Société Civile Immobilière (SCI)
- What is an SCI?
- Multiple Ownership of French Property
- Transfer of French Property
- French Inheritance Laws/Taxes
- Tax Implications
- Business Use
- Setting Up an SCI
- Running an SCI
4. SCIs and Inheritance Laws & Taxes
SCIs are often used by international buyers in order to protect themselves against French inheritance laws and taxes.
We first deal with the position concerning inheritance rights before taking a look at inheritance taxes.
4.1. Inheritance Laws
Buying a property through a SCI enables the owner(s) to avoid French laws on French inheritance rights; these laws do not permit complete testamentary freedom.
If the owners are non-resident this advantage applies without restriction, but it can also be structured to apply in part to those who are resident.
The reason why a SCI structure avoids French inheritance rules for non-residents is that only fixed assets held by them are captured by the rules and, as shares in a company are considered as meubles (movable objects), they are exempt from controls on the disposal of fixed assets in France.
Thus, if you are non-resident, the use of an SCI enables you to dispose of the property as you wish, without being encumbered by enforced inheritance rights.
Nevertheless, even for residents of France it is possible to obtain some relief from the inheritance laws through an SCI. This is achieved through a special ownership structure, in which rights over a particular property are divided between the owners.
This ownership structure is called démembrement croisé.
The structure is complex, but briefly, two or more people buying a property would do so on the basis that neither holds an interest in the freehold of the property. Instead each holds shares that grant them (say) half of the 'life interest' and half of the 'reversionary interest', on an overlapping basis.
On death of one of the owners the life interest of the deceased is merged with the reversionary interest held by the surviving partner, to grant them freehold ownership of half of the property, whilst they also retain a life interest in the remaining half.
The remaining interest in the property will be the former 'reversionary interest' of the deceased which passes to their inheritors, who inherit the full freehold of half the property on the death of the remaining owner.
Whilst, therefore, the inheritors of the deceased will become reversionary owners of part of the property (without the right of occupation), the surviving owner retains an interest and the right to remain in exclusive occupation until their death.
Example: Michael and Angela Robertson create an SCI and divide the life interest (usufruit) and the reversionary interest (nue-propriété) into 100 shares.
Michael buys shares numbered 1 to 50 of the life interest, and shares 51 to 100 of the reversionary interest.
Angela buys shares 51 to 100 of the life interest, and shares 1 to 50 of the reversionary interest.
If Michael dies Angela recovers the freehold of shares 1 to 50 (without paying inheritance tax) and retains the life interest of shares 50 to 100, of which the reversionary interest will be shared between Michael's inheritors.
Angela thereby retains use and occupation of the property until her death (or vice versa).
We consider this structure is particularly useful if you are buying as a couple who are neither married nor in a civil partnership, although you would need to examine the inheritance tax implications, as we state below.
Nevertheless, dismemberment of a property does not require that an SCI be used for this purpose; it can also be achieved without it.
If married or in a civil partnership the advantages are not so clear cut, and there it can potentially be disadvantages, eg loss of 30% discount on main home for wealth tax purposes, although few households are liable to this tax so the risk only applies to wealthy households.
The use of this structure is sometimes frowned upon by tax officials as it seeks to get around the payment of gifts tax on the reciprocal grant of a life interest. So a gifts tax on the 'life interest' is potentially payable, although rarely is this the case. The liability can also be reduced by buying the property with a mortgage as the loan is offset against liability to the gifts tax.
As useful as an SCI is to the transfer of property in successions, it should, however, also be noted that the right of a surviving spouse to remain in the the property for life following death of their partner does not exist if the property is held in an SCI.
This right is called the droit de viager and is enshrined in French law.
So careful drafting of the articles and other inheritance measures may be necessary if the property is in multiple ownership.
Whilst an SCI is a useful vehicle to get around forced heirship rules, since 2015 it has also been possible by Will to adopt the inheritance law (but not taxes) of your country of nationality, which would achieve the same objective. You can read about this at European Succession Law.
In addition, if you are buying with your children, you need to consider whether they have an interest in taking on the property on your death. There is no reason why they might wish to do so, and there are plenty of examples of brothers and sisters having different aspirations on the inheritance, which can leave it deadlocked.
In addition, when you purchase the property, it may well be too early in your life or that of your children to consider inheritance questions.
In short, an SCI might not be that useful as an inhertiance planning tool, unless you adopt a more comprehensive inheritance planning strategy at the time of purchase, and in tandem with other inheritance planning steps.
4.2. Inheritance Taxes
In relation to inheritance taxes an SCI does not, per se, escape exemption from French inheritance tax for either residents or non-residents, as the company is considered to be ‘fiscally transparent’.
Nevertheless, in view of the fact the shares of an SCI are less liquid than ordinary company shares, the taxation authorities do tend to allow a discount of around 10% on the value of the property against liability to the tax.
Perhaps of even greater interest, it is possible to structure the company to reduce potential liability through the use of an SCI démembrement croisé, as outlined above.
No liability to inheritance tax arises for a surviving married partner, although there may be taxes to pay for the other inheritors of the deceased, depending on their relationship and value of the estate they inherit. The use of démembrement croisé reduces their potential liability because of the value in the property inherited on death has a lower fiscal status.
Nevertheless, the issue is a complicated and controversial one, and you need to take sound professional advice, as the tax authority could choose to tax the full freehold value of the property if they considered that the structure was being used simply to avoid tax.
For those who are non-resident the division of property is not recognised in tax law in either the UK, US or Belgium (and potentially other countries), meaning that the inheritance tax base would be 100% of the value of the property. You can read more in How to Transfer French Property to Children.
If this type of cross-ownership structure is not used, it is also possible to reduce liability through the use of a suitable debt structure in the company, or to avoid the payment of inheritance tax altogether, on the death of the first party, through the use of an SCI created with shares issued en tontine.
That having been said, buying the property indivision with a mortgage on it, or using a secured loan on the property to undertake renovation work, would also be another method of reducing potential liability to inheritance taxes, particularly if you were non-resident.
Once again, however, things are not always that straightforward, for if you are obliged to take out a life insurance (mortgage protection) policy to cover repayment of the mortgage on the your death (as is required by French lenders) then the use of debt to reduce inheritance tax liability is not possible.
You also need to consider whether your inheritors are likely to be liable to French inheritance taxes, and the extent of this liability. There are generous allowances for inheritance taxes between in-line inheritors, and if the potential liability of your inheritors is low or nil, then there may be no reason to establish an SCI to avoid these taxes!
Next: Tax Implications
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