An introduction to viager sales
by Edward Coxall, March 26th, 2012
You may have heard of Jeanne Calment, the French woman, who died in 1997 at the age of 122 and who is still credited as the person with the longest recorded life span. Such longevity is generally a cause for celebration but not perhaps for her unfortunate Notaire who purchased her apartment in 1965 en viager. Selling a property en viager involves transferring ownership of the property to a third party purchaser (just like an ordinary sale and purchase) but instead of paying the full price the purchaser (known as the débirentier) pays an annual rent to the vendor (known as the crédirentier) for the duration of the vendor’s life. It can be subject to one life (viager sur une seule tête) or until the death of the survivor of a couple (viager sur deux têtes).
A viager sale enables a vendor (who in most such cases is elderly) to receive an additional income at a time when he or she may need it most and also to remain in occupation of his or her house, if they wish. For the débirentier (purchaser) it is primarily an investment which, in the event of the premature death of the crédirentier, could turn out to be a “bargain”!
The key element of a viager sale is that it is founded on a contingency, being the life expectancy of the vendor. Therefore if, for example, the vendor is extremely ill and dying the sale will be void. It is this element which gives rise to perhaps the most complicated area of viager sales which is the calculation of the rent. The basic principle is that if the vendor were to die at the average life expectancy age the purchaser should by that time have paid rent broadly equivalent to the value of the property but there are a number of different ways to calculate the rent.
Although a viager sale will often be on the condition that the property is occupied by the crédirentier it does not have to be and it may be sold with vacant possession or it may become vacant when the crédirentier is no longer able to live in the property alone. The question of whether the French property is sold vacant or occupied clearly has an impact on the calculation of the rent which will be discounted if the property is occupied.
If the property is sold occupied the contract should not only contain provisions which permit a revision of the rent if the vendor is obliged to leave the property but also provisions which set out who is responsible for the running and maintenance costs. The general rule is that the crédirentier will be responsible for minor works and the taxe d’habitation whereas the débirentier will bear the cost of major works and the taxe foncière. In many cases the contract will also contain a provision for rent increases in line with an annual cost of living index.
Another factor which can affect the amount of rent paid is whether a capital sum (bouquet) is demanded or not. Although it is not a legal requirement the vendor can request the payment of a capital sum by the purchaser at the outset. Any such sum is agreed between the parties but is deducted from the sale price and only the balance is converted into a rent.
In terms of taxation, rent is treated as income rather than capital and is subject to particular tax rules which allow for a discount of between 50% and 70% depending on the age of the vendor. For someone aged 70 or over at the time of the viager sale any rent is subject to a 70% deduction such that the vendor only declares and pays tax on 30% of the rent received.
Whilst the document prepared by a Notaire for a viager sale will look very similar to a standard sale document there are a number of other provisions which a crédirentier would be wise to ensure are included.
One such provision is that a charge is registered against the property as security for the payment of the rent. Ultimately this would entitle the vendor to sell the property at auction and recover the rent due. The charge should also secure an obligation on the débirentier to ensure that any purchaser from him or her complies with all his/her obligations in the contract.
A further provision is a clause which enables the contract (sale) to be annulled if the rent is not paid. Often such a clause may be invoked by the crédirentier if rent is unpaid for a month or more by giving notice to the purchaser of his or her intention to invoke the clause. Such clauses often provide that any bouquet and all rent paid to the date of termination are retained by the crédirentier by way of damages. The effect of such clauses is draconian in that the débirentier loses everything.
Finally, and as indicated above, a débirentier may sell the property during the lifetime of the crédirentier. The new débirentier is obliged to pay the rent on the same terms as the original débirentier and if he fails to do so the original débirentier may be called upon to pay as he will remain liable under the original sale contract.
………..And as for Ms Calment’s Notaire, he died two years before Ms Calment and he and his widow ended up paying more than twice the apartment’s value! In the case of viager sales the maxim “buyer beware” has never been more pertinent!
Boundaries and easements affecting property in France
by Edward Coxall, January 21st, 2012
When purchasing property in France the transfer deed prepared by the Notaire will very often specify that in the event of any error in the surface area of the property or the description of any easements affecting the property the purchaser has no right of recourse against the vendor, in the absence, of course, of fraud. It is important therefore that any prospective purchaser recognises the potential impact of this provision.
Boundaries
Whilst it is true that most properties will generally have visible boundaries in the form of hedges, walls, ditches etc these do not constitute a legal guarantee as to the situation of the boundary, at least not unless their position has been continuous and uncontested for at least thirty years.
Similarly, any information on the “Cadastral” plan is principally for fiscal purposes (serving as a basis for calculating the local taxes) and has no legal value as such although in the absence of any other evidence it is often taken as proof of the boundary. In reality however it is only one element of “proof” amongst others.
A further potential source can be the title deeds to the property although these rarely refer specifically to boundaries. Nowadays the description of the property often simply refers to the total surface area of the land based on the “Cadastral” plan references.
It is important therefore to consider all the possible sources and ensure that any inconsistencies are resolved prior to purchase. This would require the agreement of any neighbours, possibly with the intervention of a “geometre”. A “geometre” is a professionally qualified person who is entitled to establish boundaries.
Easements
Easements (“servitudes”) are defined by Article 637 of the Civil Code as “a charge imposed on a property for the use and utility of another property belonging to another owner.” By definition therefore they relate to land in different ownership but affect that land in different ways. A right of way for example will represent a limitation to the enjoyment of the land on which the right of way sits but will be an advantage to the land which benefits from it.
Easements can be created in one of four ways:
- By law
These are imposed by law between owners of land but can be expressly waived by those persons they are designed to benefit. Examples would be a right to light, a right for a property to claim access over a neighbouring property for the purposes of accessing the public highway where that property has no other viable access, a right to a minimum distance from the boundary for any planting and a right to allow surface water drainage.
- By agreement between neighbouring owners
Owners can agree in writing to any easement they wish with a neighbouring property owner provided it relates to the land and not the person and is not contrary to public order. Examples of such easements would be any modification of an easement imposed by law, rights of way and covenants (for example restricting the right to build).
- By prescription
Easements can be acquired by usage but only if it can be established that an easement has been used continuously and has been visible for a period of thirty years. In order to demonstrate continual usage there must not be any human intervention. Therefore although a right of way will be visible (apparent) it cannot be acquired by prescription because it cannot be exercised without human intervention. Contrast this for example with a right to light which exists as a matter of fact because of the existence of a window overlooking the neighbouring property.
- By the landowner on sale of part of the property
An owner of land can create an easement when he sells off a part of the land in circumstances where, prior to the sale, he has used the land in a way which, had the land been in different ownership, would have given rise to an easement.
On a sale of property a vendor must declare any easements which are not visible (non-apparent) or are hidden and any failure to do so enables the purchaser to either terminate the contract or seek damages, providing he can demonstrate that the easement is of such importance that he would not have purchased had he known. Clearly this provision will not apply to easements which are visible (apparent) which will be the position in most cases. It is important therefore, when inspecting a property, to be on the lookout for easements and to seek to gather as much information as possible for example from the title deeds. Whether such information is available or not before signing the “compromis de vente” it is a wise precaution to include a conditional clause relating specifically to easements in the event any easements are “discovered” between signing the “compromis de vente” and the appointed date for completion.
French Property Law- How might the changes affect you?
by Edward Coxall, January 20th, 2012
French Finance Law 2011 and proposed Wealth Tax (impot de solidarité sur la fortune (ISF)) reform – how might the changes affect you?
Like most European governments France is grappling with budget deficits and it is no surprise therefore that the principal objective of the 2011 Finance Law (which came into force on 1st January 2011) is to seek to reduce the deficit from some 152 billion Euro in 2010 to 92 billion in 2011: Still some way to go then if they wish to break a 30 year habit of voting in deficit budgets!
The reduction is to be achieved mainly by the non-replacement of 50% of retiring civil servants and by reducing the so-called “niches fiscales” (tax credits for certain investments) but there are also changes to the rates of capital gains tax.
The rate increases from 16% to 19% and the “social charges” element increases from 12.1% to 12.3%. For French residents this means an effective rate of 31.3%. For non-French residents the rate is 19% providing they are resident in another EU state as such persons are currently exempt from the “social charges” element.
Capital gains tax is essentially a tax on the difference between the purchase price and the sale price of a property although (as is also the case in theUK) there is a total exemption for the sale of your main home. In the case of second homes there is no inflation allowance but once a property has been held for 5 years a reduction of 10% of the gain is applied each year, such that after a further 10 years (15 in total) any gain is reduced to zero and there is no liability.
Unfortunately that may not be the end of the changes so far as capital gains tax is concerned. As part of a reform of the system of taxation of assets (due to become law this Summer) the Government is considering other changes to capital gains tax. One of these would be the removal of the reduction for the number of years held in the case of the social charges element, resulting in French residents being taxed at a minimum rate of 12.3% on any gain irrespective of how long the property has been held. This measure originally appeared in the draft of the 2011 Finance Law but was rejected in the Senate. It may yet see the light of day in the forthcoming reforms.
The impending reforms to the taxation of assets were outlined by President Sarkozy last November. At the time he announced that he was willing to sacrifice one of his flagship reforms (introduced in 2007), the “bouclier fiscal”, which ensures that no-one pays more than 50% of their income in tax but he also indicated the creation of a new wealth tax. He stated: “the idea of the new wealth tax is as follows: the error of the past was to tax the assets whereas it is better to tax the revenue from the assets and the capital gains from the assets. This is the thrust of the reforms that we will undertake”.
After months of speculation the final proposal was confirmed on 12th April 2011 and the reforms do not appear to be as far reaching as initially indicated. The Government is in fact proposing to retain the existing Wealth Tax system (which taxes the assets rather than the revenue from them) but is proposing to raise the level at which the tax applies from 800,000 Euro to 1,300,000 Euro and to simplify the rates applicable from 6 bands to 2. François Baroin, the Finance Minister, confirmed on Tuesday (12th April) that “the purpose of this reform is first and foremost the complete removal of the “bouclier fiscal”. Since its inception, in 2007, the economic crisis has passed. With the “bouclier fiscal” removed, it was imperative to adapt the Wealth Tax so as not to have a confiscatory tax”.
Wealth tax currently affects some 600,000 tax payers in France. If the reforms are adopted it is estimated some 500,000 taxpayers will no longer be subject to Wealth Tax. Following the reforms, Wealth Tax will be imposed on assets between 1.3M Euro and 3M Euro at 0.25% and over 3M Euro at 0.5%. As it currently stands the tax is applied in bands with the first 800,000 Euro tax free. However this will no longer be the case if the reforms are adopted and, by way of example, anyone with assets of say 1.4M Euro will be liable for Wealth Tax at 0.25% on the total value of their assets.
For French non-residents, only assets inFrance are taken into account in calculating any liability to Wealth Tax. However French tax residents are taxed on their worldwide assets.
The reforms should be presented to parliament at the beginning of June with a view to being adopted before mid-July.
Changes to French Property Law
by Edward Coxall, January 18th, 2012
Edward Coxall provides a summary of some recent changes in French property law including changes to home inspection reports and clarification on the “cooling-off” period
When selling (or letting) properties there are a number of reports that must be available to a prospective purchaser (or tenant) before they enter into a binding commitment. The law relating to two of these, the energy efficiency report (Le diagnostic de performance énergétique (DPE)) and the risk of exposure to lead report (Le constat de risque d’exposition au plomb (CREP), has been amended with effect from 1st January 2012.
The DPE is designed to provide an estimate of the energy consumption of a building and its energy efficiency by classifying it in a comparative table. It also provides an indication of the quantity of greenhouse gases emitted, based on the estimated consumption, as well as advice on how to improve the energy efficiency. The DPE has a shelf life of 10 years (for sales and lettings alike) so it is always worth hanging on to the one acquired when you purchased. Six measures were announced at the end of last year (which came into force on 1st January 2012) designed to improve and make the DPE more reliable:
- improving transparency with regard to consumers by ensuring the person carrying out the tests identifies in a formal document the data that he/she obtains direct from the householder with a view to limiting the risk of fictitious DPE reports;
- improving the reliability of the energy efficiency calculation by increasing the number of elements to take into account in order to provide a more accurate calculation;
- limiting the software available for generating DPE’s to that which has been evaluated by the Environment Agency (ADEME);
- creating an on-line database of DPE’s so as to enable the statistics to be used in forming local and national policy;
- improving the competence of the persons carrying out the tests by increasing the level of difficulty of their exams;
- establishing an on-line directory of testers and the setting up of an enquiry by the Competition, Consumption and prevention of Fraud Commission into the property testing sector.
The CREP is required where the building was constructed before 1st January 1947 and is designed to test for the presence of lead in coverings (paint etc). The report, which must not be more than 12 months old at the time of the sale, identifies the presence or not of lead and its condition. If the report finds lead in concentrations exceeding 1mg/cm² the owner must commence work without delay to remove the risk of exposure to lead. This obligation is transferred to the purchaser after the sale. On 1st January 2012 it became a requirement for all persons undertaking CREP’s to have a certificate from the manufacturer of the testing equipment stating the maximum life span of the radioactive source in the equipment beyond which the equipment cannot be used.
Finally, clarification of what constitutes notice of the contract under the SRU law (which gives every purchaser of property a 7 day “cooling-off” period starting from the day after the purchaser has received a copy of the purchase contract) has been given. It had always been thought that a copy of the contract could be handed to the purchaser by the Agent or Notaire and that would be equally as good as sending a copy by recorded delivery (with acknowledgement of receipt by the recipient). However the Supreme French Court of Appeal held in a recent decision that the practise of handing a copy of the contract to the purchaser, without any accompanying deed by which the date of delivery can be evidenced, does not comply with the requirements of the law (article L271-1 of the Code de construction et de l’habitation) and accordingly cannot start the 7 day “cooling-off” period. It would appear therefore that the practise of sending a copy of the contract by recorded delivery (with acknowledgement of receipt by the recipient) should be adopted universally as it is the only mechanism which provides certainty as to the start date of the cooling-off period.
French Tax – Should you be paying it?
by Edward Coxall, January 18th, 2012
Whether you rent out your French property informally for just a few weeks a year or on a more or less permanent basis you may be required to file a French tax return and pay French tax. Edward Coxall looks at the detail.
Non-French residents are only required to file a French tax return in respect of their French sourced income.
The key distinction for the purposes of French law and tax is whether the property is let furnished or unfurnished. If let unfurnished there are broadly two possibilities for non-residents in respect of the taxation of French rental income:
(i) Basic or common regime – If the gross amount of your rental income is less than 15,000 € you will be subject to the “micro-foncier” regime. This is the most straightforward and avoids the requirement to submit a supplementary tax declaration (Form 2044) where all expenses must be itemised. With “micro-foncier” it is only necessary to indicate the gross amount of rental income in the relevant section of the tax return (Form 2042). A deduction of 30% is made from this figure (representing notional expenses relating to the rental) and you will be taxed on the resulting figure.
(ii) Real or actual regime – If you do not fall within the category above or you wish to be imposed on a basis which takes account of the actual expenses you must submit not only the tax declaration (Form 2042) but also the supplementary tax declaration for rental receipts and expenses (Form 2044). This regime allows you to deduct the actual expenses incurred against the receipts and you are taxable on the resulting figure.
If the property is let furnished it is treated in France as a trading activity and there are two different regimes for taxing profits:
(i) “Micro BIC” or “micro-enterprise” – if the gross rental income does not exceed 32 000 € per year and the owner of the property is an individual (and not a company) the gross receipts and capital gains can be declared in your tax declaration (Form 2042 and 2042C). A deduction of 50% is made from the gross receipt (representing notional expenses relating to the rental) and you will be taxed on the resulting figure. The advantage of the Micro BIC regime is that it does not require any complicated accountancy and still offers a generous discount on rental income for tax purposes. The disadvantage is that actual expenses cannot be deducted and there is no writing down allowance. Above the figure of 32 000 € per year the real or actual regime will apply.
(ii) Real or actual regime – You can deduct all the expenses relating to the letting such as insurance, building works, Notaire’s fees, co-ownership charges and loan interest. It is also possible to carry forward any losses. The accountancy requirements are more stringent than for the Micro BIC and a full profit and loss account must be filed on Form 2031 and the net profit on Form 2042C.
Whichever system applies to you the amount of tax is calculated in accordance with the usual French rules. These apply a progressive scale and a family quotient system. For example, a married couple is treated as having two “parts” such that a joint income of 50,000 Euro is divided into two with each part then being taxed at the following rates (2011 figures):
up to 5,963 Euro : 0%
from 5,964 Euro to 11,896 Euro : 5.5%
from 11,897 Euro to 26,420 Euro : 14%
from 26,421 Euro to 70,830 Euro : 30%
above 70,830 Euro : 41%
This results in each part being taxed at a lower marginal rate than would otherwise have been the case if they had been aggregated together. However in the case of non-residents there is a proviso that the rate of tax shall not be less than 20% unless the taxpayer can justify that the average rate of French tax applied to French sourced income and all other income (i.e. income in the UK) would be lower than the rate applicable in the UK, in which event the average rate would be applied to the French sourced income (section 8, line TM of Form 2042 C). Proof of yourUKincome would also need to be included with your French tax return.
Once completed your tax return and any supporting documents should be sent to Centre des Impôts des Non résidents, 10 rue du Centre, TSA
10010,93465 NOISY LE GRAND CEDEX, FRANCE.
As a non-resident you will also be liable to local taxes but fortunately the proposal to tax second homes owned by non-residents has now been abandoned.
Is the kitchen sink included?
by Edward Coxall, January 16th, 2012
Perhaps not surprisingly it is a little known fact that objects and animals placed by an owner of property for the service and exploitation of that property are regarded under French law as immovable property and as such transfer across to a purchaser. Although a somewhat extreme example, what is, by law, included in a sale of property and what condition should a purchaser expect to find it in at completion?
The law classifies possessions into two main categories: movable and immovable. In the context of property sales land and buildings are immovable and broadly speaking everything else, such as furniture for example, is movable and excluded from any sale. French law however is very prescriptive as to what constitutes immovable and movable property.
Article 1583 of the French Civil Code provides there is a binding agreement for sale as soon as the parties are agreed on “the thing” and the price but what, in practice, does this mean? The starting point is that the property must be identified or identifiable. The postal address and a description of the property is sufficient for a binding contract to be created which is why it is always wise for a prospective purchaser to preface any offer on the condition that it is subject to a full sale contract (often called a compromis de vente) being entered into. In a sale contract a description of the property should also include a room by room description, the total surface area and any features of the property or on the land. For off-plan purchases and apartments there are other obligations imposed for determining what is being sold.
Beyond the description, there are provisions in a number of the French Codes which help determine what is or is not included in a sale. Perhaps the most helpful is Article 1615 of the Civil Code which states literally: “the obligation to deliver the thing includes its accessories and all that was designed for its perpetual use.” With the insight provided by judicial interpretation of this and other provisions, three main areas can be identified:
(a) Incidental property and rights
In addition to tangible items which are physically attached to the property certain intangible rights are also included. For example the Insurance Code provides that the vendor’s insurance policy against fire risk is transferred to the purchaser, although the purchaser can terminate it. Any obligations given by the vendor in relation to State grants to renovate a property are transmitted to the purchaser. As a general rule easements (such as rights of way affecting the land) and covenants are regarded as attached to it and transfer to a purchaser.
(b) Property immovable by its nature
Land and buildings are immovable by their nature. Fruit hanging on trees and also other crops not yet harvested are also immovable by nature and thus included in any sale!
(c) Property immovable by its purpose
Article 524 provides that “Animals and things that the owner of a tenement placed thereon for the use and working of the tenement are immovable by purpose”. This includes, for example, beehives, grape/apple presses, boilers, stills, vats and barrels. Article 524 also provides that: “All movables which the owner has attached to the tenement for permanent use in it are also immovables by purpose”. The Courts have held that “attached” must mean clearly and permanently attached to the building whereby removal would result in damage to the building and a loss of character and charm. Thus, a fitted kitchen screwed to the wall that can be removed without damage was held not to be included in the sale. Conversely, a fitted kitchen that was integrated to the property by means of tiling was included.
As a general rule, movable property (providing it is not permanently attached to the building) remains the property of the vendor. For it to be otherwise there would have to be an express provision which is why if any furniture is being purchased it must be accurately listed in the sale contract. However any movable property which is designed to be used for the purpose of the building is sufficient to render it part of the property sold. An example would be any door keys, bathroom fittings (such as toilets), fitted furniture and heating installations although there are cases where electric radiators have been held to be both immovable (a 2001 case) and movable (a 1981 case). A television aerial has been held not to be included (a 2000 case).
Not surprisingly there has been a considerable amount of litigation in this area. It is vitally important therefore that, after having visited the property, the parties agree exactly what is or is not included. “Standard” sales contracts very often modify the above provisions and not always to the benefit of a purchaser which is why it is so important to set out the agreed terms in the contract. In addition a purchaser should always inspect the property immediately before completion to ensure the vendor has complied with any obligations in the contract.
As to condition, property is generally expressed to be sold in the condition it is in at the time the sale contract is signed. This obligation is generally re-stated as at completion. Many vendors leave their property in the condition a purchaser would wish to find it in but this may not always be the case. The safest approach is to insist on a clause in the sale contract that the vendor will leave the property clean and empty of all belongings. Some vendors may be offended at such a request and it is clearly a judgement that the purchaser must make based on his viewing of the property and assessment of the vendor. If there is a considerable amount of “junk” in any area then it is always worth clarifying that this will be removed before completion, backed up by a clause in the sale contract. In addition, there should be an obligation on the vendor not to make any modifications or alterations to the property and to maintain it in the same condition between the sale contract and completion.
Finally, it is worth noting that a Notary is not there to enforce the obligations undertaken by the vendor in the sales contract. In practice, a Notary may seek to find agreement between the parties as to the manner of resolving such issues so as to enable completion to take place as planned. This may be the withholding of some of the sale proceeds but the Notary has no right to do so without the agreement of both parties, save where the sales contract specifically provides for it.
French Property Sale Success
by Edward Coxall, January 7th, 2011
We were contacted by a client in May 2010 who had recently inherited a property in Northern France and wished to sell it. Edward Coxall of Mayo Wynne Baxter’s French Property Team referred the client to Willow French Properties who contacted one of their local agents. We are pleased to hear that the sale of the property was completed last December at the full asking price within 6 months of the property being taken on.
William Pearson of Willow French Properties said, “In the current climate this would be a good result but it is even more so when you consider the property is in rural France!”
William adds: “We represent around 100 licensed agents in most regions of France, most of whom I have visited and can recommend with confidence. Our web site – www.willowfrenchproperties.com shows a small selection of the many properties available, as well as a guide to buying in France with a glossary of terms used.”
For anyone purchasing with Willow French Properties William stresses: “There is no additional cost as a result of the advice or introductions we give – clients pay the same as they would if speaking directly to the agents concerned.”
Willow French Properties can be contacted at info@willowfrenchproperties.com
All Change For French Tax Laws
by Edward Coxall, November 17th, 2010
French President, Nicolas Sarkozy, outlined in an interview on national television on Tuesday 16th November 2010 his proposals for reform of certain aspects of the French tax system, including Wealth Tax.
There are few details yet but he said that between now and Spring 2011 he wishes to harmonise German and French tax laws. In order to do this he said that he is willing to sacrifice one of his flagship reforms, the “bouclier fiscal” which ensures that no-one pays more than 50% tax. Implemented by the 2006 Finance Law it places a ceiling on direct taxes such that income tax, local taxes applicable to the main residence and wealth tax is capped at 50% of the previous years revenue of the taxpayer.
In addition he has also indicated the creation of a new wealth tax. He stated: “the idea of the new wealth tax is as follows: the error of the past was to tax the assets whereas it is better to tax the revenue from the assets and the capital gains from the assets”. “This is the thrust of the reforms that we will undertake”.
It is possible therefore that change to the capital gains tax system may also be on the way. There has been some talk in the French Press of an increase to capital gains on shares but clearly changes with regard to French property cannot be ruled out having last changed in 2004.
If you require any advice and assistance on French property and related issues please contact Edward Coxall of Mayo Wynne Baxter’s French Team for an initial discussion of your requirements.