by Schuyler Hoffman
When you buy property in France you not only need to consider the inheritance law, you must also consider gift and inheritance taxes. Those who receive any or all of your property are required to pay these taxes. The amount of tax depends on how closely related the beneficiary and the deceased are, and there is no spousal exemption.
A lifetime gift of your French home or an interest in it will incur a gift tax--"droits de donation." On your death your French property will incur a succession tax--"droits de succession." French inheritance taxes are lowest for heirs most closely related to the deceased... children's automatic rights to inherit come with lower tax rates.
While similar breaks exist for spouses, cohabitating partners are treated as complete strangers, with the worse rates. Regardless of who your are, these taxes are high, ranging from 20% in cases of direct lineage up to a staggering 60% for heirs who are more distantly related or inheritors who are not related at all.
Dealing with these taxes is a complex subject. There are ways to ameliorate their impact. Be advised, they require careful planning and professional advice and assistance. As part of your process to buy property in France we encourage you to consult a professional on these issues.
I often talk about the differences between France and other countries (especially the United States) when it comes to real estate issues. But you know two things you can't avoid no matter where you live? Death and taxes (although you can severely reduce the amount of tax you pay...keep reading.) Any discussion about buying property here should necessarily involve a discussion of both issues (see last week's article about France's inheritance laws for a refresher: http://www.adrianleeds.com/parlerparis/property/inheritance.html).
While inheritance taxes exist in France, as they do elsewhere, the system itself is different. In the U.S. and Britain, it is the estate that pays taxes when property is transferred after a person's death. In France, inheritance taxes are paid by the beneficiaries. (Note: if you are domiciled in France at the time of your death, your beneficiaries will pay French inheritance taxes on all of your assets, worldwide. If you're domiciled outside France, they will only be taxed on your assets in France.)
Similar to French laws of succession, inheritance tax rates vary according the degree of relation the beneficiary had to the deceased. Children and spouses pay the least (as little as 5%), the rate increasing (to as much as 60%) as the relationship between beneficiary and deceased becomes more distant. The rate is also based on the value of the property and allows for a tax-free allowance (see the tax rate table at the end of this article). Spouses and children receive a 76,000 euro and 46,000 euro exemption respectively; more distant relatives and non-relatives are given a 1,500 euro exemption.
For example: for an estate valued at 300,000 euro, where there is a surviving spouse and two children, the value of the estate would be reduced by the widow's 76,000 and the children's 92,000 (46,000 x 2). The taxable value of the estate would then be 132,000 euro.
Inheritance taxes are unavoidable, but there are a couple of ways to help reduce the amount of taxes your beneficiaries will pay on your property in France. You might consider making a lifetime gift of the property. While the tax rates and allowances are generally the same for a recipient of a lifetime gift, the tax rate will be reduced by 50% if you are under age 65 or 30% if you are between 65 and 75.
A more popular option to reduce the inheritance taxes is to gift the property to your children or other beneficiaries while retaining a life estate in the property (known as Usufruct). This gives you the right to occupy the property for your lifetime while your beneficiaries actually own it. As the life estate holder you not only retain the right of occupation, you are also entitled to any income the property produces (such as rent). This can be an attractive option if you intend to buy an apartment for the purpose of renting it out.
In theory using this option would play out like this. Your property is worth 300,000 euro. You are under the age of 50 and have two children. The value of the property you gift to your children would be 50% of its actual value or 150,000 euro. Each child receives one half the value of the gift, 75,000 euro. Because you retain a life estate in the property
the taxable value for each child is further reduced by 40% to 45,000 euro. Since each child receives an exemption of 92,000 euro (46,000 from each parent) they would not pay any taxes on this transfer. And, because the children already own the property--you only have the right of occupation--they will not pay any taxes when you die and they have full rights to the property. (Note: this scenario would play out similarly for non-related beneficiaries, but values and exemptions would be different according to their status.)
INHERITANCE TAX TABLE
The following rates for spouses and children are current as of early 2002. The value of the property allowance is different for spouses in some cases and is noted in parentheses.
* Property Value...Tax Rate
* Less than 7,600 euro...5%
* 7,600 to 11,400 euro...10% (7,600 to 15,000)
* 11,400 to 15,000 euro...15% (15,000 to 30,000)
* 15,000 to 520,000 euro...20% (30,000 to 520,000)
* 520,000 to 850,000 euro...30%
* 850,000 to 1,700,000 euro...35%
* 1,700,000 and above...40%
(Siblings are taxed at 35% on a value of 23,000 euro or less; 45% if more than 23,000 euro. Distant relatives and non-relatives are taxed at a flat rate of 60%.)
I cannot emphasize enough that you should always consult with legal and tax professionals who can advise you on the particulars of your situation. We encourage you to seek the necessary counsel to enable you to deal effectively with inheritance aspects of buying property in France.