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KEY POINTS
- Civil partnerships and their equivalents are not treated the same throughout the EU.
- A possible solution to the problem in France.
- Will there be a longer term European solution?
Ever since Peter Mayle gave up work as an advertising executive and went to live in France and to write various books on the pleasures of life across the Channel, it seems to have become an increasingly popular dream for the Englishman (or woman) with some spare cash to buy that 'little place in France'.
His best known work was A Year in Provence and Wikipedia helpfully summarises the plot (look away now if you have not read the book and don't wish to know whether 'the butler did it') as: 'Peter Mayle and his wife move to Provence, and are soon met with unexpectedly fierce weather, underground truffle dealers and unruly workers, who work around their "normalement" schedule'.
Now, not only husbands and wives are moving to France, but, since the advent of the Civil Partnerships Act 2004, same sex couples have joined the cross-Channel exodus. Unfortunately, it seems that amongst the warnings of truffle dealers and Gallic working practices, Monsieur Mayle omitted to include a warning of French tax practices.
A problem in Provence
Perhaps we should forgive Mr Mayle as the book was written before the advent of civil partnerships, but a particular problem has come to light in recent years and was highlighted a little while ago in Pinknews.co.uk.
'Fernando Soares, 54, lost his life partner of 31 years, Nigel, to a rare form of stomach cancer in March. Five years ago and long before Nigel had developed cancer they bought a small house together in the village of Ceret, near Perpignan, France. They were in a legally registered civil partnership (CP) and assumed that their partnership would be recognised in France. The French equivalent, the pacte civil de solidarité, known as the PACS, is fully recognised in Britain. However, when they went to see a notary last summer in France, because Nigel wanted to write a will, they found out that France does not recognise their CP and Mr Soares discovered he would have to pay a 60% inheritance tax on the property.'
This obviously came as a shock to the parties involved.
Rather confusingly, the fact that one country's relationships are not recognised does not mean that this applies in all circumstances. Two Dutch men who had married in the Netherlands in 2002, later moved to France and tried to file a joint tax return which, for opposite sex married couples, results in a lower tax liability.
The tax authorities' refusal to accept this was challenged and the Ministry of Finance eventually agreed that they would be treated as married for tax purposes.
Conversely, two Irish doctors, Ann Louise Gilligan and Katherine Zappone — who were legally married in Canada — claimed to be treated as a married couple in Ireland. This was refused by the High Court in the Republic and I understand that their appeal to the Supreme Court awaits a hearing.
I suppose that there are several tax aspects to this story. The first and probably most important is that civil partners obviously need to be aware of this potential problem. Secondly, is there anything that can be done to get around the problem; and thirdly are there any plans to resolve the issues politically?
Awareness
Part of the problem is probably that in these days of European union and harmony we think that what applies here (the UK) also applies there (other EU countries). We may accept that the rates of tax might be different and that certain transactions may or may not be charged to tax dependent upon the country, but generally we assume that people in the same personal circumstances will not be discriminated against.
Perhaps this is rather simplistic. Although marital status is generally recognised across the EU, there is a conflict of law regarding civil partnerships. In the same way that the UK would not recognise a bigamous marriage as it contradicts the laws of this country, civil partnerships may well contradict the laws of other countries.
The end result of this is that it was perhaps simplistic of Fernando and Nigel to assume that they would be treated the same in France as they would have been in the UK.
After all, to take perhaps an extreme example, the fact that it is legal to drive on the left hand side of the road in the UK does not mean that this rule applies universally, so why should the law on civil partnerships?
Parties such as the protagonists above are caught in something of a Catch 22 situation. If they want the recognition of civil partners in France they would have to form a PACS, but to do this means that they have to declare that they are not already married or in a civil partnership, so they would have to divorce out of the UK civil partnership with the attendant tax disadvantages in the UK.
So why is there this discrepancy? Part of the problem seems to be that CPA 2004 was quite forward-looking in its scope.
CPA 2004, s 215 treats overseas relationships as within the civil partnership definition.
'(1) Two people are to be treated as having formed a civil partnership as a result of having registered an overseas relationship if, under the relevant law, they:
(a) had capacity to enter into the relationship; and
(b) met all requirements necessary to ensure the formal validity of the relationship.'
CPA 2004, s 212(1)(a) then defines an 'overseas relationship' as 'either a specified relationship or a relationship which meets the general conditions'. Section 213 states that 'a specified relationship is a relationship which is specified for the purposes of section 212 by Schedule 20' and the Table of specified relationships lists these as currently shown in HMRC's Independent Taxation Manual at IN511J and SI 2005 No 3135.
It seems that the UK Government assumed that its recognition of other countries' legal relationships would be reciprocated, but perhaps the problem is that the wide range of relationships that are recognised by the UK Government is in advance of other countries.
Historic or cultural factors may come into play here. There might be a cultural or political reluctance to recognise same sex relationships. Italy, for example does not recognise same sex relationships at all. Alternatively there may be historic reasons.
For example, registration of same sex relationships might have echoes of persecution lists from the Second World War in certain countries. There are also differences in the acceptance of homosexual marriages between different EU countries, ranging from the Netherlands with an 82% acceptance level to opposition levels of 84% in Greece (see ILG-Europe.org).
Possible solutions
In the short term there are various possible solutions to French inheritance tax problems for same sex couples.
Guillaume Barlet has highlighted the issue and the potential liabilities that can arise when one of the partners dies. He suggests separating the different French rights existing in the property ownership and distributing it between the partners as illustrated in his Example overleaf.
As a result, one must distinguish the usufruit (the right to use an asset owned by someone else and the right to receive its income) from the nue-propriété (the remaining share), which together form the full ownership of the French property asset. Perhaps one might liken this to the UK equitable and legal interests of beneficiary and trustee.
Of course, if a company is set up by non French residents to hold the property (usually to avoid the drawbacks of a tenancy in common), shares can be transferred without French inheritance tax liability upon death.
Longer-term solutions
So in the immediate term there is not mutual international recognition of same sex partnerships and the answer seems to be a 'work around'. But what are the prospects for the longer term; for example, is there a potential case under the European Convention of Human Rights?
Article 12 of the ECHR states that 'Men and women of marriageable age have the right to marry and to found a family, according to the national laws governing the exercise of this right'.
Article 14 provides that 'the enjoyment of the rights and freedoms set forth in this Convention shall be secured without discrimination on any ground such as sex, race, colour, language, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status'.
The Treaty On European Union, Article 3(c), states that 'the Community shall include, as provided in this treaty and in accordance with the timetable set out therein … an internal market characterized by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital'.
Is the non-recognition of civil partnerships an 'obstacle to the free movement of persons'? Possibly yes. Does it also infringe Article 8 ('Citizenship Of The Union'), which states that:
'Every citizen of the Union shall have the right to move and reside freely within the territory of the Member States, subject to the limitations and conditions laid down in this Treaty and by the measures adopted to give it effect'? Possibly. However, Article 11(2) qualifies these rights:
'No restrictions shall be placed on the exercise of these rights other than such as are prescribed by law and are necessary in a democratic society in the interests of national security or public safety, for the prevention of disorder or crime, for the protection of health or morals or for the protection of the rights and freedoms of others.'
So one might argue that the effect of non-recognition is that there is restriction on the freedom of movement of individuals between countries. However, a counter-argument would be that different countries have different social rules and Article 11(2) probably provides the 'get out of jail free' card for countries that do not recognise civil partnerships in one form or another.
And on the subject of form, one should note that the pacte civil de solidarité (PACS) is available to both same sex and opposite sex couples so a man and woman can form a PACS. This might be because France was reluctant to recognise same sex relationships as a separate institution.
The PACs has rights and responsibilities, but less than that of a marriage and the parties are treated as single for some purposes, but on a par with married persons for others. Interestingly, the PACS appears to increasingly be used by opposite sex couples instead of marriage.
This difference also means that countries can draw a distinction between these relationships — the UK same sex civil partnership is obviously different from a civil relationship that allows either same or opposite sex partners.
Campaign for change
I understand that there are various efforts being made at a European parliamentary level to resolve matters and questions have been put to the French parliament for which replies are waited.
However, change and recognition seem unlikely to happen in the near future. As mentioned earlier, the problem is not confined to the UK and France and other countries' 'partnerships' that are recognised by the UK, Denmark for example, do not reciprocate.
With regards to Germany, it seems that the question of recognition will be at a federal rather than national level. So the short answer at the present time for any same sex couples considering investments in other countries is definitely to take local professional advice.
Conclusion
There is currently a draft EU Council Directive (2008/0140) 'on implementing the principle of equal treatment between persons irrespective of religion, or belief, disability, age or sexual orientation'.
The impact assessment on this states:
'The right to equal treatment is a general principle of Community law. Article 13 of the Treaty specifically allows action to combat discrimination based on sex, racial or ethnic origin, religion or belief, disability, age and sexual orientation. Yet discrimination still exists in many areas… The present EC legal framework provides much more extensive protection from discrimination on grounds of race or ethnic origin than from discrimination on grounds of religion or belief, disability, age or sexual orientation… The conclusion is that not acting is not an option: society, individuals and the economy would continue to bear the costs of discrimination. The most effective way to achieve the stated objectives would be new legislation at EU level, since relying solely on national developments may result not only in those differences in the levels of protection being left in place, but also in their widening'.
As evidenced by the list of 'specified relationships' there does seem to be a gradual move towards the recognition of same sex relationships.
However, while there are countries that still do not recognise civil partnerships in their own jurisdictions, it is probably too early to expect them to recognise these relationships from other countries, especially as they interact with their domestic laws.
In fact, I am tempted to think that there is likely to be even less sympathy amongst the domestic population when the subject under discussion is whether non-residents or non-domiciles are trying to avoid a tax liability.
I see that Peter Mayle was awarded the rank of Chevalier de la Légion d'Honneur (Knight of the French Legion of Honor) in 2002. I don't suppose that it was for services to the French tax authorities?
Example
Anna and Megara, both in their 60s, live in the UK and wish to purchase a holiday home in France worth around €65,000. The compromis had not yet been signed.
They have both been married in the past, Anna is a widow and Megara is now divorced. Anna has three adult children. Anna and Megara have lived together for over 20 years and will soon be entering a civil partnership.
They have made wills in England leaving everything to one another and would like to find a way to leave the property in France to one another without incurring too much inheritance tax, and on the deaths of them both pass the property on to Anna's children.
The principles of English and French private international law provide that the inheritance to property, as an immovable asset, (immeuble), is governed by the law of the place where it is situated.
Under French law, children must be entitled to a share of the parent's estate (réserve légale). This means that if Anna dies, then a share of her French estate will automatically pass to her children. Alternatively, if Megara dies she would still be free to dispose of the remaining share pursuant to her will.
In the absence of any estate planning measures and assuming that in any case the property would be transferred to the surviving partner then to the children, this would be the outcome:
- If Megara dies first, her share of the property would be taxed at 60% on transfer to Anna. Then on Anna's death, however, the children should receive the property free of tax.
- If Anna dies first, her share of the property would be taxed at 60% on transfer to Megara. On Megara's death, the children would also be taxed at 60% on transfer of the property to them.
Inheritance tax is usually paid by the beneficiaries of the estate and is charged in a series of bands. However, various allowances exist and each of Anna's children can be granted an allowance free of tax, which is similar to the UK inheritance tax threshold.
Since 22 August 2007, a surviving spouse or a surviving person conjoined by a French civil partnership (PACS) is not liable for inheritance tax.
However, a civil partnership made in the UK is not recognised by French law and a surviving partner in this case will be considered as a third person and liable to pay 60% of inheritance tax on the value of the legacy after an allowance of €1,596 free of tax.
In addition, a lifetime gift or a legacy of the French asset from Megara to Anna's children would also incur a 60% gift/inheritance tax after an allowance of €1,596 free of tax.
Usufruit and nue-propriété
In France there are two separate rights in ownership:
- The usufruit is the right to use the asset owned by someone else and the right to receive its income.
- The remaining share is the nue-propriété.
The combination of these two rights is the full ownership of the asset. The nue-propriété can be transferred to Anna's children upon her death and inheritance tax would probably not be paid since the allowance would cover the value of the share of the property.
Upon the usufruit holder's death (usufruitier), the usufruit is automatically rejoining free of tax the nue-propriété to form the full ownership again.
Therefore, in order to eventually divide the French assets between Anna's children, Anna would need to hold the nue-propriété of the property and Megara would need to hold the usufruit so the nue-propriété can be received by each child free of tax. Depending upon which partner died first, different routes of transfer would take place.
- If Megara dies first, her usufruit would automatically rejoin free of tax Anna's nue-propriété to form the full ownership again. Anna could then decide to transfer the property to her children during her lifetime or upon death.
- If Anna dies first, her nue-propriété could be transferred to her children with very little or no inheritance tax to be paid. On Megara's death, her usufruit would automatically rejoin free of tax the children's nue-propriété.
Clearly, if Anna dies first, this solution would involve a shared ownership between Megara and Anna's children and important decisions would have to be taken with their agreement (e.g. major building work on the property or a decision to sell).
Thanks to this estate planning, the surviving partner or the children have little chance of paying French inheritance tax.
Barlets is headed by Guillaume Barlet, a French lawyer specialising in French Property Law and Wealth Management issues. Guillaume can be contacted by e-mail at g.barlet@barlets.co.uk or by telephone on 07 515 947 617.
