How to Reduce the Cost of an Inheritance - Part 1
12th Sept 2024
By the standards of many other countries inheritance tax in France is high, so taking advantage of the options available to reduce the tax is essential for many international owners.
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How to Reduce the Cost of an Inheritance - Part 1
12th Sept 2024
By the standards of many other countries inheritance tax in France is high, so taking advantage of the options available to reduce the tax is essential for many international owners.
One of the most effective steps that can be taken is to create different legal interests in real estate, either at the time of purchase or at a later date.
The dismemberment of ownership (démembrement de propriété) involves the division of the freehold interest into bare ownership (nu-propriété) and life interest (usufruit).
The usufruit (usufruct in English) is equivalent to the right to use and/or derive income from the property during a lifetime.
The usufruct can be separated from the reversionary interest in property, the nu-propriété. The nu-propriétaire has no right to occupy the property.
On the death of the usufruitier the full freehold of the property passes automatically to the nu-propriétaire.
An example can illustrate how it works and the fiscal advantage it provides.
Mr A is the sole owner of an apartment worth €180,000.
At the age of 56, he decides to make a gift of the bare ownership of the property to his only son.
According to the tax scale for usufruct and bare ownership, between the ages of 51 and 60 the value of bare ownership is 50% of the full freehold. This means that gift tax will be calculated on €90,000 instead of €180,000.
As there is a gifts tax allowance of €100,000 for those in direct line, no gifts tax is payable.
On the death of the usufruitier his son recovers the property in full ownership when no inheritance tax would be payable, irrespective of the value of the property.
Only if the value of the gift were in excess of €100,000 and/or Mr A died before 15 years had passed would gifts tax be payable.
Nevertheless, as there is a gifts tax allowance of €100,000 per child per parent, it is possible to envisage the gift of the bare ownership of a property of a higher value being made between parents and children with minimal or zero gifts tax or inheritance tax being payable.
However, the inheritance tax advantage does not always work for non-residents of certain countries, notably the UK, USA and Belgium, where the tax authorities do not recognise the split of ownership. There are different and sometimes punitive rules that apply so non-residents considering dismemberment need to take good specialist professional advice.
After the transfer, should circumstances change, provided the parties are in agreement, the property can be sold when the new owner would obtain full freehold ownership of the property. The proceeds of the sale would then be shared between both sides.
If the property were still the main home of the usufruitier no capital gains tax would be payable on the sale. In contrast, were it not their main home, the nu-propriétaire, would be liable on their share, on the difference between the value of the gift and the sale price.
The usufruitier has no right to sell the property, but it can be sold by the nu-propriétaire, when the former would enjoy the right to remain in occupation.
With dismemberment the usufruitier is responsible for repairs and maintenance to the property, whilst the nu-propriétaire is responsible for major works. In practice, however, more informal arrangements can apply.
It is also important to note that the value of the tax benefit decreases with age. Thus, the value of the usufruct between the ages of 61 and 70 is 40%. Between 71 and 80 years it is 30%.
Apart from the fiscal advantages associated with inheritance tax, the division of the property also reduces the potential liability to wealth tax (Impôt sur la Fortune Immobilière), although few owners are likely to be liable for the tax. It is beneficial in this way, as it reduces the value of the property that might need to be declared.
The same benefit applies in relation to the local rates (taxe foncière) when the value of the property declared by the usufruitier would be lower, leading to a reduction in the rates payable.
An alternative (or additional step) to dismemberment of the property is to take out a life insurance investment product called assurance vie, a topic we will cover at a later date.
If you seek further advice on this matter you can contact us at Property Clinic