Peter Smith, a British national, married Pamela Stowe, who thus became his second wife. The marriage took place in Saint-Jean-de-Luz on 21 October 2003 without a pre-nuptial agreement. The couple resides in England. Mr Smith would like to purchase a second home in France and set up the transfer of this property in favour of his wife. He has three children from a previous marriage and owns both real and movable property in England. Determining the applicable law In such a case, the situation is said to include elements of foreign origin: foreign nationality and foreign residence of the persons concerned. Before proposing a few solutions, we must analyse the situation and determine the effect of these elements of foreign origin on the law that applies to the marital regime and to the future succession.

The marital regime The French notaire must determine the applicable conflict rule and, based on that, must then identify the law governing the marital regime (régime matrimoniale, i.e. the set of legal rules that applies to spouses and their property). The Hague Convention The spouses were married after 1 September 1992, the effective date in France of the Hague Convention of 14 March 1978 regarding conflicts of laws pertaining to marital regimes. The determination of the law which applies to the marital regime must therefore be made based on the terms of this convention. The law of the spouses’ primary residence Pursuant to Article 4 of the Convention, failing designation of the law prior to the marriage, the marital regime of the spouses is governed by the law of the habitual residence subsequent to the marriage. The spouses are therefore subject to British law. The place where the marriage occurred has little significance. The fact that the law recognised as applicable is that of a country which did not ratify the Convention is also irrelevant. In British law, the notion of marital regime does not exist, and the basic principle governing the financial relations between spouses is that of absolute separation of property.

Law applicable to the succession Article 3, paragraph 2 of the French Civil Code stipulates that real property located in France, even if it belongs to foreigners, is subject to French law. Other assets (bank accounts, securities, furniture and so forth) are considered as being located in the place of the deceased’s last residence. French and British law Real property acquired in France should therefore be transferred according to the rules of the French Civil Code. The rights of the surviving spouse to said property will be those arising from the law of 3 December 2001, codified in Articles 756 et seq. of the French Civil Code. Real property located in England will be transferred according to British law, as will all movable property regardless of its location, provided that the deceased resided in England at the time of his or her death. Gifts between spouses Gifts of future property between spouses are not prohibited by British law. In accordance with French law, the forced heirship of children must be respected. The surviving spouse may therefore receive benefits, but only within the limits of the disposable portion between spouses. Change of marital regime In French private international law, change of marital regime is subject to the law governing the original regime – in our example, this is British law However, British law is very permissive: the spouses could therefore change regime and governing law, opting to be ruled by French law and the French regime of their choice without judicial approval, given that British law does not provide for any regime. This change of regime and governing law will apply to all their property, whether it is located in France or in England. This may not be the choice made by the Smiths, who may simply wish to settle the legal status of the property located in France. A limited change of regime The Hague Convention allows a rather strange transaction. It involves a sort of “dissection” of the marital regime: the real property in France would be subject to French law, while the rest of the parties’ estate would continue to be subject to British law. During the course of the marriage, the spouses may change the law which applies to their marital regime and adopt i) the law of the country of which one of the spouses is a citizen at the time of the designation, ii) the law of the habitual residence at the time of the designation, or iii) the law of the place where the real property acquired or to be acquired is located. The real property in France would be jointly owned Article 1397-3, paragraph 3 of the French Civil Code, derived from the law of 28 October 1997, therefore allows spouses to choose the marital regime of their choice directly within French law. For example, they could decide to establish joint ownership of the property located in France and include in this arrangement a clause whereby the property would pass to the surviving spouse. This would not require judicial approval since it entails application of the Hague Convention and Article 1397-3, paragraph 3 of the French Civil Code, which authorises such a decision between spouses. Forced heirship of the children The clause establishing joint ownership, even if limited to the home located in France, constitutes an avantage matrimonial (i.e. a benefit not subject to inheritance tax). The children born of Mr Smith’s first marriage can claim their forced heirship by bringing a divestment action (action en retranchement, i.e. the right to claim the avantages matrimoniaux received by the surviving spouse). The way to prevent the children from bringing this action would be to adopt them, since after the adoption, the children from a spouse’s first marriage will be considered as “born of both spouses”. Unfortunately, British law, which is applicable to the conditions of the adoption, allows adoption of minor children only. Adopting the spouse’s children will thus not always be possible.

Property investment partnerships and their tax disadvantages As stated above, the transfer of personal property, with regard to succession, is subject to the law of the deceased’s last place of residence. Under French law, shares in a company or partnership interests are considered movable property. If, upon the death of the pre-deceased spouse, the latter resided in England, this property may be transferred in accordance with British law, which does not include the notion of forced heirship. One possibility, therefore, is to advise Mr Smith to create a property investment partnership and to make a will bequeathing the shares to his spouse. Estate taxes in France Article 4-g of the Franco-British Convention of 21 June 1963 regarding inheritance taxes stipulates that shares of a property investment partnership are taxable in the place where the real property is “used”, namely in France. Income tax in England British tax law regards property investment partnership as joint stock companies and taxes the advantage derived from the gratuitous provision of the residence by the company to its partners as income tax in England. This income may exceed the real market rental value (Income and Corporation Taxes Act of 1988, Articles 145 and 146). Preference given to a change of marital regime These two serious tax consequences prompt notaires to advise their clients to make a partial change to their marital regime rather than automatically resort to a property investment partnership. However, in making the decision, one must take into consideration the value of the real property located in France, which may be less than the €76,000 tax allowance. The impact of the taxation in England must also be weighed against the notional income from the real property in France.

CÉCILE GERAUD CRIDON* of Bordeaux-Toulouse* Centre for Notarial Research, Information and Documentation

« CONSEILS PAR DES NOTAIRES » - FEBRUARY 2004 – No. 324