Sarkozy and French property owners

How changes made by Sarkozy might affect those who own French property

Sarkozy, his changes and the French property market

Nicholas Sarkozy was elected president of France on May 6th 2007. His campaign promised many changes for France. In essence, he promised to drag France kicking and screaming if necessary, into the 21st century. Sarkozy wanted, he said, "to improve France's place in the world" and "to increase spending power". And this might well have a big affect on the French property market.

French laws - to be changed by Sarkozy?

France has been financially hamstrung by outdated laws for a long time. Many of us who have moved to this beautiful country because we love its landscapes, its people, its culture, food (Buying and cooking French food), wine (French properties with vineyards) and even its incredibly difficult to learn language (Learning French), would admit that the one thing that we don't love is the financial situation in which we, as French residents, find ourselves caught. There are massive social and employers' charges that can make running a successful business seem an impossibility. There is the punitive wealth tax, that sounds as though it should only apply to the super rich, but actually catches many of us who own property. Then there is the Napoleonic nightmare of succession law, followed inextricably by succession tax, all of which seems designed to leave most of us in what can only be described as a right old mess. Then along came Sarkozy. We all waited with baited breath to see what would happen.

Sarkozy and French tax changes almost certainly to affect British ex-pats

At the time of writing, September 2007 (with updates added October 2010), some of the reforms promised by Sarkozy are beginning to appear. There is a long way to go, certainly, and as yet there are many problems still to solve, and French businesses are still mired in paperwork and difficulties. However, at least in terms of tax reform, the new president Sarkozy seems to be taking steps in the right direction. This month, several changes that have been proposed by Sarkozy should pass into legislation. Amongst them are taxation changes that will almost certainly affect British ex-pats, and of which we need to be aware.

Sarkozy and French property owners

So what is changing, and what will it mean for us? The main burden of Sarkozy's changes that will be likely to affect French resident Brits and property owners are those concerning the succession and inheritance taxes and those concerning wealth tax. (Tax in France.)

Wealth tax and French property

This is the tax that frightens everybody who moves to France and owns a property. Contrary to the sound of the tax it actually affects many who are not particularly wealthy, as it applies to any household whose total assets are at or above €732,000 (as of October 2010, this is now €790,000). That sounds like a lot of money, but when you consider current house prices, especially in the UK which is where most ex-pats have owned property, it becomes a real concern for many.

Sarkozy and the change to wealth tax

The main change that Sarkozy has implemented on wealth tax, is to increase the 20% reduction currently allowable on the value of your main residence to 30%. This is intended to help to stem the tide of wealthy French leaving the country... think Johnny Hallyday (What? You don't know who Johnny Hallyday is? You haven't been in France long!)... rather than specifically to benefit ex-pats, but hopefully, it will do this too.

Sarkozy and other tax changes

Other changes include a reduction in the bouclier fiscal (the limit of the amount of taxable income that can be taken in taxes that combine both wealth and income taxes) and changes that affect investment in business. (Owning Gîtes and Chambres D'Hotes (B&Bs) in France.) Indeed Sarkozy is now coming under increasing pressure from the unions to ditch the bouclier fiscal, as it is seen as helping the rich avoid tax, but as of October 2010, it survives for the next year at least.

Sarkozy - succession or inheritance law and tax and French property owners

Succession or inheritance law and tax are perhaps the biggest headaches of all for those of us who move to live in France, or own a property here. In fact, they are also the biggest headaches even for the French, who understand the process and have had since the time of Napoleon to get used to it and learn how to deal with it. These laws and taxes are ripe for reform, and the changes proposed by Sarkozy here are of great interest.

Sarkozy - changes to succession or inheritance tax

The first change by Sarkozy concerns the tax that used to be levied on a surviving spouse or PACS partner. (PACS is a contract between non-married couples). It has always been possible to avoid this French tax, but it has been a very complex process. From the implementation of these changes by Sarkozy, this tax will no longer be levied. Inheritance for children of deceased parents (in this case "children" in the broader sense of the word, not necessarily children in age!) will also be improved. The French succession tax free band rises from €50,000 to €156,974 (October 2010) per person. The current tax free band between brothers and sisters trebles to €15,697 (October 2010). Monetary gifts will be tax free up to €30,000.

Sarkozy and his changes - what does this mean for French property owners?

Well, in short, it should be good. How good depends on a number of factors, not least of which is getting the right advice to make sure that the changes work for you.

Expert financial advice for French property owners

French finance is a complex issue, and one best left to the experts, so I asked Rob Hesketh of the Spectrum Group Independent Financial Advisers to simplify and explain exactly what the position is in the light of these changes imposed by Sarkozy. Rob lives and works in France, so he is well placed to outline the key issues that will have a bearing on the finances of British ex-pat French property owners. This is what Rob has to say on the matter of inheritance and succession:

"Separation des biens

The separation des biens system is the standard French marital system. Each spouse holds half of the assets in the marriage, including the house(s), cash, car, cat, wine collection etc. There are two big problems when it comes to passing your hard earned wealth to your descendants; succession law and succession tax. The first dictates who gets what, and the second taxes a big chunk of it. Mr Sarkozy decided that it would be a vote-winner if he tampered with the tax element, so he abolished succession tax between spouses. Very popular it was too, and Sarkozy was duly voted in as president. The headlines then say 95% of succession tax abolished in France, and the unwary ex-pat French property owner breathes a sigh of relief and chucks the complicated letter from his financial adviser in the bin as there isn't a problem any more. Mistake.

Succession law and French property

Mr Sarkozy may have tampered with the tax structure, but he didn't tamper with succession law. No-one messes with Napoleon, even now. This means that the newly complacent ex-pat may not be aware that when he dies, his wife will not inherit all his possessions tax free, in fact she won't inherit many of his possessions at all. OK, she won't pay any tax on what she does get, but succession law steps in first to decide who gets what.

French property and other assets

The allocation of assets including property depends on how many children you have, but the wife could easily end up with just 25% of the husband's share of the assets. The rest will have gone to the children, and inheritances for children are not tax free, although the tax free allowance is now much more generous at €156,974 (October 2010) per child, as mentioned previously, as long as they are bloodline descendants of the deceased. So the UK ex-pat still has the fundamental problem of how to make sure that when he dies, all his assets pass to his wife (assuming that is what he wants to happen). If he wants to leave everything to Accrington Stanley FC, he has an even bigger problem. There are, and have always been (in recent history anyway) ways round this problem.

Avoiding French succession law

Some of the cheapest ways of avoiding this French law involve notarial acts such as tontine clauses and forms of gifting such as donations entre epoux (donations between spouses) and donation au dernier vivant (donations to the surviving partner). These are ways of circumnavigating French succession law, presumably drafted while Napoleon wasn't looking.

Avoiding French succession tax

The problem with these in the past is that they didn't manage to avoid succession tax. So with a tontine clause built into the house purchase contract, on first death the property passed to the surviving spouse, not the children. If the value was above the tax allowance for spouses, however, tax was payable. The difference now is that succession tax has been abolished, so a tontine clause is much more efficient. The remaining problem is that it only covers the property, not the other assets, which will still be dispersed according to succession law.

French property and communaute universelle

I still think that the best way to overcome the problem is to change your marriage regime to that of communaute universelle. This fundamentally changes the way the marriage is structured. Instead of separation des biens, all assets and property are considered jointly owned. When one of you dies, the other merely assumes ownership of the whole. This can easily be worded to include all assets, not just property. Result? Easy transfer, no tax.

French property purchases and tontine clauses

A tontine clause is added to a house purchase to circumnavigate succession law difficulties. When the first spouse dies, the house becomes the property of the surviving spouse. Until recently there was a problem with this if the property was of high value. If the value being transferred was higher than the spousal tax free limit, the survivor would be faced with a tax bill at approximately 20%. M. Sarkozy has now abolished succession tax between spouses, so the tontine is now much more efficient.

French property passing to children

Second death. Always a problem, especially if it's you! You may not care where your wealth or property or assets go at this stage, but many of us do. Sarkozy's tax changes here do benefit the children. Their tax allowance has been raised from €50,000 to €156,974 each (October 2010), so if you have two children (and they are your children, not anyone else's that you've accumulated on life's great highway), €310,000 plus of your assets will pass tax free. It would not be unusual for all of this tax free inheritance to be taken up by the value of the property. In that case any further inheritance such as cash or other investments will be taxable, so other measures need to be taken. To be fair, there is not much you can do about the house, unless you look at a corporate ownership structure. The rest, however, can be kept from the taxman's grasp with the help of an assurance vie.

Assurance vie

Assurance vie is an investment vehicle combined with an insurance policy. The benefits that accrue from holding such policies are vitally important in structuring your finances in France. The policies are usually funded by single premium investments, although monthly savings are also possible. These investments are allocated by the policyholder to a range of funds and are free to grow within a very favourable tax structure. The sum assured, or amount payable on the death of the life assured, is the value of the fund. Joint policies are common. Here are some of the major advantages of assurance vie policies:

Income tax treatment of investment

Funds invested in assurance vie policies are not subject to French income tax or capital gains tax while the gains are left to accumulate within the policy. Tax is levied when withdrawals are made, but the tax rates are very favourable, with only the growth in the fund being subject to tax payments. After eight years, for example, the tax rate for withdrawals is just 7.5%. Only capital gain is taxed.

Sarkozy - new French succession tax rules very important for French property owners

You can nominate any number of beneficiaries under an assurance vie policy. Normally each of the beneficiaries can receive €152,500 free of succession tax before a rate of 20% is applied to the balance. This overrides standard succession tax rules. As a result of the Sarkozy changes, spouses are no longer subject to this limit. This is a very important change for a cash-rich ex-pat couple. In the case of an individual or couple investing in an assurance vie policy before becoming French resident, the benefit is even greater. In this case none of the beneficiaries suffer the restriction on the tax free sum. In other words your entire fund may pass to your chosen heir(s) without tax. It must be noted that this exceptional benefit is only available to policies set up and funded before the policyholder(s) reach the age of 70.

Assurance vie and wealth tax

An assurance vie policy can be a very useful tool to reduce your liability to wealth tax. Whilst the sum invested still needs to be declared in your ISF (wealth tax declaration), placing your assets within such a policy reduces your taxable income, and so reduces the total tax you pay. And another law passed recently means that for new arrivals in France, non-France based assets do not count towards wealth tax for the first five years, so if you have the right assurance vie, it won't count.

Advice to French property owners about assurance vies

To summarize, any surplus cash which you do not need to access to live on in the next five years should be considered for investment in an assurance vie. There are any number of top quality investments that qualify as assurance vie. Any funds invested this way are immune from succession or inheritance tax, as long as you have enough beneficiaries to cover the value of the investment."

And finally...

Just in case you are still wondering... who is Johnny Hallyday? France's favourite son, and most famous tax exile, Johnny Hallyday is a singer whose popularity within France is legendary, though he is hardly known at all in the UK!

Additional articles which may be of interest:

French Legal services and solicitors for those with property, business or a life in France
Life in France
Jobs in France
Banking in France

About the author

Joanna Simm moved to the Languedoc area of south-west France in October 2004 having found her property through French Property Links. Information in this article was also provided by Rob Hesketh.

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