French Estate Planning – A Brief Overview
The human tragedy of the recent pandemic is of course colossal, and in reality impossible to appreciate fully. Everybody will be able to relate to a story, whether directly or indirectly, of someone whose family has been torn apart by this awful disease.
A consequence of the virus outbreak is that many people have recognised their own life expectancy. The thought that one really should find time to prepare a Will has for some now become a pressing need. And for those fortunate enough to own assets in France as well, this means that there is a need to consider in detail the implications of French inheritance law and tax, in addition to how these matters may inter-relate (or not) with English legal and fiscal concerns.
Limitations of space mean that we will not be able to set out an exhaustive guide here to all relevant issues. We can, though, set out a few points that should be borne in mind when thinking about how to address what should happen to your French property at the time of death.
Many readers will be aware that in accordance with the EU Succession Regulation, it is possible to choose to apply English law (or Scottish or Irish as the case may be) to govern the devolution of their estate. Under English law, the testator (the person writing the Will) has almost entire liberty to leave their estate to any person they may choose. There are in fact some limitations on this testamentary freedom, although these are far from equivalent to the reserved rights of inheritance that exist under French law rules.
It is, of course, these reserved rights that have for many years proved to be a major concern for Brits with an interest in French property. Before the advent of the EU Succession Regulation, we were regularly instructed to advise on methods of ensuring that the surviving partner would be able to inherit the whole property at the time of the first death, rather than an interest having to pass to the children. Our advice would often centre on the application of French matrimonial property law rules, the inclusion of a tontine clause in the purchase deed, the constitution of a French company to be interposed as the property owning vehicle, or even gifting property to children. The addition of a French Will was often treated as a secondary issue, of much less importance.
Yet these structures can still be relevant: just because writing an English Will should mean that the testator would be able to leave their estate to a specific person does not mean that all other options should be disregarded. Indeed, there are potentially instances where applying English inheritance law rules in France can be disadvantageous.
As an example, a common French ownership structure, often employed where families intend to pass their French estates down the generations, is for the parents to retain a sort of life interest (known as an usufruit) in the estate. This would allow them to remain in their home for their lifetime, and to take the income from any revenue generating assets (e.g. rental property, or bank interest), while not being able to reduce the capital. A British couple living permanently in France could just as easily employ the same structure, and this is in fact an option we regularly discuss with clients. It is also beneficial for French inheritance tax purposes.
There are however two potential problems with such a structure. The first is that an usufruit is a structure that is somewhat alien to English law. So if our British couple retain a house in the UK, then it would simply not work to retain an usufruit that would then apply to that house.
In practice, a French usufruit would be treated as being kin to an English life interest trust. Many readers will already be well aware of the problems that can be generated by any form of trust being linked to France in any way. This is best avoided.
Through this example we can see that we need to decide whether to choose to apply English law to the estate in France, or whether French structures may be just as suitable, or even preferable.
We must also bear in mind the potential inheritance tax consequences. While choosing to apply English law to the French estate may be possible, we must not forget that French inheritance tax will also apply to some or all of the succession. So while under an English Will it is possible to leave ones entire estate in France to an unmarried partner, this does not avoid the fact that such a legacy would result in 60% inheritance tax applying.
And that same problem can arise where a testator leaves their estate to their spouse or civil partner, on the understanding that the spouse or civil partner would leave an interest back to the children of the first to die. If those children were the issue of a different relationship, then the surviving spouse would be unrelated to them, and so 60% inheritance tax could apply.
Most of the potential pitfalls can be avoided with careful planning. It is, in fact, commonly the case that simply declaring that English law should apply to the French estate is perfectly sufficient. This, though, still means that detailed advice should be sought.
In addition to choosing which law should apply to the estate, we will also consider whether testators should be writing English or French Wills, or both. It may appear surprising, but it is possible to prepare a French Will that applies English law. Since the EU Succession Regulation was passed into international law in 2012, and certainly since it came into force in 2015, preparation of two Wills has been relatively common practice.
While there has been a debate for many years about the pros and cons of writing separate Wills or having one Will to govern the entire estate, a recent French court case has added a new element to the debate. It is unlikely to be of concern where a Will does not need to be scrutinised by the Court, which would only ever arise in the event of any litigation following the death of the testator. However, in one such case the French court found that where a non-native French speaker had written out their Will in French the court had to question whether they truly understood the effect of the Will. In practical terms, where a testator is not actually disinheriting anyone under their French Will, it is unlikely to cause the notaire any concerns, but it is a point to bear in mind.
There is a further complication to the impact of a choice of English law. A new French law is coming into force that in certain circumstances limits the ability to override the French reserved heirship rules through the EU Succession Regulation. At the time of writing this has not been struck out by the French constitutional council. It may be challenged through the courts in France, and eventually at the Court of Justice of the European Union, although there might be an intervening period in which application of a person’s wishes in France might be challenging. Close attention will be necessary over the coming months and years though, as in the meantime we will need to be careful about how Wills are going to be drafted. This is particularly the case where the effect of a Will would be to disinherit ones children, for example by leaving the French estate to a second spouse rather than to the children.
This will not be a problem in every such instance. In practice, there is little to replace a detailed analysis of your specific circumstances through a firm of solicitors that has suitable experience in French and English matters.
This article was originally featured in the December 2021 edition of French Property News: https://www.completefrance.com/french-property
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