The total net income is subjected to several band rates (like for the PAYE in the UK). It applies only on the income realised in France if you aren’t a French resident.

1. The total net income is divided by the number of family tax quota (1 for a single person, 2 for a married couple).
2.  A different rate is applied for each tax band.
3. The total amount obtained is multiplied by the number of tax quotas.

Example 1: a married couple without children (=2 shares) has a total net income of 100,000 euros. They have a shared income of 50,000 euros each.

Each of their shared income is imposed by band according to the scale below (valid for 2010 tax year):
Up to 5,875 euros: 0%
From 5,875 to 11,720: 5.50%
From 11,720 to 26,030: 14.00%
From 26,030 to 69,783: 30.00%
Beyond 69,783 euros: 40.00%

They will pay less taxes than a single income person earning 100,000 euros per year because he will have to pay 40% taxes while their individual incomes are lower than 69,783 euros each so they will pay only 30% saving 10% taxes.

Example 2: the total taxable income of a single person is 35,926 euros. He will pay:
0% on the band lower than 5,875 euros
5.50% on the income bracket ranging between 5,875 and 11,720. That is to say 5.50% X (11,720 – 5,875) = 5.50% X 5,845 = 321 euros
14% on the income bracket ranging between 11,720 and 26,030. That is to say 14% X (26,030 – 11,720) = 14% X 14,310 = 2,003 euros..
30% on the income bracket higher than 26,030. That is to say 30% X (35,926 – 26,030) = 30% X 9,896 = 2969

So the total tax income to be paid by this single person will be: 321 + 2,003 + 2,969 = 5,293 euros.

Example 3 for property investor: Mr. Smith (UK resident) owns a French property investment with an annual rental income of 8,000 euros and has an interest only mortgage which cost 3,000 euros/year. He can deduct the interests from his French income: 8,000 – 3,000 = 5,000 euros per year. It is below 5,875 euros which is the lower tax band at 0%. Thus he does not pay income tax on his investment.

References:
http://droit-finances.commentcamarche.net
http://fr.wikipedia.org

It is useful to regularly check on the current status of such rules, among others with respect to the amounts of tax allowances or exemptions one can benefit from.

The level of allowances is reviewed annually and has been increased on a regular basis in the past years. It is important for British nationals purchasing in France to have a clear view on the current status of allowances.

The level of allowance depends on the remoteness of the blood relation between a donor or deceased and the beneficiary of a gift or of a succession.

The highest tax allowance is between parents and children in the amount, currently, of 156,974€ per child and per parent (ie: a child can receive twice this amount in total from his two parents). In the case of a gift, this amount is reconstituted if the donor survives for a period of six years after the gift. It should be noted that this doesn’t mean that the gift would not be taken into account for the purpose of assessing the shares to which the various children may be entitled to. For example, in the case of a couple with three children, one of which has received a gift up to the level of the tax allowance over six years ago at the time of death eg: of the father, then this will be taken into account in order to assess what the other children will be entitled to (their share will be increased).

Between brothers and sisters, the allowance is only 15,697€, and between more remote siblings such as aunts, nephews etc., the amount is only 7,849€.

It should be noted that between spouses and parties to a PACS (the French equivalent of a civil partnership which can be contracted between co-habitants and not only same sex couples) there are no death duties, whatever the amount received. However, in the case of a gift, there is only a tax allowance of 79,533€. It is important to keep an eye on the evolution of such allowances as in the current economic context, it is possible that such levels of allowance, which are fairly generous, could be reviewed downwards in future.

‘Exceptional gifts’ can be made to a child or grandchild or great grandchild who is of age, in the amount of 31,395€, provided that the gift is made in cash and if the donor is aged less than 65 years if the beneficiary is a child, or less than 80 years if the beneficiary is a grandchild or great grandchild. This is a one off gift and can only be made once between the same parties.

It should also be noted that there is a current tendency of harmonisation between civil partnerships and the PACS to the effect that both will eventually be fully recognised in France and the UK.

Between grandparents and grandchildren, the tax allowance for gifts is 31,395€ and between great grandparents and great grandchildren 5,232€.

Finally, there is a tax allowance ‘by default’ which applies to successions in the absence of any specific tax allowance in the amount of 1,570€.

Please note that gifts or successions between unrelated people i.e. with no blood or marriage relation are taxed at the discouraging rate of 60% of the value transferred.

Hervé Blatry
Avocat

TEE FRANCE
STANLEY TEE LLP
High Street
Bishops Stortford
Herts CM23 2LU

Tel 01279 710621 and 01279 710654
heb@stanleytee.co.uk

What may be the advantages of purchasing a property through such an entity, and what is an SCI in the first place?

An SCI is a civil company (as opposed to a commercial one), which is tax transparent (ie: any income it makes is taxed in the hands of the shareholders under French income tax), the purpose of which is to purchase and hold real estate property among several people, to put it at the disposal of the shareholders, to rent it and share the rental income and even, exceptionally, to sell it.

An SCI requires a minimum of two shareholders (no maximum) and there is no minimum share capital, although in practice, the capital will consist in the market value of the property (plus any advances in cash by shareholders in current accounts).

It requires at least one annual general meeting to approve the accounts, to prepare such accounts (this can be a fairly simple exercise depending on the activity of the company), which do not need to be certified by a chartered accountant. A balance sheet must be prepared along with a profit and loss account yearly, as well as a report by the manager to the shareholders on the company’s activity once a year. A number of companies in France can assist with taking care of such service at a reasonable cost.

An SCI is a tax transparent civil company, which means that any income derived from it is taxed directly in the hands of the shareholders under French income tax. Because its purpose is civil as opposed to commercial, it can rent the property it owns, but on a long term unfurnished basis. If short term furnished letting is contemplated, it is best to opt for corporation tax (such option is irrevocable).

Turning to the advantages:

-    Avoiding the rules of indivision:

A straightforward purchase of real estate in France, say by an English couple, will take place under the rules of the Civil Code regarding indivision. In a nutshell, pursuant to such rules, one can request to be bought out or force the sale of the property in auction sale, but more importantly, the majority required to make any decisions regarding the property is often two thirds (after a fairly recent reform, prior to which unanimity was often the rule). This can be a major hurdle, in particular in the scenarios of a large number of heirs inheriting a property, of a property being purchased by a group of friends or two couples, etc. In France, a fairly large number of properties are left empty to decay simply because of lack of agreement between members of an indivision.

On the other hand, the SCI offers a large amount of flexibility in decision making, which can be organised in the bylaws. It is possible therein to appoint one or more managers (“gérants”) with large decision powers, including day to day management of the property, decisions regarding works or even the sale of the property.

In addition, the majority required for decisions made by shareholders is often a simple one.

As regards the transfer of an interest in the property, the process is also simpler in the case of an SCI. As a matter of fact, this can take the form of a transfer of shares under private signatures (although a notarised deed can be recommended for publication purposes and opposability to third parties in certain cases), while a transfer of a share in a title held in indivision will invariably be more complicated and required a notarised deed. It is of course possible to prevent the entry into the company of unwanted people thanks to an appropriate approval clause in the statutes (with right of first refusal in case on intended transfer of shares).

The company’s bylaws can organise the rights of occupation of the property or how it is to be run. It is possible for members of an indivision to enter into an agreement achieving the same, but again, it is heavier, and will need to be notarised. It is also only valid for five years (although renewable).

-    Facilitating the transfer of the underlying asset:

It is quite common for a married couple to gradually gift shares in an SCI to their children with a view, ultimately, to transfer all of the underlying asset to them. Children enjoy a tax allowance of over 156,000 € on the death of each parent, but also upon a gift from them, provided that the donor survives six years, after which the allowance is reconstituted in full.

A word of caution though: an SCI must not be set up solely for the purpose of obtaining a tax advantage, as it could otherwise fall under the tax administration’s doctrine of abuse of right. It is therefore advisable to bring the children gradually into the share capital, initially with a small shareholding, and later to gift them larger amounts of shares. Provided such gifts do not exceed the tax allowance, they should not give rise to any re-qualification by the tax authorities.

Another advantage of a gift of shares in an SCI is that debts of the company will be taken into account in order to assess the value of the gift (provided that the donee accepts to take over the indebtedness), in particular mortgages, while this is not the case for an outright gift made by an individual. Also, it is accepted that the property’s market value taken into account for the purpose of a gift can be reduced by up to 15% to reflect the fact that there is no market for the sale of shares in SCIs.

It is also possible to transfer the bare title to the shares in the SCI and for the donors to keep the usufruct thereof (ie: the right to use the property and to receive any income from it). The usufruct holder is deemed to be the full owner for tax purposes, which can be convenient in cases where parents want to benefit their children without imposing a tax burden on them.

-    Overcoming the rules of French law on forced heirship:

Under French law, children have a right to a share in both their parents’ estates, which cannot be taken away from them even by will.

However, in the case of an SCI, provided that the family remains domiciled in the UK for inheritance purposes, the shares in the SCI, as chattels (as opposed to real estate), can be dealt with as the testators see fit in their UK wills, while the real estate property remains owned by the company.

The death duties, if any, will remain the French ones, as the SCI is a company with French real estate preponderance, but the shareholders can transfer the title to the shares freely. This possibility makes the SCI very attractive to many British buyers.

A lot more could of course be said about the SCI, but it should be considered as an option in any purchase of real estate property in France.

Hervé Blatry
Avocat
TEE FRANCE
STANLEY TEE LLP
High Street
Bishops Stortford
Herts CM23 2LU

Tel 01279 710621 and 01279 710654
heb@stanleytee.co.uk

One of the main advantages of the donation-partage is that, if all the children accept it prior to death, it will normally avoid quarrels between them upon death, although legal action will still be possible in certain cases.  The donation-partage avoids the situation where the heirs will be the joint owners of all the deceased’s assets and a possible lengthy distribution procedure (‘partage’) in case of disagreement.

It also has an essential advantage in that it enables to avoid a pitfall relating to the valuation of the assets given.  As a matter of fact, once the donor has passed away, the assets given under the donation will be valued at the value retained at the time of the donation, as opposed to the time of the distribution of the estate after death.  This is so while to the contrary, when valuing the share to which each child is entitled, gifts made outright during lifetime will be taken into account at their value at the time of the death, which can create discrepancies in the treatment of children depending on what was given.  Let us consider an example: during his lifetime, a father makes gifts to his two children, one of a real estate property and cash to the other in equal values or two equal sums of cash, one of which is later invested by the child in the purchase of a property when the other spends his gift without buying anything.  Then on the death of the father, the value of the gift taken into account in order to assess the share of the estate that needs to go to the child having bought the property will be the market value thereof at the time of death, while the gift received by the other one (and who has spent it all) will be taken into account at its nominal value, meaning that this child will benefit from the increase in value over time of the property purchased by his sibling.  This can seem quite unfair and the donation-partage remedies that situation by ‘freezing’ the valuation at the time of the gift.

Process to follow to make a donation-partage:  like any gift, a donation-partage needs to be signed before a Notaire.  Two parents can give their respective personal assets but if there is a community between spouses, it is best to do a joint single deed of gift by which each spouse gives his own personal assets and both spouses give their joint assets at the same time.

In order for it to be valid, all the beneficiaries must accept the donation-partage, although if one refuses, then it will remain valid for the others.  The one who has refused will not be able to take advantage of the above-mentioned rule on valuation and if the assets left in the estate are not sufficient for him to receive his full reserved share of the estate, then he will be entitled to challenge the scope of the donation and have it reduced (‘action en réduction’).

Assets gifted within a donation-partage may consist of specific assets existing, or by way of reintegration of previous outright gifts made.  In that case, however, it is to be noted that the value to be retained for the outright gift will be the value at the date of the donation-partage, not the value at the time of the outright gift.  It is therefore recommended to do a donation-partage in the first place rather than outright gifts.

One does not have to give all of one’s assets under a donation-partage and in case of partial gift, then the surplus of the assets are distributed according to default applicable rules of successions.

Once the donation-partage has been accepted, it is normally impossible to come back on it.  There are exceptions in very exceptional cases, for instance if the gift was made subject to an obligation which was not carried out.

It is possible to provide, in a donation-partage, that should the beneficiary die before the donor, then the donor will get the asset back.  If this is not provided, then on the death of the beneficiary, the assets given will benefit his or her heirs.  However, if the intention is to receive the asset back in case of death of the child or children, it is essential, in case there are several children, not to give them the same assets jointly, in other words in case only one dies, then the assets cannot be returned in full.  It is possible to give assets of unequal value to different children but in that case, the child who has been advantaged will need to pay back the difference in value over and above his reserved share to the estate.

The consequences of the donation-partage on title: as the assets have been gifted, the children can in theory sell them even prior to the death of the donor.  However, should there be a claim in reduction by the other heirs in case they did not receive their rightful share, the purchaser of the asset could be forced to return it or indemnify such heirs.  Only if the donor and all the heirs consent to the sale will that not be possible.

The donation-partage is therefore a very useful tool but it is also a very technical subject and people interested in going down this route should use caution.

Hervé Blatry
Avocat
TEE FRANCE
STANLEY TEE LLP
High Street
Bishops Stortford
Herts CM23 2LU

Tel 01279 710621 and 01279 710654
heb@stanleytee.co.uk

Pursuant to article 605 of the French Civil Code, the holder of the bare title is responsible for major repair works. Since 1 January 2009, they can deduct the cost of such works from their taxable income in France. Prior to this reform, such deduction was only possible if the property was rented by the usufruct holder. This requirement is now removed and the bare owner can deduct the cost of the works even if the property is occupied by the usufruct holder, by the bare owner himself or any other person occupying the property either against a rent or for free.

There is however an annual ceiling for the deduction of 25,000 euros. If the amount of the works carried out exceeds this limit, the balance can be carried forward against the income of the next ten years.

If the property is rented out by the usufruct holder in normal conditions (proper lease agreement, effective rent…), and if the usufruct holder is taxed for such rental income in the category of real estate income, the bare owner may elect not to opt for this deduction capped at 25,000 euros. He has the option to deduct the cost of the works from his own real estate income in the normal conditions of deduction of property costs. This is particularly advantageous for bare owners who have paid a high cost for works and who receive, from other properties they own in France, significant real estate income, as it enables them not to be limited by the annual deduction ceiling of 25,000 euros.

This is a mere illustration of one of numerous tax advantages which may be enjoyed by British investors in France, at a time where real estate prices in France are at their lowest in a very long time. Another trend is for tax advantages for works aimed at making properties greener.

Hervé Blatry
Avocat
TEE FRANCE
STANLEY TEE LLP
High Street
Bishops Stortford
Herts CM23 2LU
Tel 01279 710621 and 01279 710654
heb@stanleytee.co.uk

Taxe d’habitation
The taxe d’habitation or French residence tax is payable every year by the person (or persons) occupying the property on 1st January. Even if there is no one there on that date, if the tax authority deems that your property is ‘capable of being occupied’ you will be taxed. This means that regardless of how much (or how little) time you spend at your French home you will still have to pay the taxe d’habitation. Whether or not your property is furnished makes no difference. Your television license fee (or redevance audiovisuelle), which costs 116 € a year, is charged in the same way.

There are however certain circumstances under which you will not have to pay this tax. If you move into your property after 1st January you will not be liable for the taxe d’habitation payable that year (the previous tenant will be unless you have made a private agreement with them). Similarly you will not have to pay this tax if you let out your property as it will be paid by your tenants instead. You may also be exempt if you have tried without success to let your property (though you must have evidence to support your claim) or if your property is a holiday let – that is to say a chambre d’hote or a classified gîte (contact your local mairie for more information about this). Finally, if you are aged over 60, are a widower or are registered disabled (ie incapable of gainful employment) you will not be required to pay this tax.

The way in which this taxe d’habitation is calculated is rather complex but is essentially based on the notional rent a property might achieve (taking into account its condition, size and location) rather than the actual rent payable. As the formula applied to this notional rent varies according to how much income the local authority needs to raise, the amount you pay in tax will be different in different places although it will, generally speaking, be higher for a property in a town than for a comparable property in the countryside. You can find out the notional rental value of your French property by contacting the local Centre des Impôts Fonciers (Service de Cadastre).

Taxe foncière
The taxe fonciere or French wealth tax is payable by the owner of the property rather than the occupier. All types of property are subject to this tax (residential, commercial, professional and industrial property) as is land.

There are exemptions, however. The taxe d’habitation is not payable by those aged over 75, the disabled and recipients of the "minimum vieillesse" (a pension for elderly people with low incomes), with those aged between 60 and 75 benefitting from a reduction of €100 or more (these personal exemptions however are only granted if the property is your principal residence). Other exemptions include agricultural buildings, land with new woodland planting, properties built prior to 1989 where major energy conservation measures have been undertaken and residential properties which have been placed on the market but remain unsold (although, once again, the property owner must have evidence as to their efforts to sell). New builds, extensions and rural conversions are also subject to a two-year exemption.

The taxe fonciere is determined in much the same way as the taxe d’habitation (and again, is usually higher in towns). It is paid annually with tax invoices (Avis d’imposition taxe foncière) normally sent out during the third quarter of the year. Those buying/selling properties during the tax year will not however be left out of pocket with the parties involved usually agreeing to share the cost of this tax (if this is the case, ensure that it is mentioned in the relevant sale and purchase agreements).

The taxe fonciere is often accompanied by the taxe d’enlevement des ordures menageres, the rubbish collection tax (some local councils charge separately for this service whilst other fund rubbish collection from the general budget).