What is an SCI in France 鈥� and what are the tax and inheritance risks?
Mistakes made in setting up the structure may cause issues
SCI allows several parties to hold shares rather than the property just being in legal co-ownership
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A Soci茅t茅 Civile Immobili猫re (SCI) is a special kind of French company set up to buy and manage real estate between its shareholders 鈥� often within families.
Popular since reforms in the 1970s, some 76,000 were created last year. They can be useful tools, but have their pros and cons.
Recent discussions among notaires have underlined both their attractions and potential traps, especially where 诲茅尘别尘产谤别尘别苍迟 is involved, ie. a splitting of the usufruit right to use the property and the 苍耻别-辫谤辞辫谤颈茅迟茅 residual ownership.
An SCI allows several parties to hold shares rather than the property just being in legal co-ownership. This can simplify management and inheritance.
It may be used, for example, for the purchase of a second home, or in some cases to invest in buy-to-let property.
Sometimes parents keep the usufruit (use and income) of the shares while gifting the residual ownership of the shares to children.
Due to gift tax allowances (鈧�100,000 per child every 15 years), families can thus transfer value efficiently. On the death of the usufruit holders the residual owners consolidate full ownership without extra inheritance tax on their shares.
An SCI can also centralise decision-making, with parents, for example, designated as its managers.
One problem, however, is that choices made in setting up the structure may cause issues if the parents decide they would like to use the property differently later on.
Notaires say it may also not be ideal if you want to regularly buy and sell your properties, or do occasional seasonal holiday rental.
A classic problem is where parents set up shares for their children in 苍耻别-辫谤辞辫谤颈茅迟茅 but later find that, due to financial needs or retirement plans, they would like to sell up.
If they are the managers, the SCI鈥檚 statutes may allow this, but notaires say there is a legal grey area over who gets the sale money.
This is often not an issue where everyone gets along well, but there can be problems, for example, if a child predeceases their parents and a dispute arises with the child鈥檚 own heirs.
There can also be tax consequences 鈥� including fines 鈥� if the money goes to the usufruitiers, but the tax office considers this a taxable gift to them by the 苍耻别-辫谤辞辫谤颈茅迟补颈谤别蝉.
To reduce risks, notaires are advocating for a legal change to make so-called quasi-usufruit the default for SCI shares.
Under this regime, the usufruit holder may freely use the proceeds (including from a sale), but owes an equivalent value to the 苍耻别-辫谤辞辫谤颈茅迟补颈谤e once the 诲茅尘别尘产谤别尘别苍迟 arrangement ends, typically on death as a deductible debt against inheritance tax on the estate.
Thus, the parents could benefit from cash flow, while not harming their children鈥檚 rights in the long term.
Notaires say this regime could also help the parties to clarify who benefits from incomes from occasional rental of a property.
