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Buying French property by buying shares in an SCI
Conversation between David Anderson and an English buyer of a French property owned by a French Société Civile Immobilière (SCI).
Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. Taxation and law are complex subjects and the information herein is intended only for general information. Nothing herein constitutes financial advice.
Q: I want to buy a €1 million house with €750,000 mortgage on it. The problem is that a French SCI owns the property and the sellers want me to buy the shares in the SCI from them not the property. A notaire I have spoken to and an English Solicitor have both advised against buying the shares. What do you think?
A: The share purchase may be a good option and could save you a lot on transaction costs. If you are deeply cynical you may think that the notaire has advised a property purchase rather than a share purchase because his high fixed conveyancing fees only apply to property purchases. The English solicitor may not have the necessary expertise in French company acquisitions (not unusual for solicitors who deal exclusively with conveyancing) and is taking what is seen as the safe option.
Q: So what are the advantages for me in buying the SCI shares?
A: You only pay French stamp duty on the equity in the SCI. So if the property is worth €1 million and the mortgage is €750,000 you will pay 5% of €250,000 = €12,500 stamp duty instead of €50,000. You also do not need a notaire to deal with the transaction as you are buying shares not land and the notaires' monopoly only extends to land. Obviously the higher the borrowings the bigger the savings.
Q: What about the mortgage?
A: You take this over. An advantage is that there is no personal covenant from you to the bank. Remember, the loan is to the SCI not you. If this is the sort of gearing you want this saves arrangement costs with the bank. If you want to change the gearing remember French banks are not as flexible as UK banks regarding extending the mortgage or part repayments. Also remember that if you want to redeem the mortgage you will have to pay frais de mainlevée (legal costs for repaying the mortgage) to the notaire on redemption. Unsurprisingly these fees are steep for something, which would be a nominal cost in the UK.
Q: What are the disadvantages?
A: You need to do due diligence on the SCI. You need to make sure it owns the property and that you know about all debts due by the SCI either on the property or generally, as you will buy subject to these debts. You also need to make sure the shares themselves in the SCI have not been mortgaged or pledged by the sellers.
Q: That all sounds very scary!
A: In general it is not as most SCIs only own the property. The due diligence should be straightforward if all the SCI has done is own the property. It also helps if the SCI's accounts are up to date and have been prepared by an accountant. SCI's accounts are normally prepared on a cash basis so the entries should show the actual position of cash paid and received rather than on a debts accrued basis. In cases we have dealt with the buyers have continued to instruct the same accountants to prepare the SCI's accounts which has helped in getting information for the due diligence. You should of course get personal warranties from the sellers.
Q: What about owning the property?
A: A search needs to be done at the French Land Registry requesting the " Etat Hypothecaire ". This will reveal all mortgages and others charges affecting the property. This needs to be done shortly before you complete the purchase.
Q: What do you mean by the sellers possibly having mortgaged or pledged the shares?
A: In France you can pledge shares in an SCI (called a nantissement ). If the shares have been pledged, say, to the bank as additional security to the mortgage then you will buy the shares subject to this pledge. You need a search at French Companies House to check this is clear. I have been surprised that some British buyers (and their English advisers) have been blissfully unaware of this!
Q: What sort of documentation do I need? The sellers have told me not to bother with anything and just to sign a contract to buy the shares.
A: This is up to you. No documentation is needed but then you will have no comeback. I recommend a simple share purchase agreement, which generally follows a fairly standard form with suspensive conditions.
Q: Why would the seller want to sell the shares in the SCI? What is in it for them?
A: It should not make any difference to them. However, if they are not French resident then the usual obligations on the notaire to deduct the French capital gains tax obviously does not apply because no notaire is involved. It is sensible for the buyer to have this covered in the contract though if the sellers are non resident and do not pay the French Capital Gains Tax there is unlikely to be any comeback on you as the buyer. The seller also saves because they do not have any costs to redeem the mortgage.
Q: Does the above also apply if instead of an SCI the company is a non-French company?
A: No. Once you get involved in companies formed outside France you are in a very different scenario. Great care needs to be taken here especially with tax haven companies and companies formed in countries such as Switzerland. Here there are very good reasons why a seller will want to sell you the shares and very good reasons whey you will want a substantial discount of the price to buy them. This area needs highly specialised tax advice and the property has to be worth at least several million Euros to make it worthwhile.