Taxing non-doms isn’t just a terrible idea, but it’s also one that could kill the proverbial goose. Very bad for the gander, says Caroline Garnham.
Sipping a vin chaud after an excellent days skiing in Val d’Isère, watching the sun slip out of a perfect blue ski behind a glimmering white mountain, I reflected on the day. Skiing with my children, now fifteen and twelve, was a great family holiday. Maybe I should buy a chalet in France so that we could enjoy days like this more often.
I shared my reflections with my children. ‘Don’t be silly Mummy,’ came the reply from my fifteen-year-old son. How many times have you told us that investing in a property abroad is sheer madness’. I snapped out of my reverie. Of course he was right. It is madness, for many, many reasons. I would go to France, more often than I really wanted to, feel obliged to entertain, worry about repairs, moan about the currency exposure and would have invested too much of my capital in property.
Even if I cared little for these practical and financial issues, buying a chalet in France can cause serious concerns, if I were to die while owning it.
Considering death before buying a French retreat may be as unromantic as a pre-nuptial before a wedding, but serious consideration needs to be given to structuring it properly before buying any property abroad.
In England a testator has testamentary freedom; in France there is a forced heirship regime where heirs are guaranteed fixed percentages of the estate on the testators’ death, and the testator has only a limited freedom of disposal of assets on death.
An heir under French law inherits outright. If the heir is a child, their inheritance will be an interest in the French property as from the moment of death. However, if at that time the child is resident in the UK, it is UK property law that determines the rules with regard to dealing with a child’s rights.
Under Section 6 of the Law of Property Act 1925, a child cannot have an interest in land.
Children therefore could take the house under French law, but cannot sell, let or mortgage it. The UK guardians, parents, executors or trustees can do little to help.
In order to deal with their inheritance it would be necessary to go to Court under, either the Court’s inherent jurisdiction, or under section 8 of the Children’s Act. The order from the English Court will then need to be enforced in France, or you need to obtain an order in France from the Juge des Tutelles.
Until 2002, a spouse had no right to the testator’s estate. This has now been changed. A spouse has now been elevated to a similar position to a child of the deceased, but with a minimum right limited to one-quarter share of the estate. Where there are children involved, and they are from the marriage, then the surviving spouse can opt for a usufruct over the deceased’s estate. A usufruct is not a life interest but it does have the effect of providing for the spouse for her life and thereafter the children. This is not available for children of divorced parents.
Under French law, the division of assets between a husband and wife is governed by community of property rules. There are several different matrimonial property regimes, which are chosen on marriage. The effect of the change in law in 2002 makes the choice of a matrimonial regime even more important. Couples married under English law are treated as if they had been married under the French ‘separation of assets’ regime which treats each couple as owning their own assets. Most French couples, however, are married under the ‘community of property regime’, which can include a special clause attributing any community property in France to the survivor absolutely. If not, the usufruct arises for the life of the survivor. In this way the children’s rights are postponed until the death of the survivor. An alternative which used to be favoured was the tontine clause in a will at the time of purchase.
Under a tontine, the surviving spouse or joint owner is deemed to have owned all the property from the beginning. The surviving spouse takes all. There are however restrictions on sale while both owners are alive, and no sale is permissible unless both consent.
An English-resident couple who are already married and who wish to take advantage of the community regime of marriage can do so by electing under the Hague Convention No.25.
This is not always an ideal situation. For example, if A has children by a first marriage and B also has children from a previous marriage, then if A dies before B, on B’s death the house goes to B’s children, and not to A’s children which may or may not have been what A and B may have wanted.
A simple solution to these difficult succession issues, and one favoured for many years, was to interpose a company between the non-French resident and the property so that the inheritance is of shares in a company, rather than property in France, to which English law rather than French law applies. It was recently feared that this arrangement would result in an income tax charge in the UK, but this fear was removed in this year’s Budget.
I smiled at my children. With all these complex problems, maybe it would be better to invest my money in a diversified portfolio and rent a chalet wherever and whenever I want.