12. Gift Tax in France
- Definition of a 'Gift'
- Liability to Gift Tax
- Rates of French Gift Tax
- Gift of Real Estate in France
- Gifts & French Inheritance Tax
- Procedures for Declaring Gifts
12.4. Gift of Real Estate in France
All types of real estate are liable for gift tax, save for those classed as a monument historique, which are exempt. There is also partial exemption for forests and agricultural land.
In addition, for real estate located outside of France, where the donor is not tax resident in France, liability only arises where the beneficiary is France resident at the time the gift was made, or has been resident in France for at least least six years out of the last 10 years.
The usual tax allowances apply on the gift of real estate, as for other types of gifts.
12.4.2. Division of Property
Where the gift takes the form of the transfer of interest in real estate then one of the most tax advantageous ways to do so is to divide the property into different legal interests gifting only part of the interest in the property.
This process is known as démembrement d'un bien immobilier/démembrement de propriété.
French gift tax allowances may be payable, depending on the age of the donor and value of the property.
At the outset we need to define and distinguish three types of interest in property. This is a little technical, but you need to grasp it if you are considering the gift of real property.
It is possible to distinguish three types of legal interest that can be created in property.
This is the reversionary interest in property (bare ownership) which grants the right of the freehold to a property, without the right to use it. A nue-propriétaire can sell, but a usufruitier has the right to remain in occupation.
Accordingly, a usufruit is the right to use property (life interest) and to enjoy the revenues from it (ie, use fruit), without the right to destroy it or to sell it.
The right can exist for a definite period of time or for the life of the user. Where it is for the life of the user it is known as a property en viager.
iii. Plein Propriété
This is the freehold ownership and use of property, where both the nue-propriété and the usufruit become enjoined.
So, for example, it is possible to transfer part or all of the reversionary interest in a principal or second home to your children and continue to enjoy a legal life interest in the property, either by using it or by receiving rental income from it.
In the case of transfer of either the nue-propriété or the usufruit, for the purposes of gifts tax it is necessary to determine the value of the interest that is to be transferred.
This is done by way of a scale established by the tax authority based on the age of the usufruitier, as follows:
Table: Value of Interest
|Age of Usufruitier||Value of Usufruit||Value of Nue Propriété|
|Less than 21 years||90%||10%|
|21 years to 30 years||80%||20%|
|31 years to 40 years||70%||30%|
|41years to 50 years||60%||40%|
|51 years to 60 years||50%||50%|
|61 years to 70 years||40%||60%|
|71 years to 80 years||30%||70%|
|81 years to 90 years||20%||80%|
So, for example, a person of 62 years gifts the nue-propriété in a second home to a member of their family. The donor remains usufruitier of the property to benefit from any rental income received, or to use the property themselves.
The value of the nue-propriété is then a function of the value of the usufruit. In this case it is 60%. This is the figure that is then used to calculate liability to gifts tax.
Example: A mother aged 75 years gifts the full freehold in a property to her daughter, with the value of the property being €150,000. If the freehold is transferred, then as the daughter only has a gifts tax allowance of €100,000 then she will pay gifts tax of around €8K on the transfer, plus notaire fees and stamp duty.
However, if the transfered is made with the usufruit reserved to the mother, the value of the nue-propriété that is transferred is €105,000 (70% of the freehold value). After deduction of the €100,000 gift tax allowance, gifts tax is based on €5,000, being €250.
In addition, transfer taxes are lower, as they are only based on the value of the nue-propriété of the property and not the freehold interest.
The mother continues to live in the property (or receive the rental income) until her death. Where both parents are alive, then that right is extended to the surviving spouse.
On the death of the donor(s) the freehold interest in the property is automatically transferred to the recipient, without the need to pay inheritance tax.
There is no reason, why, if both choose to sell the property at a later date, they cannot do so, as they will then be selling both interests. However, the mother on her own, would not be able to sell the property, without the participation of her daughter.
In the case of a gift of the freehold of a property, it is not necessary that the whole of the freehold interest is transferred. If you do not wish to exceed the tax free limits you can transfer up to the maximum of these limits.
For non-residents of certain countries, notably the US, UK and Belgium, this ownership structure may not be the most suitable approach due to the lack of recognition of a split in ownership for tax purposes.You can read more at How to Transfer French Property to Children.
12.4.3. Estranged Child(ren)
Where you are estranged from any of your children, which could then lead to problems concerning the management or disposal of real estate after your death, you may wish to consider making a specific gift of the real estate to your other child(ren), or leave it to them in a will.
Whilst under French laws those favoured by either procedure would would later need to make monetary compensation to their brother/sister, they would at least have control of the real estate, as they would not share ownership with them. Alternatively, adopt the inheritance laws of your home country, as we have outlined elsewhere in this guide.
You do not need to undertake a formal valuation of the real estate, but if the tax authority later considers that an incorrect valuation has been made they can make a retrospective valuation of the property, on which liability to gifts tax is then assessed.
In practice, this situation rarely occurs and the valuation of residential property in France is certainly more of an art than a science.
12.4.4. Capital Gains Tax
There is no French capital gains tax payable on the gift of real property, although non-residents need to take advice on whether any would be payable in their home country.
Accordingly, if you may be liable for capital gains tax on the prospective sale of the property, one tax planning strategy you may wish to consider is the prior transfer of all or part of the property to your next of kin.
You will pay gift tax on the transfer value of the property above the tax allowances that are available, but if the donee was later to sell the property, capital gains tax would only be payable on the sale value (less costs) over the gift transfer value.
However, you need to do this with great care, as an early re-sale of the property (donation-cession) is likely to attract the interest of the tax authority. If they consider that a gift has been made with the specific purpose of avoiding tax they can ignore the gift and apply the capital gain. The law on a sale disguised as a gift was toughened in 2018, with substantially higher penalties that now apply
Thus, any subsequent transfer of the proceeds of the sale of the property to your own account would certainly catch the interest of the tax authority. The proceeds of such a sale would need to rest with the seller.
Similarly, the gift of the reversionary interest of your principal home to your child(ren) would also incur capital gains tax if you later wished to sell the property (with the consent of your children) as the property would no longer benefit from the principal home exemption. However, only that capital gain above the transfer value to your children would be taxable.
12.4.5. Fee and Taxes
Whilst these tax concessions are going to be of interest to those doing inheritance planning, transfers of real estate by way of gift attracts legal registration taxes and notaire fees.
Stamp duty (taxe de publicité foncière) of 0.60% of the value of the property is payable, plus other ancillary charges.
In terms of notaire fees they are based on the full market value of the property, on a fractional basis, as follows:
|Up to €6,500||4,931%|
|€6,500 to €17,000||2.034%|
|€17,000 to €60,000||1.356%|
In effect, notaire fees are around 1% to which must be added VAT at the rate of 20% to these rates.
Together with stamp duty, that means the transaction costs are around 2.5%.
Next: Gifts & Inheritance Laws in France
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