Inheritance Law

[shermans]

I have been reading the FAQs on inheritance law, and I am surprised that so many people seem to think that French notaires know what they are doing.  This is just not necessarily true, and no-one should confuse a notaire with a UK solicitor; it is not the same profession at all.  Notaires are executors, not advisors, and they are more comparable to civil servants than to lawyers. So be careful, although I admit it is often Hobson's Choice.

On the question of Inheritance Law in respect of people who do not necessarily want their French property to go to the children of a previous marriage, there is really only one safe solution.  The property needs to be owned by a Societe Civile Immobilier or SCI.  The shares in the SCI are then owned by the effective house owner in the UK.  This mechanism is bona fide, is perfectly transparent (CGT allowances work in the same way, for instance), and is recognised and permitted by the French authorities, providing one is not domiciled in France.  In other words, it is not a loophole; it is a scheme which has been established to overcome this sort of situation experienced by foreign purchasers.  Many notaires do know about this until asked to find out about it, although some UK law firms specialising in French properties do know about it and will recommend it.

My problem was that I have a very severely handicapped daughter who is in residential care in the UK.  Under French Law, she would therefore normally inherit.  However, Gordon Brown would then simply take the lot, without so much as a by your leave - he would not need to have a Chance Card even to get out of gaol before collecting his lolly as he passed "Go", because my daughter receives disability allowances and income support, and is not therefore allowed to own anything.  And you can be sure that dear Gordon would not spend a single penny of the his ill-gotten gains on improving my daughter's quality of life.  Therefore, we had to be extremely careful about ensuring that she could not inherit, preferring to make private arrangements to protect her interests after our death.

Unfortunately, our notaire knew nothing about this, and we discovered only after we had bought our house several years ago.  When we did find out, we asked the notaire to investigate and to confirm that it was correct, which was done.  It meant, however, that we then had to sell the house to the new SCI in which we then owned the shares.  The whole thing actually cost less than £1,000 in the end, including the registration of the SCI, all the tax affairs, the payments to SAFER, the legal fees and other taxes and the conveyance of the property.  Our local notaire did it all in about four weeks.  However, we got quotes from UK solicitors to do the same thing which ran into several thousand pounds.

After it had gone through, we then had to visit our local tax office to explain what the purpose of the SCI really was, because it was assumed by them that it would be a business which rented out the property.  As soon as they knew about my daughter, they updated their records and told us that we would not need to even complete an annual tax return, and we have never received one for the SCI since.

The logic of this arrangement is that the inheritance laws only relate to immoveable property, not to moveable property.  A house is, of course, immoveable whereas shares are moveable and, if owned in the UK, are than subject to UK inheritance tax law.  If someone dies, then the house does not change hands; it continues to be owned by the SCI in France.  It is the shares which are inherited, but they are inherited outside France.

The only questionable area about this - which I have not been able to resolve - concerns the term domicile which seems to mean different things to different men.  It is a requirement that you are not domiciled in France for the scheme to work, and therefore presumably you cannot join the French medical scheme for instance.  But it appears you can live in France up to nine months per annum on average over five years without becoming domiciled, providing your "economic ties" are more with the UK than with France - i.e. you need to have an address in the UK, and your income (pension) should be derived from the UK, and it helps if you have close family in the UK.  If anyone has anything to add on this aspect, I would be interested to hear about it, as we would ideally like to retire permanently to France but cannot take the risk.

[Teamedup]

Which 'local' tax office did you see.

Also aren't the british government planning on taxing SCI's.

[shermans]

The local French tax office from whom I received the first tax return was the one I visited and with whom I resolved the matter.  They simply confirmed that there was no need to file further tax returns unless I rented the property out and said they would not issue any more returns - and they have not done so since.

The UK can only tax an SCI if it has any income which my SCI does not.  Fortunately, there is no such thing as a wealth tax or anything like that in the UK which might render the SCI liable to any tax in the UK.  Even if I were to let the property, the outgoings in respect of mortgage, running expenses and management costs would far exceed any potential rental income.  But that is not my intention in any case.

[Teamedup]

I don't think that the british tax people were going to work it like that. They are going to tax on rent whether it be earned or not as it is a personal benefit. There have been posts about it and I remember sending a friend some details  about this too.

This is from this board some time ago

 

I have am urgently trying to research the tax issues of SCIs as we have been involved in a number of group purchases using this procedure, after following "expert" (!!) UK legal advice. I would be very keen to pool information with anyone who is interested in this subject as the situation appears to have changed significantly if you are a UK resident taxpayer.
It's my understanding that there are 2 kinds of SCI, if you have one of the kind which is "fiscally transparent" and do not use it for a business type purpose (e.g. renting!) then as far as the French authorities are concerned it seems that they can keep track of what the company is doing because it knows a great deal about exactly who is involved in it (and so can track their personal taxes), and it isn't making profits so there's nothing to be taxed - ergo there are very few reporting requirements, and no taxes usually fall due. The other type of SCI IS a business and has much more to do.

However the problem which has arisen is in regard to the UK authorities. Until a few years ago they went along with the French position. They have now changed their minds about the status of SCIs and apparently regard them like any other company, i.e. as "opaque" rather than "transparent".

In parallel with this, there was a court case last year which decided that the people who actually controi and influence a company are effectively its directors, whether they appear on the books as such or not.

This is where it gets sticky. If you are a UK company director and you have the use of some of the company's property (e.g. it buys a big house and a Jaguar with the company's money and lets you live in it for nothing, paying you a lower salary instead) the Revenue says hang on, we want the value of that accomodation etc counted in your tax return as it's a substitute for money.

So now the position appears to be that if you own the property via an SCI, when you stay there you are using the company's property, NOT your own. Since you control the company you are a "shadow director" and hence have obtained a taxable benefit in kind from it. Depending on your tax man's interpretation, in the worst case he might say your property COULD be rented for (say) £1000 a week, you have it available all year round, so that's £52k benefit, please pay me 40% of £52k = £21,000.
(pick your own numbers).

I do not believe this was what the legislators intended since in this case all the company's assets were purchased by you (the director) out of already taxed income, and you are paying all the company's outgoings out of your (already taxed) income. So applying any rule which says the benefit you are getting is more than a theoretical one, will result in you being taxed twice on your real income, which you subsequently put towards your property. You are in fact being extremely highly taxed simply for owning your own property via a company structure.

However, at the moment there is a big BLACK HOLE as far as I am aware in that there appears to be no official guidance in the Revenue on how individual tax men should calculate this notional "benefit", and how the outgoings which you have can be set against it.

There are lots of other detailed aspects which become apparent when you start to dig into this but that is probably enough to start wiht!!

If you have any knowledge or contacts in this area PLEASE let me know as it is a matter of considerable concern, and I am actively trying to figure out what we need to do to get some clarification.

 

 

[shermans]

Thanks for that. It is a salutary warning and, if it were to happen, then one which I imagine might be able to be challenged under the Human Rights Act, perhaps or by reference to the EU Committee on Petitions.  Before I established the SCI, I also considered registering a company in the UK for the same purpose, and at that time, I did enquire in writing from the local UK tax officer.  The answer I got was very much along the lines mentioned in your article, which is why I opted for the French SCI rather than a UK limited company.  It did not cross my mind of course that the benefit in kind could still be claimed by the UK tax authorities.  However, I think it would be a very arguable situation for the reasons stated.  I am no tax expert, but if the purpose of the SCI was to avoid paying tax, then I would be on thin ice no doubt.  But that is not the purpose, as I expect to have to pay French inheritance tax if I were to die which would be higher than UK inheritance tax and under the dual tax agreement, the UK exchequer would be no worse off as a result of the SCI, providing it does not trade of course.  I suspect that the Inland Revenue would have to justify a claim to tax where no fiscal activity actually takes place, but whether it would be in the UK courts, the ECHR or elsewhere, I really do not know.  I suppose one has to say "Sufficient unto the day"....

[Patf]

Well it's quite a coincidence that you have mentioned this today as I just quoted from an article in last week's Sunday Times - see in the

Postbag section on "more houses up for sale". There was evidently a recent test case in the house of Lords which the IR won. It might be worth speaking to your financial adviser. Pat.

[shermans]

Unfortunately, I do not get the Sunday Times.  Could you possibly give more details either about this article or perhaps about the name of the test case, so that I can ask the Inland Revenue about it directly ?  You suggets asking my financial adviser - every time I have done so, it is has been me that ends up having to do the research because they just do not know !!

Many thanks.

[Teamedup]

And nine months without being classed resident or domiciled. Personally I would doubt that the french authorities would wash that. There are many people living here who are completely dependant on UK income, but they are french residents.

Also, your health care. You would be dependant upon an E111 which is for holiday cover anyway. And you would not be able to take out top up cover, and you would likely have problems getting any medicines for pre existing conditions. Which would be fine if you aren't ill. However, if you are and end up in hospital would be very costly.

Looks like you really have a lot to do. The inland revenue taxing SCI's has been mentioned quite a bit over the last few years. With so many people doing this, it has not surprised me that Mr Brown has cast his eye over what could be a very luctrative revenue source to persue. I think that you need to see a good international accountant or simply ask the IR.

[WJT]

Just to respond to a comment in the original quote regarding Notaires and UK Solicitors. Our experience is that our UK based Solicitor was a complete waste of money. Even though the Notaire is a civil servant in France they seem to keep more up to date and know a damn sight better than the UK based Solicitors! By the way we went for a change of marrage regime.

[shermans]

Well, I have now got some advice - from a tax expert at a major French bank in London.  The House of Lords case was Regina v. Allen in 2001 - easily found in Yahoo !  This was a £3,000,000 tax fraud which ended up with a 7 years prison term.  So not quite the same scale as most of us are talking about, but understandable that it should have attracted the IR attention.  However, it appears from that case, that foreign properties owned by foreign companies did indeed fall under benefits in kind regulations under the old Income and Corporation Tax Act 1988.

However, that Act has since been superceded by the Income Tax (Earnings and Pensions) Act 2003.  Part 3 of Chapter 5 is the relevant part, sections 97-113.  The full text can be downloaded from www.hmso.gov.uk.

I have to say that I have now reasonably carefully studied the Act.  No matter how I wriggle, it does appear to apply to people in my situation.  I would indeed be regarded as a shadow director; I would be classified as an officer of the company which would be deemed to be an employment; the use of the house would be regarded as a benefit in kid provided as a result of my "employment".  It matters not that the company does not trade, because its primary function is to own property.  All very negative and it appears that they have thought of everything.  However, it is also fairly clear that the new Act is not directed at this sort of innocent SCI at all; it is directed at tax evaders who hide behind off-shore companies.  But despite that, I think anyone owning an SCI is probably caught and may want to take some precautions.

However, I think that the saving grace is in section 105.  Firstly, there is a distinction between properties costing less than £75,000 (including renovations) and those costing more, which of course attract a higher liability to tax.  But, any funds provided by the "employee" reduce the valuation proportionately.  That should apply in most cases, I imagine, and therefore we only need to consider section 105 which reads :

 Section 105     Cash equivalent: cost of accommodation not over £75,000
  
  (1) The cash equivalent is to be calculated under this section if the cost of providing the living accommodation does not exceed £75,000.
  
  (2) The cash equivalent is the difference between-
 
  (a) the rental value of the accommodation for the taxable period, and
  (b) any sum made good by the employee to the person at whose cost the accommodation is provided that is properly attributable to its provision.............

(5) If the rental value of the accommodation for the taxable period does not exceed any sum made good by the employee as mentioned in subsection (2)(b), the cash equivalent is nil.

I think that the Inland Revenue would find it very hard to argue that an SCI shareholder who had paid for the house out of his own pocket, and just put the house in the name of the SCI had not paid a "sum made good by the employee to the person at whose cost the accommodation is provided that is properly attributable to its provision".  I am reasonably confident that the fact that a shareholder of an SCI had put up all the capital cost, paid for all the renovations and continued to pay for all the maintenance and running costs would come within that effective exemption clause.  The word "sum" is not defined and therefore must be wide enough to include "capital".

Unless anyone knows better, then the only way we are ever going to know is if there is a test case, and I am not volunteering !  It is no good asking the IR for advice because they will never commit themselves at a local level, and asking for a former ruling just draws attention to the issue.

Despite the above, it may be wise to take further precautionary steps and to break the direct link between the SCI and the ultimate user.  It occurs to me that this could simply be achieved by the SCI letting the house at arm's length to a trustworthy independent third party for a peppercorn rent; that third party then lets the property back to the SCI shareholder for a marginally higher, but still peppercorn, rent.  By that means, the shareholder would not be receiving a benefit in kind as a result of his office / employment at all.  Very transparent and perhaps it might be challenged by the IR but I cannot imagine what leg they might have to stand on providing it was properly documented.  Again, others may have knowledge of how the IR reacts to devices like this; I have no experience.

I would be most interested in any other comments and I do hope this discussion has been worthwhile.

 

[Iceni]

Firstly I would like to say that if the IR want to tax you they will. The rules on IR35 (totally different I know but as an example) state that the contractor HAS to get and give to the IR copies of a contract that they are not party to - and if they cannot get this - tough. The IR have won the right to do this even though it goes against contract law.

Secondly I also have a disabled daughter in exactly the same position as you. I have sorted my affairs out, with my husband to suit US. We are the ones who live in our house in France. What happens to the house, contents and any money (big laugh) on the demise of both of us is of no concern to myself or John. We have 6 children between us. Having bought En Tontine three of the children will be disinherited and the other three will inherit any monies from the sale of the house. If Gordon Brown gets it - so what. My daughter is 34 and has been supported, housed and cared for by the UK gov who are paid for by the UK citizens out of tax. If I give some of that tax back it is just a drop in the ocean compared to the care and support she has had. You have gone to a lot of trouble and 'may' end up with a tax bill plus interest if you do fail to prove that this is all tax efficient. Our way ensures that we have use and can do what we want with the house while we live. We may have a tax liability when the first one dies but we recently had a conversation with our Notaire (free of course) and know what liability we could be faced with - and not a lot at that.

Do you really want to hand your property to a third party - it would have to be transparent to keep the IR happy and what happens if they decide to go on a prolonged holiday in your house that they have rights to - they may think it is worthwhile paying the tax. The only person you can truly trust is yourself and you seem to be going down a very complex route just to avoid your daughter inheriting.

Our UK solicitors (who advertise in a well known magazine) made a chocolate teapot in hell look stable.

[shermans]

It is nice to hear from somebody who understands the issues due to shared experience.  My daughter is nearly the same age, and she has indeed been also cared for wonderfully by UK taxpayers, for which we are eternally grateful.  This is a different thread, I know, but we doubt if she would be as well cared for if at all if she were living in France - the old seem to be better looked after, but there is less focus for the disabled from what we have seen.  We have looked at all sorts of options over the years, including Germany and Canada, both of which would have been open to us (my daughter is a Canadian citizen as well as UK, and we have family and have lived in Germany), but we have always concluded that, no matter how justified complaints about public services in the UK may be, when the chips are down, there is nowhere in the world to compare with the UK, especially for the disabled.

But having said that, I have to add one caveat - in the UK, you have to be prepared to fight hard for it.  In the last twenty years, we have had two very bitter and long legal disputes with our local authority to ensure our daughter has received appropriate care - she is deaf, blind and mentally handicapped, and so needs very special care and a high level of intervention.  We have won on both occasions in the courts, but not without a major struggle each time, including a debate in the H of C on her case involving the Minister.  So these things have to be put into perspective.  At present, we have absolutely no complaints, and she is lovingly cared for in a home run by a charitable organisation, but paid for of course by the state.

That is why we are so anxious to ensure that Gordon Brown does not inherit instead of her.  As her condition was congenital, we have no other children to take responsibility for her after we have gone.  We have to make financial provision to ensure that her quality of life does not suffer when there is no longer anyone around to fight her corner for her.  For obvious reasons, that can only be by private arrangement relying to a large degree on trust.  Having gone into it in great detail, we know that you cannot disinherit your children in France, and you are living in a fool's paradise, with all due respect, if you think you can disinherit some of yours.  And the tontine arrangement is only respected by the French authorities.  If one of us were to die and our daughter were to inherit a 50% share of the property, the fact that there was a tontine clause would be of no interest to Gordon Brown.  As soon as my daughter owned any property, funding for her care would be liable to be withdrawn and sadly, there are several cases where that has indeed happened.  The tontine is irrelevant in the UK; all that is considered are assets, irrespective of whether they are "liquid" or not; that is the law.

As far as the wider moral question is concerned, I would of course agree entirely with you that the Exchequer is morally justified in using my daughter's inheritance to pay for her care, if that is really what would happen.  But it would not; the disabled budget would not be increased by one penny as a result; the money would just be absorbed by the Treasury, and squandered on other worthless causes (I resist the temptation to be political).  Far better to be able to leave the proceeds of our estate in due course to the charity who actually cares for our daughter but to be able to do so, we have to disinherit her by means of the SCI.

I have to disagree with you, therefore, about the risks involved; in my opinion, those risks are not substantial.  Even if I had to pay a few hundred pounds tax each year to the UK Inland Revenue, my daughter's eventual welfare will be better served by ensuring that she benefits from several hundred thousand pounds when we die.  Taxing money on which tax has already been paid is immoral; our SCI does not trade and has no rental income or anything else.  Indeed, not only have we subscribed all the shares from taxed income, but we have paid for all the renovations costing three times the purchase price of the house paid for by the SCI, out of our own pocket, not out of the SCI.  If push came to shove, I would go all the way to the EHCR on this subject because the legislation was never intended to trap honest people like us; it was intended to pursue tax evaders who hide their commercial affairs behind off-shore companies and trusts, and the case which prompted this discussion in the first place was just one of those.

[Iceni]

Regarding the last paragraph, if you look at what happened to IR35 you may revise your view that you can take your case anywhere and win against the IR. We always ran our business in the UK in total fear of both the IR and VAT man who can commeth and take what he wants with very little recourse to you and yours, we obeyed the rules to the letter as we do over here.

My daughter and I have been down the same roads as you and have had the same struggles (even hearing this reason as to why they let her suffer with a dead festering kidney inside her for 17 months - 'we thought she would die and we would not have to pay for treatment'). She now has a 'advocat' who fights and gets her what she wants - once again paid for by the UK Gov and he has far more powers than I do.

As regards the Tontine. You are wrong. We live and I work in France, we are residents in France not the UK. On the death of one of us, those children by that partner by a previous marriage WILL be disinherited. As we have none between us, three children will lose their rights to inherit the house when their parent dies. As all children have been provided for one way or another and have had their pot this act will not lose them any sleep. On the remaining spouses death, the house will be left to the three children of that partner. Under current French law, a child cannot make a parent sell a property if they do not want to (but this may just apply to those resident in France). I could not see social services succeeding in making you sell a holiday home in another country, in the UK perhaps but in France.

Even if this had not have been the case and the children had been ours, we would still have gone down this route. According to our Notaire, no-one owns the house until one partner dies, they then own it and pay tax on any amounts over and above €75,000 approx (I would imagine that this changes each year).  My original view that I could not give two hoots who gets what on my death stands, I really could not care less as long as John has enough money and a roof over his head. We have done out bit for our children, it is now our time.