Second thoughts on SCIs
IF you are like many British people who have bought or are about to buy a French property you will have seen the acronym SCI for Société Civile Immobilière. An SCI offers one of the many ways to own a farmhouse and to ensure it is not inherited by your spouse’s children; they are really very nice kids, but perhaps you would rather leave your half of the farmhouse to your cat. But beware. Your favourite feline could be leading you into a potentially deep tax trap in the United Kingdom.
First a recap
Consider the case of two married British residents, Bob and Carole. They buy their holiday home with an SCI and each receive 50% of the shares. Bob chooses to be the registered gérant (managing director) and takes charge of running the affairs of the SCI.
As the property is located in France, the French succession laws, including the much feared law of forced heirship, would apply if it were not for the operation of the SCI. (An SCI does not circumvent French inheritance laws if the shareholders are French residents.)
Under French statute, the applicable inheritance law is that of the last country of residence of the deceased, and the SCI shares are considered ‘movable property’ which is taxable revenue in the UK. Thus, because Bob is domiciled in the UK, he is subject to UK inheritance laws and is free to leave his shares of the property to whomever he likes.
While the advantages in terms of inheritance laws remain unchanged, the long and growing arm of the British tax authorities has for many years cast a cloud over what constitutes taxable revenue derived from the earnings of company directors. This includes our SCI gérant, Bob, and as we shall later see, Carole, even though she is just a shareholder.
The SCI is a corporate entity. This is the catch. Bob and Carole have declared that their domicile is in the UK, for the purposes of avoiding French inheritance laws. But in avoiding one French law they are at the risk of facing costly UK tax implications (sections 145 and 146 of the ICTA 1988) relative to corporate entities.
The logic is simple: since the SCI is the real owner of the property, when Bob and Carole visit the property, they stay rent free. This is considered to be a ‘benefit in kind’ and as such can be considered a taxable advantage. While Carole is not the gérant, she would be considered to be a shadow director if she had ‘real influence’ on the running of the SCI and would thus be subject to the same tax provisions.
Ironically, French law sees SCIs as fiscally transparent or semi-transparent and, where an SCI does not trade commercially, treats each shareholder as an actual owner of property. Therefore no particular tax implications arise if the shareholders and the gérants live rent free in the property.
Grey areas
French and UK laws interpret this issue in very different ways. This is because SCIs are difficult creatures to classify. In the UK, only after many years of debate have they been judged to be corporations as opposed to partnerships under the ICTA Act.
The important point to remember here is that anyone examining the pros and cons of a SCI should first seek the advice of a specialist, who hopefully also has an SCI, a house in France but is resident in the UK, and maybe even has stepchildren and a cat.