The Importance of the Tontine Clause in the Purchase of French Properties
When two or more people buy property in France, they must consider how to purchase it in a legal sense for inheritance purposes. There are several options available:
- Joint ownership
- Creation of a civil partnership
- Changing the matrimonial regime from a separation of ownership to a community of property
- Dismemberment of the property, in which one person buys the life interest to use the property, while the other buyer owns the property itself
The final option is the tontine acquisition method. In the 1990s and early 2000s, this was a common method for British people to acquire French property, as it enabled them to overcome the very restrictive inheritance system until 2015, and since November 2021, when the rules were again changed.
What is the principle of tontine?
Tontine allows several people to buy a property together with the provision that upon the death of one of them, the property ownership defers to the survivor(s). While tontine purchases are usually made by two people, they can be made by more: and as each person dies, the property defaults to the survivors, until it becomes the exclusive property of the last survivor.
The final survivor is considered to be the sole owner of the property from the time of purchase, and the predeceased lose any rights. When the final survivor becomes the sole owner, there is no official transfer of the estate to them, because their title is on the original deed of purchase. This mechanism prevents the tontine clause from being used after completion of a property.
The relevance of the buyers' status at the time of the tontine purchase
Cohabitants / partners in a civil union
The tontine ensures that the property passes to the survivor: without it, the status of cohabitants has no relevance and provides no rights over the estate. Put differently, tontine purchases by cohabitants ensure the protection of the survivor, whereas the status of cohabitant or even a partner in a civil partnership provides no advantage for inheritance purposes without it.
In order for the transaction not to be requalified as an indirect or disguised gift, the two purchasers must have comparable chances of life expectancy, and both must make a similar contribution to the payment of the price.
Between spouses
A tontine purchase cannot be made by spouses who are married under the community of property regime (regime de la communaute de biens reduite aux acquets) with common funds. The property acquired is then necessarily considered to be common.
The transaction can be carried out by spouses married under the regime of separation of ownership, using personal funds, or by spouses married under the community of property regime, but only if both parties use their own funds and comply with the formalities of use or reinvestment (clause d'emploi ou remploi).
Care should always be taken to ensure that the spouses share the expectation of gain or risk of loss in a balanced way, and that both similarly contribute to the purchase price.
Between siblings
Originally, tontine purchases were often made between childless siblings who shared a home. This ensured that the surviving sibling would be able to keep his or her living environment under favourable conditions.
Before death
There is no indivision between purchasers: only one will be deemed to be the owner of the entire property from completion. As such, it is not possible to request the sharing of the property by using the provision of the articles 815 and follow of the civil code. There is then a risk of deadlock if one of the tontine holders wishes to put an end to this situation and the other is opposed to it.
The property can always be freely sold with the unanimous consent of the tontine holders. The property cannot be seized by the creditors of one of the tontine holders. This is because the owner of the property is not determined until the situation is settled.
When reselling the tontine property
The sale of the tontine property may be carried out with the consent of all owners: it doesn't require the prior regularisation of a deed recording the waiver of the tontine. The price may be divided between the purchasers in proportion to their contribution to the payment of the purchase price.
Tax regime of the tontine acquisition
In principle, the share of the rights accruing to the survivor as a result of a tontine clause inserted in a joint purchase contract is subject to inheritance tax according to the standard system, i.e. according to the relationship between the deceased and the survivor. (CGI art. 754 A).
Between cohabitants, the tax rate is surprising: inheritance tax is 60% after a minor allowance of €1,594 (CGI art. 788, IV). On the other hand, between spouses or between civil union partners who are exempt from inheritance tax, the transfer of property will not be taxed (CGI art. 796-0 bis).
Exceptions of note
? As an exception, the share acquired by the survivor under a tontine clause is not subject to inheritance tax, but it is subject to stamp duty when the following conditions are met (CGI art. 754 A, para. 2):the property is the purchasers' main residence
? It is exempt if its value is less than €76,000 when the first owner dies
Both conditions were introduced with the tontine, when inheritance tax applied between spouses and the value of properties was not as high as it is now. Given the property market and the low threshold, especially for a principal residence, these provisions are rarely applicable now.
The tontine company
As mentioned above, the tontine can be acquired by cohabitants, civil partners or spouses, and different tax rules apply. Between spouses, the exemption is automatic, but between civil partnerships we recommend that you create a will to benefit from the tax exemption on the entire estate.
Questions arise regarding cohabitants who are subject to the 60% rate, or brothers and sisters to the 45% rate.
For cohabitants, it may be advisable to create a non-trading property company for several reasons:
? The hybrid system of joint ownership may not adapt to their situation
? Some people are against marriage or PACS
In such cases, a company can allow the organisation of the regime the enjoyment of the property, the administration during the cohabitation and the modalities of any separation.
? From a tax point of view, including the tontine clause in the company's articles of association prevents the transfer of property resulting from death from being subject to inheritance tax at the rate of 60%.
o In contrast to a tontine clause in a joint purchase agreement, a tontine clause in a company's articles of association is only subject to the 5% sales tax for a company, such as SCI, used as a holding company.
Within this structure, we recommend that the shareholders keep a couple of shares outside the tontine clause. Since the introduction of the European succession law, notaires are reluctant to use the tontine to the benefit of the professio juris, which enables a person to choose the law of their nationality to organise the settlement of his estate and distribution of assets.
However, the recent change in French succession law has disrupted our new vision of succession law and there is no doubt that the tontine clause will still have a bright future ahead of any legislation that can be implemented in France.
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French and UK laws differ when buying property. For this reason, it's important you work with an expert who is experienced in both French and UK-laws. Get in touch with us today to find out how we can help.
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