[Note from the Editor: the adoption of EU rules affects inheritance legislation in France.]
It is always better for people who own a property in France to make a French Will disposing of their interest in that property, whether they live in France or not. In some cases, it is absolutely vital. This situation arises when a married couple or a couple in a civil partnership recognised by French law have children who are not from that union.
In this case, assuming that Mr and Mrs Brown have between them (say) four children and own a property jointly en indivision and one of them dies intestate, all the survivors will be entitled is one quarter of the deceased’s half share in the property.
But if Mr and Mrs Brown make ‘mirror’ Wills, they can each leave a usufruit to the other of their interest in the property. A usufruit is similar to a life interest in English law but only allows the person who has the benefit of the usufruit, the usufruitier, to occupy the property and enjoy the rent of the property during his or her lifetime.
However, there are some potential UK tax issues that may arise from the use of the usufruit and these are set out below:
If the property is sold during his or her lifetime, the usufruitier does not receive any benefit from that part of the property to which the usufruit applies.
So on the death of Mr or Mrs Brown, who both made such Wills, the survivor can live in the property or enjoy the rent from it for the remainder of their life.
Had they have made no Will in France, all the survivor would be entitled to is 62.5% of the property, the remainder being divided between the heirs of the deceased (the ‘remaindermen’) according to French law.
If you have purchased a property in France en indivision with your spouse and you have a child who is not of that union, and you wish the survivor to be able to live in your property for the rest of their life, you should consult a lawyer with a view to making separate Wills that dispose of your French property in a form that is recognised by French law.
Although HM Revenue and Customs consider that a usufruct is equivalent to a life interest for the purposes of Inheritance Tax, there seems to be no decided case on this in the English Courts. There are, however, significant differences.
Contrary to the provisions in an English settlement under which a life interest arises, where the life tenant is entitled to the benefit of that property for the rest of their life, the usufruitier is not so entitled under French law.
If the property is sold during the lifetime of the usufruitier, the remaindermen are entitled to that part of the property which is subject to the usufruit, so the usufruit is more akin to a personal right for the usufruitier to live in the property and to its income whilst it is unsold and is therefore not a trust, and therefore the usufruit is arguably fundamentally different from a life interest.
If HMRC is correct about a usufruit being equivalent to a life interest and the usufruitier is resident in the UK at his or her death, UK Inheritance Tax will be payable on the whole value of the half share of the property. The only way a UK national can avoid the charge is to die domiciled in France, ideally with no assets in the UK.
If HMRC is correct, if the remaindermen immediately prior to a sale of the property sell their nue-propriété to the usufruitier for the value of the share of the deceased in the property and then the usufruitier survives for a further seven years, it would appear that there would be no Inheritance Tax payable. Insurance could perhaps be taken out by the remaindermen to cover any Inheritance Tax.
For further information, contact David Barney on 01458 270296 via email or write to Barney & Company Solicitors, The Old Vicarage Vicarage Lane Somerton TA11 7NQ to discuss your requirements.
Please note that whilst every care has been taken in the preparation of this publication, professional advice must be sought in all cases. No responsibility will be accepted by us for the consequences of failure to do so. The views expressed in this article are the views of the writer.
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