A non-trading property company (société civile immobilière - SCI) is an excellent way of managing and transferring assets.
The main purpose of this non-trading company, which has at least two partners, is to rent out the property it owns. SCIs may carry out purchase and sale transactions, but only exceptionally, to avoid being reclassified as a commercial company by the tax authorities.
We will look here only at SCIs set up on a non-professional basis. In other words, individuals who set up an SCI to manage their personal assets, without opting for corporation tax.
Although non-trading property companies make it easier to manage and transfer assets, their tax benefits are virtually non-existent, apart from very specific exceptions. In the discussion that follows, we will look at certain aspects of non-trading property companies and certain legal arrangements, and we will note the relative lack of tax benefits as the study progresses.
The following topics will be covered:
- SCIs for managing and transferring property assets
- non-trading property companies and ownership stripping
- SCI and tontines
- SCI and property income
- SCI and property capital gains tax
- SCI for preferential or disinherited ownership
- SCI to circumvent a preference pact
SCIs for managing and passing on assets
Non-trading property companies (sociétés civiles immobilières) are very attractive for people who want to give one or more properties to their children (or others) on an equal basis, while retaining management.
For example, a couple wish to give their two children the property they own, namely a house in Tresserve valued at €700,000, and a flat in Aix les Bains, valued at €150,000. To distribute these assets fairly, the use of an SCI will make things much easier, especially when the assets are of very different values.
By setting up a non-trading property company (société civile immobilière) and contributing the house and flat, the parents will be able to give their children equal portions of the property, while avoiding the risk of creating a joint ownership arrangement. Each of the two children will be allocated an equal number of shares. What's more, as in this case, if the parents want to pass on to their children assets that exceed the tax allowances, setting up an SCI facilitates a gradual transfer by spreading the gifts over time. In this way, every six years (the period after which the tax allowances for gratuitous transfers are regenerated) the parents can give shares in the company, which is easier than giving undivided shares in property. Since the TEPA Act of 21 August 2007, there has been less interest, except for large estates.
What's more, the SCI makes it easy to separate capital and powers. The parents, who are the managers of the SCI, will have more or less extensive powers depending on the Articles of Association, and may be remunerated for their role, while the children will own the property in the form of shares. This separation of capital and powers is all the more attractive in the event of ownership dismemberment.
SCI and ownership stripping
In a ruling handed down on 3 October 2006, the French Supreme Court (Cour de Cassation) validated a practice that had been considered for some time as constituting an abuse of rights. This practice consisted of transferring bare ownership of a property to a SCI and then making a gift of full ownership of the shares in the same SCI.
For example, parents who own a house in Aix les Bains contribute it to a non-trading property company (SCI), reserving theusufruct. This non-trading property company, which becomes the owner of the bare ownership of the house, is managed by the parents, who will then donate the full ownership of the shares to their children.
With this legal arrangement, transfer tax is paid on the economic value of the house, not on its tax value. This is because the scale set out in article 669 of the General Tax Code applies to gratuitous transfers. It therefore does not apply to contributions made to a non-trading property company, which are transactions for valuable consideration.
The economic value takes into account the exact age of the usufructuary, as well as the net income likely to benefit the usufructuary (in the case of the house, this will correspond to the rental income). By taking into account the net yield of the house, the value of the usufruct is increased compared with that estimated according to the tax scale in article 669 of the General Tax Code. The valuation thus made by the parties is enforceable against the tax authorities, provided that there has been no undervaluation, in which case the tax authorities may revalue the house.
The transfer tax on the gift of the shares (which represent the bare ownership of the house) is therefore levied on the economic value of the property. If the parents had given the bare ownership of their house directly to their children, the tax scale set out in article 669 of the CGI, which is compulsory in this case, would have taxed the transfer more heavily.
This can be an attractive option for people with substantial assets.
It should be noted that the SCI must not be fictitious.
What's more, the tax aspect of the legal arrangement we have just briefly outlined should not be exclusive of civil reasons, of which there are many:
Parents often donate bare ownership of a property to their children. This dismemberment allows the donors to retain the use of the property and any income from letting it throughout their lives (if the usufruct is for life). In this way, they retain the management and benefits of the property while passing it on to their children. On their death, the children recover full ownership without paying any tax.
There are additional advantages to using an SCI, as in our example. The parents, who are the managers of the non-trading property company that holds the bare ownership of the house, will have more comprehensive management. They will not have to depend on their children to carry out the major repairs that are the responsibility of the bare owners. The SCI allows shares to be given in lieu of one or more properties, which is easier to divide up in an equitable manner. The non-trading property company also avoids the risks of joint ownership (deadlock between joint owners, unilateral desire to leave joint ownership, etc.).
Finally, if the parents had given their house directly in bare ownership to their children, the latter would have had to give their consent before selling the house at a later date. With the legal structure of a SCI and the appropriate articles of association, it will be easier for the parents to sell the house outright.
SCI and tontine
This is a very special case in which the creation of a SCI allows for tax optimisation. The tontine or clause d'accroissement allows the surviving purchaser to be the sole owner of the property. Predecessors are deemed never to have had any rights.
Subject to certain exceptions, under the terms of the first paragraph of article 754 A of the General Tax Code, property acquired by virtue of a clause inserted into a joint purchase contract under which the share of the first deceased will revert to the survivors in such a way that the last living person will be considered as the sole owner of all the property is, for tax purposes, deemed to have been transferred free of charge to each of the beneficiaries of the increase.
Transfer tax on the property may be payable if a number of restrictive conditions are met:
- the property must be the main residence ;
- the property must have been acquired by two people;
- And last but not least, the property must have a market value of less than €76,000. If the tontine agreement relates to a flat worth €100,000, tax will be payable on €100,000 rather than €24,000 (€100,000 - €76,000).
This exception is therefore very rare in practice.
However, a société civile immobilière (non-trading property company) can avoid the application of tax on gratuitous transfers. This is because the article imposing this tax only applies to deeds of acquisition, and not when the increase clause is included in the articles of association of a non-trading property company.
In practical terms, two people living together form an SCI to buy a house in Aix les Bains. The articles of association of the non-trading property company include a clause granting the shares of the deceased to the surviving partner. In this way, the death of the first cohabitee will not incur transfer duties, which are 60% for cohabitees! However, to be valid, the tontine arrangement must involve a genuine contingency and must not be classed as an indirect gift. The tontine also allows the property to be removed from the estate and therefore from any reserves of the heirs.
It should be noted that since the TEPA Act of 21 August 2007, the surviving spouse and surviving partner in a civil solidarity pact are exempt from transfer duties. In these two cases, there is no longer any tax advantage to using a SCI that includes a tontine clause.
It is also important to remember the major disadvantage of the tontine: without the unanimous agreement of the purchasers, it is impossible to exit the tontine system (unlike a joint ownership arrangement). This extremely important aspect must be taken into account when concluding a tontine agreement.
SCI and property income (SCI that has not opted for corporation tax)
There is no difference between owning a property directly or through an SCI. Property income from a flat or house owned by an SCI is taxed in the hands of the partners as if they were the direct owners of the property, regardless of whether the profits are distributed to the partners or placed in reserve. The same applies to the allocation and carry forward of property losses.
SCI and capital gains tax on property
The sale of a property held by a non-trading property company (société civile immobilière) subject to income tax does not differ from the rules applicable to private individuals. However, there is a difference in terms of the period during which the property must be held if the shares are sold. The sale of shares held by the SCI for more than fifteen years results in exemption from capital gains tax, even if the property in question was acquired recently.
Capital gains tax may be waived for members of an SCI who occupy the property owned by the company as their principal residence. In this case, only the partner's shares will be exempt.
Non-trading property companies to privilege or disinherit
Two people who live together buy a house in Aix les Bains through a société civile immobilière (non-trading property company) that they have set up between them. Prior to this purchase, the couple split up and exchanged shares so that each owned half the shares in usufruct and the other half in bare ownership. For example, Mr will own shares numbered 1 to 500 in bare ownership and shares numbered 501 to 1000 in beneficial ownership, and vice versa for his partner. In this way, on the death of the first partner, the surviving partner, who is not the presumptive heir, will retain full ownership of half the shares and usufruct of the other half. The articles of association, drafted in such a way that the voting rights belong to the shares in full ownership or in usufruct, favour the cohabitee's position in the company over that of the presumptive heirs of the deceased. This arrangement can be used by couples with children from a previous marriage. In this way, the partner is assured of the use of the property that forms the couple's home.
SCIs are also useful for life annuity sales. Here, the creation of a non-trading property company overrides the presumption that the sale is free of charge under article 918 of the French Civil Code. A person can sell his or her house in Aix les Bains on a life annuity basis to a SCI in which one of his or her children is a partner, without this act being classed as a gift, which would give rise to rights for the co-heirs, in particular to assert their reserve. Life annuities must not disguise a gift: an annuity and a contingency must genuinely exist. In addition, as with all legal arrangements involving a SCI, the partners must not neglect the management of the company, particularly in terms of its accounts or mandatory meetings.
Finally, as mentioned above, the creation of a SCI with an accretion clause (tontine) may make it possible to exonerate.
SCI (non-trading property company) to circumvent a preference pact
For example, a non-trading property company (société civile immobilière) owns commercial premises in Aix les Bains, which are leased to a retailer who has a preferential right to the property in the event of a sale. To prevent the retailer from exercising his preferential right over the premises, the SCI could sell the shares instead of the property. In this case, the SCI would retain ownership of the premises, with only the partners changing. The beneficiary of the preference agreement will not have to be called to exercise his right.