Conversation between an English couple resident in the UK who own a French property in an SCI and David Anderson solicitor and chartered tax adviser at Sykes Anderson LLP regarding inheritance tax in France on the shares in the 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 is a complex subject and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.

Q: My husband and I bought our French property in the name of an SCI (Societé Civiles Immobilier) because we have children from a previous marriage. The notaire advised us to do this. Was this good advice?

A: Yes. Provided you do not become French resident then the shares in the SCI will be regarded as moveable and will pass under your English Will and be outside the French forced heirship rules. The structure you have set up allows you to sidestep difficulties with the children and give the shares to each other.

Q: What about Inheritance Tax?

A: You should have no problem in the UK, as gifts between spouses are exempt. The problem is that under the French tax code the shares in the SCI are taxable in the hands of the heir on a death. In France, unlike the UK, inheritance tax is payable between husband and wife.

Q: So, if my husband dies first I may have to pay French Inheritance Tax even though the asset passes under my English Will?

A: Yes. The relevant part of the French Tax Code provides that land in France is taxed in France if it is owned through an SCI and the deceased and his spouse owned more than half the shares in the SCI. This will usually be the case.

Q: Does not the UK France Double Tax Treaty help?

A: No because your husband will die domiciled in the UK and the SCI shares are deemed to be situated in France as the Double Tax Treaty specifically states that an interest in an SCI shall be deemed to be situated where the land is i.e. in France. The Treaty allows France to tax assets in France even though the deceased died domiciled in England.

Q: I have heard that you can get around this Inheritance Tax problem with a marriage contract

A: Unfortunately not, because for non-French residents marriage contracts can only apply to French immoveable property - not moveable property which is what you have got, namely shares in the SCI. If you had bought the property in your own names then it would be standard practice for you to enter into a marriage contract and put the property into the community. This avoids French inheritance tax on the first death. The important point is that you can only do this because you own an immovable (land) not a movable (shares in the SCI).

Q: So the marriage contract route is not open to me?

A: Not unless you become French resident then both moveable and immoveable property can be subject to the marriage contract. In your case the shares in the SCI can be taxed to French inheritance tax.

Q: It seems bizarre that the fact that we bought with an SCI puts us in a much worse position then if we had bought direct. It also seems bizarre that a non-French resident couple will pay Inheritance Tax whilst a French resident couple will be exempt!

A: I agree. However, the treatment of assets for succession purposes and their subsequent taxation are two separate matters in France. This is quite difficult to grasp for an English person but perfectly logical to a French mind. We have drawn this problem to the attention of the relevant authorities in France, as there is clearly an anomaly in the way the tax law operates.

Q: What should I do?

A: It is probably sensible to have a French marriage contract relating to your French "immovables". The question a French court will face is whether the SCI shares can be construed to be "immovables" and so come within the tax exemption for husband and wife or whether the marriage contract is invalid as the shares are moveables.

David Anderson

October 2005