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
3. Transfer of French Property
One of the most frequent reasons why an SCI is established is to manage the progressive transfer of property to other family members.
Specifically, it facilitates:
An SCI offers the possibility of achieving these objectives more easily and cheaply than other ownership structures.
3.1. Gift Transfer to Children
An SCI permits the gradual transfer of property to other family members, such as your children.
Thus, the shareholding of the SCI could be changed over time so that children (and grand-children if necessary) of the family can be granted, by way of a tax-free gift, an increasing proportion of the value of the property.
The gradual transfer of property in this way would not be possible if the property was held indivision.
In this way, the liability to French inheritance tax is also reduced, although as between parents and children this is only going to be relevant if the value of the transfer exceeds the inheritance tax liabilities (if any).
One particularly interesting route is for parents to transfer to their children the 'reversionary interest' in the property, while they themselves retain a 'life interest'.
As the property is held by a company, rather than directly, the French tax authorities allow a discount against the value of the gift of around 15%, so reducing further your liability to gifts tax.
In practice, as tax-free gifts can only be made every fifteen years up to a maximum value, there are serious limitations on how effective this may be.
Neither is an SCI needed to make a tax-free gift of the property, and in recent years the level of gift tax allowances between parents and children has been substantially increased.
However, the process is easier and cheaper with an SCI, as all you would need to do to make the gift would be to transfer shares of the property between different owners, rather than having to actually go through a property transfer procedure, as would otherwise be the case.
Moreover, if there is debt (a mortgage) in the SCI, then the value of any transfer by way of shares in the property can be reduced by offsetting it against the debt.
Thus, in the case of the gift of property having a market value of €350,000 with a mortgage of €100,000, liability to gifts tax would arise on only €250,000, against which gift tax allowances would be available.
Accordingly, provided there is a debt in the company, the costs of transferring part or all of the shares in the company to another shareholder (child, partner) are substantially reduced. This would not be possible if the property were not held indivision.
There are also reduced transaction costs with a transfer of shares in an SCI over the transfer of property under indivision by way of a gift or sale.
In each case registration taxes of about 5% are payable, although a little lower in the case of a share transfer, and notaire fees are not always payable. However, the difference is not huge, and it should not be a key factor in the decision making process.
3.2. Protection of Surviving Partner
The use of an SCI also ends the potential enforced sale of a property on the death of one of the owners.
If the property is held within an SCI, on the death of one of the owners the shareholding structure of the SCI would ensure that one member of the family could not enforce the sale of the property, as would be the case if the property was held indivision between them.
The inheritor may well wish to sell their shares, but this would not result in the sale of the property.
This is clearly going to be critical for a surviving spouse or partner, who would then be protected from potential loss of the property.
The issue is more important for those in free union, and to a lesser extent those in a civil partnership. We say more about it in the next section on inheritance laws.
Use of an SCI does not deprive the children of their inheritance, and if the articles of the company are carefully drafted to ensure that the surviving partner retains full control of the use of the property, they are protected.
Alternatively, to draft the articles of the company so that inheritors of a deceased owner are prevented from becoming shareholders of the company through a clause d'agrément, but granted alternative compensation of equivalent value.
Another option is to set up the SCI with a clause en tontine so that the company passes directly to the surviving spouse or partner on first death.
Alternatively, to establish a crossed ownership structure called démembrement croisé, which is discussed in more detail in the next section.
The articles of the company could also provide that any one of the owners wanting to dispose of the property would be obliged to offer their shares to the other owners. It would be best to stipulate a minimum period during which the option of pre-emption would be available, in order to provide other shareholders with time to organise funding for the purchase.
So there are plenty of options to protect a partner within an SCI, which you would need to discuss with a competent notaire.
3.3. Assisting Children with House Purchase
An SCI may also be a way in which parents can help their children get on the property ladder.
Thus, where the son or daughter is unable on their own to raise sufficient capital to buy a home, the parents could be joint-purchasers of the property.
There are various approaches to how this might be best achieved, depending on your fiscal circumstances, which you would need to discuss with your advisors.
One approach frequently used is for the married son or daughter and their spouse to put up a percentage of the purchase cost, with the parents contributing the remainder, thereby enabling the couple to purchase a property otherwise out of their reach. The young couple are then charged rent by the parents until such time as the capital is repaid.
In the meantime, the articles of the SCI would ensure the parents retained a controlling interest, thereby granting the necessary assurances to the bank.
Next: Inheritance Laws
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