From 1 November 2021, a new French law has come into effect which could well upend the estate planning of many individuals with assets located in France.
If you own assets in France, you may have put wills in place to avoid local ‘forced heirship’ rules from applying, so as to allow your property to pass to your spouse. This may have involved making an election in your Will to have the law of your nationality apply to your estate. If so, or if you own assets in France and are unsure about your current arrangements, you should review your planning now if you or any of your children is (or is likely to become) an EU national or habitually resident in an EU state.
The changes however will not affect you if you and your children are habitually resident in the UK and are UK nationals (without holding dual nationality with an EU member state) and are likely to remain so.
Under English law, individuals are broadly free to deal with their property as they wish on death.
By contrast, in France (in common with many other civil law jurisdictions), there is the concept of ‘forced heirship’, meaning that a fixed share of the testator’s assets will pass to their spouse/children, whether or not that is the testator’s wish.
This changed in 2015 when the EU Succession Regulation came into force. The Regulation means that testators can choose the law of their own nationality to govern their succession. Thus an English testator can make an election in the Will for English law to apply to the succession, and so (for example) leave a French property entirely to a spouse, securing exemption from UK inheritance tax. This would mean that France’s forced heirship rules could not apply.
The new French law
However, the new French law may prevent the election from working in the way set out above. It will mean that, despite an election in the Will, if the testator or any of his or her children is an EU national or is habitually resident in any EU state at the date of the testator’s death, and the testator’s law of nationality does not contain a forced heirship mechanism for children, then the children will be entitled to claim compensation in respect of a portion of the French assets.
Additionally, French notaries will be under an obligation before distributing the estate to inform those forced heirs whose rights may be affected by the provisions of the testator’s Will of their entitlement under the new law.
By way of short example, take the position of a UK national with two children who dies while habitually resident in France, leaving worldwide assets of £2m, of which £750,000 relates to a French property. The new law means the children would together be entitled to £500,000 of the value of the French property (because the ‘reserved portion’ of the estate of a testator with two children is two thirds). If the children choose not to upset the estate planning by exercising their right in France to the reserved portion (a choice that can only be made by adult children), their failure to exercise that right may itself be chargeable to UK inheritance tax.
This new law conflicts not only with the EU Succession Regulation, but also with France’s Constitution. The French Supreme Court has ruled that it is unconstitutional to apply French forced heirship rights where the proper law applicable to the succession of a deceased’s estate was not French law. It seems, therefore, that it will only be a matter of time until the new law is challenged in the French Courts. Until then, however, it is unclear whether any elections for national law in Wills of French property will be effective.
Some possible solutions?
There are number of partial solutions to the problems posed by the new French law.
For testators wanting to claim inheritance tax relief on gifts to spouses, it may be advisable to enter into a French marriage contract in relation only to French property, which would allow the surviving spouse to inherit automatically by survivorship. There is a tax cost to putting this arrangement in place and it only has effect on the death of the first spouse. The marriage contract can be entered into at any time before the death of the first spouse.
For those who are yet to purchase their French property, there would be the option of purchasing it ‘en tontine’, which is similar to the English law concept of joint ownership, meaning that on the death of one spouse or partner the whole of the property would pass to the other by survivorship.
If the testator wishes to retain control over who inherits his or her property, he or she might consider holding it in a société civile immobilère (a type of property holding vehicle, also known as an ‘SCI’), which can be effective to avoid the forced heirship rules by converting the asset to moveable property. As the new law is likely to affect even French moveable property, a Luxembourg or Monegasque SCI might be an option to consider.
Many testators have used a choice of law provision in their Will to take advantage of the flexibility provided by the EU Succession Regulation. Others may have made such an election in their Wills without being fully aware of it or its purpose. Given how the new French law threatens to undermine the effectiveness of such an election, a review of the planning should be undertaken.
Planning for cross-border estates is complex and you should seek advice before making any changes to your Will. We regularly advise clients with complicated international estates on how to structure their assets in order to pass them on tax efficiently and in the manner they wish.