family would not have been so much of an uphill struggle after he kicked the bucket. Let alone when Jill came tumbling after. Young and old may not be worried about this yet, but they could be sitting on a time bomb if they do not heed this advice.
A fairytale ending
If this story gives you sleepless nights, take proper advice now! A French will may be all you need, and neither should cost very much if dealt with by the right person who knows your personal circumstances. The consequences of burying your head in the sand could be dire and very expensive.