French property ownership law

Tom and Jill, who were unmarried, bought a property in France in 1989 at a price of 250,000 francs (about €38,112).

In 1997, Jill said to Tom: "It hasn’t worked out. I don’t want to live with you any more". So Tom paid Jill £7,300 for her share in the property and agreed to take over the mortgage, which had initially been for £18,000. He had been paying all of the monthly repayments anyway. It was a handshake deal. There was no paperwork at all. Why spend money on a notaire? Life is too short. They had agreed on it. That was that. Jill moved out. Another 11 years passed by and now it is 2008. Tom wants to sell the property. The price is now €90,000. Of course, more than 15 years have gone by since the property was bought in 1989, so no French capital gains tax is payable. So far so good.

But there is a problem: the property cannot be sold without Jill signing a power of attorney authorising the sale of her halfinterest which she holds under the deed of 1989. Tom has no idea where Jill has gone. After spending a great deal of time and money on a detective agency, Tom in the end finds Jill, now located somewhere near Newcastle.

A power of attorney is drawn up, whereby Jill acknowledges having received one half of the sale price, i.e. €45,000. This is because if she only acknowledges having received £7,300 i.e. roughly €10,500, gifts tax will have to be paid in France at 60% of the balance, i.e. on €34,500 – so in that case, bang goes €20,700 to the French tax man before the notaire has been paid for his services at all.

Jill refuses to sign a power of attorney acknowledging that she has received €45,000 when she hasn't. Back to the drawing board. Bring in the value of the mortgage. I will ignore interest on the loan in this article and bring in one half of the £18,000 loan at £9,000 and call it €13,050. We have now accounted for €23,550.

Jill, as we have discovered, is an honest woman. So Tom arranges to pay the shortfall to Jill in sterling in the sum of £17,160 (the previous conversion rate taken above was 1.45, but here I have taken 1.25). The new text of the power of attorney makes it totally clear what has happened, i.e. £7,300 paid in 1997, £17,160 paid now, and Jill's half of the mortgage taken into account.

The plan then is that Jill is to give back the £17,160 to Tom after the deed of sale has been signed in France. If Jill lives another seven years, there will be no inheritance tax in the UK on that gift by Jill to Tom. This gift takes place in the UK. So there is no gift tax in France. However, there is another problem because Jill's capital gain (I have again taken a rate of 1.25) is in sterling terms £20,755. Jill can deduct the annual exemption of £9,600, leaving £11,155 on which she pays UK CGT at 18% in the sum of £2,008. So Tom agrees that Jill can keep £2,008 to sort the UK tax man out.

The French notaire's fee for understanding and dealing with all this has been far higher than usual. The detective agency cost a lot. Moreover a UK solicitor has had to be employed, and his fee has been hefty.

It would have been much quicker, cleaner, cheaper and more efficient to have gone to the French notaire in the first place back in 1997. In other words, the system has beaten you. Good try. It was fun while you were on the run. But your hunch all along was that they would catch up with you. They have. Poor old you. Clobbered. Bad luck.

Sean O’Connor is a bilingual lawyer. Tel: 01732 365378

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