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Service France
SCI - INHERITANCE TAX ON SHARES
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. NO liability is accepted in respect of this article.
Many people who are UK resident have bought holiday homes in France using an SCI, (Societé Civiles Immoblier). One of the main reasons for doing so is because the shares in the SCI are viewed as moveable assets and can be left under a UK Will. This allows freedom of testamentary disposition as the shares are treated for these purposes as UK assets. This is attractive to married couples who have children from previous relationships and who wish to ensure that their affairs are kept simple and their share in the French property passes to the survivor.
By contrast a married couple (with no children from previous relationships) who buy in their own name will typically be advised to enter into a French marriage contract putting the French property into the community. On the first death the property passes to the survivor tax free. Under the Hague convention you can make immoveable property (i.e. land) subject to a French marriage contract but if you are not French resident you cannot make moveable assets (e.g. shares in an SCI) subject to a French marriage contract.
An aspect, which is often overlooked, relates to the Inheritance Tax position. In our experience notaires advising on these structures have never mentioned a major pitfall relating to French Inheritance Tax. This could prove very expensive to a married couple owning a property in an SCI, as in France, unlike the UK, there is inheritance tax on transfers on death or by way of gift between husband and wife.
Article 750 ter 2 of the French Tax Code provides that assets owned directly or indirectly whether moveable or immoveable situated in France are subject to French Inheritance Tax if the donor or deceased is not French resident. It goes on to provide that any building in France owned through a corporate vehicle, which includes an SCI, is deemed to be owned indirectly if the deceased or donor with his wife or immediate family owned more than half the shares in the corporate vehicle. This will catch almost all situations involving family holiday homes.
The difficulty for a married couple is that a French marriage contract cannot extend to moveable property under the Hague Convention. In other words for English couples the French default rule of "separation of assets" will apply and French inheritance tax will be due on the first death. In every case we have seen, the notaires have advised that no marriage contract is needed because the shares are movables. The tax risk has never been mentioned! Our view is that you should have a French marriage contract regardless, as it may be open to argue that the SCI shares have to be deemed to be an immoveable asset for tax purposes. It also helps with arguments based on discrimination, as the current absurd position is that a non-French resident has to pay inheritance tax in France whilst a French resident with a suitable marriage contract does not!
The UK France Inheritance Tax Treaty does not help. Article 4(g) deems shares in an SCI to be assets situated where the property is situated i.e. France. Article 5 gives France the taxing rights on assets situated in France. Any person in this situation should consult the notaire or other adviser who set up the SCI and seek their advice on the risks involved. This also shows the risk you run, especially in respect of more expensive French properties, in relying on notaires for tax advice when they often have no grasp of the international tax aspects and also owe you no duty of care for poor advice which is, in any case, never confirmed in writing.
October 2005