Inheritance and succession explained
Inheritance and succession are always a dilemma for a Lawyer when you deal with your client’s assets. Owning investments in England or elsewhere will oblige you to reconsider your client’s estate planning and structure of ownership. From an English law point of view, estate planning can be assisted by using trusts. Unfortunately, the French system has not yet recognised the trust (2007 legislation introduced fiduciary responsibility for commercial companies, but not for individuals).
Nevertheless, French law is crammed with alternative vehicles, notably the société civile immobilière. This company structure is a useful vehicle for estate planning purposes and anticipating the transfer of assets to children.
If you look at the two legal institutions, you’ll find the trust and SCI have similarities. Both structures receive assets from individuals (the parents) to the benefit of beneficiaries (usually the children) and are managed by trustees or directors (the parents).
For those unfamiliar with the SCI, the French company is a quasi-French partnership that has shares. Its articles of association set out the company’s objectives, management etc. An SCI that has the sole objective to purchase and manage a French property for the benefit of its members is fiscally transparent and therefore not usually liable for French corporation tax. Instead, the members of the SCI are treated for tax purposes (income, inheritance and wealth tax) as individual taxpayers, personally owning a share of the property. If a French property was purchased by an SCI in which shareholders were individuals then, from a tax point of view, they will be in the same position as if they own the property in their sole name.
The SCI is well known by notaires for inheritance purposes and the transfer of personal or professional real estate to the children. It is an effective tool for asset management. It protects children and may provide them with an income if the SCI uses its assets for rental purposes. The articles of the SCI may stipulate that the children can receive dividends that pay a larger percentage of the income than the percentage share of the capital share.
Management consists of one or several directors who run the company in accordance with its objectives. Parents who act as directors benefit from particular advantages to retain control if they are named as directors for an unlimited period, assuring them with voting rights to keep the majority in any decision. The SCI only deals with civil activities such as real estate matters and cannot execute corporate matters, otherwise the company would be considered as subject to corporate tax.
The main characteristic of the SCI is its capacity to transfer real estate to children or any beneficiary and minimise French inheritance tax, if it is used and set up upon each individual circumstance. It is easier to give shares of a company rather than a fraction of an immoveable asset i.e. property. Under French law it is possible to gift shares every six years and benefit from the relevant inheritance tax-free allowance. Other scenarios may also attract the use of an SCI for estate-planning purposes. Take the example of a non-married couple. The transfer of a property to each other can trigger 60% inheritance tax. There is a possibility to mitigate the tax with the setting up of a PACS agreement, but under several conditions. The use of a SCI can resolve this problem notably if the statutes include a clause tontine to transfer the majority of the shares to the survivor. There are many uses for an SCI for commercial or civil purposes but each SCI must be adapted to the need of each family hence professional advice should be sought. The setting up of the SCI, like any other companies, can have disadvantages regarding the management of it and the administrative formalities. For instance The SCI must summon a general assembly with all the shareholders each year to approve the accounts.
Further to this general assembly, a report must be established and signed by the director. This document indicates what decisions has been taken.
Moreover, a shareholder can request the director, by recorded letter, to summon a special general assembly or consult with the shareholders in writing concerning a particular question.
The rules of summoning and functioning of the assembly are stipulated in the statutes of the Company.
However, certain decisions need to obtain the unanimity of the shareholders, eg.:
– the modification of the statutes (except when there is a clause indicating that the majority is sufficient),
– the increase of the shareholders’ obligations,
– the transfer of the registered office of the Company in another country.
They are indefinitely responsible for the Company’s debts on their personal state in proportion to their share in the capital.
The creditors can turn against the shareholders for the payment after having requested the Company to reimburse the debts.
– Directors
His responsibility can be a civil or criminal responsibility.
Moreover, the director can be responsible in the case of bankruptcy of the Company.
The director is responsible towards third parties and the shareholders.
His personal responsibility may become relevant if he acts outside of his legal powers
Written by Christophe Dutertre, Lawyer at Blake Lapthorn
Tel: +44 (0)23 9253 0379
[email protected]