Buying a French property en viager
Please note that international tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
A viager sale of property is where part of the price is based on a person’s life. A viager purchase can be an attractive proposition for a person wishing to invest in French property, or to expand an existing French property portfolio. In a viager purchase, the buyer pays the seller a lump sum. The buyer then continues to pay the seller a monthly sum (known as a rent) for their lifetime. Finding a property being sold as a viager is relatively straightforward. In principle, they can be sold through any estate agent. Most viager properties are sold through specialist agencies.
Two kinds of viager occupé
The seller may remain in the property for their lifetime, known as a viager occupé. There are actually two variants of this. In the first case, the seller retains the “usufruit” of the property (akin to a life interest), the seller can not only remain in the property for their lifetime, but also move out and rent out the property receiving the rent. In the second case, the seller retains a “droit d’usage et d’habitation” a right to inhabit and use the property for their lifetime. This second option is preferable for a buyer as it avoids the risk of a third party being in occupation of the property on the seller’s death. An usufruit is worth more than a droit d’usage et d’habitation, and the value payable by the buyer may vary based on this technicality.
Alternatively, the seller will vacate the property on completion, known as a viager libre. The value of the monthly rent will vary according to the deal agreed. You will usually pay more if the property is vacant.
There is also the possibility of entering into a viager occupé where the seller must move out for a period each year (e.g. a month during the season) – these might be of interest if the property is situated in a holiday location. Whilst an additional level of drafting is required, a buyer can then combine a holiday home with an investment. This is not that usual though has advantages for the buyer and seller and is similar to a leaseback arrangement. This can have income tax advantages for the seller (see below) especially if the property is of high value and is being rented out anyway during the season when holiday rents are very high.
Vente à terme
There is a similar option, known as a vente à terme, where the only difference is that the monthly rent is paid for a set time, and if the seller dies before the time is up, the rent continues to be paid to their estate. Although in practical terms such a purchase is similar, French law understands it as a different type of contract, and therefore the tax position is different. A purchaser may find it more tax advantageous.
Only pay a lump sum and no rent
By the legal nature of a viager sale it cannot take place where only a lump sum and no monthly rent is payable. However, if a similar effect is sought, there two other legal forms of sale which may achieve this. The first is a sale of the “nue-propriété” of a property, the seller retaining the “usufruit“. The second is a sale with “réserve d’usage et d’habitation”. Both have similar effects, on the death of the seller, the buyer automatically becomes the owner of the whole property. The practical difference between the contracts is quite minor, the main difference being that where there is a usufruit, the seller can move out of the property, rent it to a third party and receive the rent. With a réserve d’usage et d’habitation, only the seller can use and reside in the property, if they move out, their right is extinguished.
The monthly rent for a lifetime, does not have to be set on the lifetime of the seller. It can be for the lifetime of the survivor of multiple sellers, e.g. a husband and wife, in which case there is generally no reduction in the rent on the first death. The rent can also be payable to a third party for their lifetime. Most commonly this is to the non-owning spouse of the seller, but any third party can be chosen.
Indexation of the monthly rent
Generally, the contract provides the index to which the monthly rent is to be linked. There is a free choice of the initial index, and good drafting of the contract provides for an alternative if the initial index ceases to be published. The indexes used are generally published by INSEE either a consumer price or a cost of construction index. If the contract fails to provide an index, there is a legal table which can be used to revalue any rente viagère which is not indexed.
What happens if you fail to make monthly payments?
Generally, the contract provides that the seller can recover the property and keep the payments made to date (lump sum and monthly payments).
How you calculate the amounts to be paid
Several factors are taken into account in calculating the lump sum and the monthly rent. Although Article 1976 of the French Civil Code gives the parties freedom to fix these figures, in practice there are certain conditions which are to be met. Given the nature of the contract the calculations must take into account the life expectancy of the person (or persons) for whose lifetime the monthly rent will be paid. There must also be an element of risk for the buyer as to the final cost of the purchase. If a buyer knows that the seller is likely to die shortly, then the sale may be cancelled by the courts. This is in addition to the specific provision that if a seller dies within 20 days of the sale from an illness which they had at the date of sale, the sale will be cancelled. Case law also sets rules as to the value of the rent payable as compared to the income produced from the capital value of the property and these need to be taken into account – generally this will be calculated by the estate agent or the Notaire. There are many companies in the market who will calculate prices (lump sum and monthly rent) and life expectancy for you, some free of charge if you are buying through them, others for a fee.
Perhaps surprisingly, there is no set formula, so it may be worth consulting several. Notaires and estate agents will rely on a variety of formulas and life expectancy tables. The various series of life expectancy tables give different results, even though most are produced either by life insurance companies or INSEE (the French statistical agency). Generally, the calculations are based on one of three sets of tables, those for a man, a woman and for couples. Where there are two sellers the table for a couple gives a different result than if the calculation was simply on the party with the longest life expectancy.
Whilst you would expect the age and health of the seller to be the primary considerations, in fact, only age is normally taken into account. There is no provision to adjust figures based on a seller’s state of health and no discussion of a seller’s health tends to take place – this is a consequence of the requirement that the contract contains a risk for the buyer.
Calculating a viager occupé
The property is valued, and based on the seller or sellers’ age, a percentage is deducted for the fact that the seller will continue to occupy the property. The seller will then decide what they want the capital payment to be and then the balance will be converted into a monthly sum based on the seller’s life expectancy.
A lady, aged 70, wants to sell her property valued at €400,000. Based on a 50% deduction for the fact that she wishes to remain in the property, the price is calculated on €200,000.
If she wants a lump sum of €20,000, she might then receive a monthly rent of €1,050.
If she wants a lump sum of €40,000, she might then receive a monthly rent of €930.
A lady, aged 80, wants to sell her property valued at €400,000. Based on a 40% deduction for the fact that she wishes to remain in the property, the price is calculated on €240,000.
If she wants a lump sum of €50,000, she might then receive a monthly rent of €1,500.
If she wants a lump sum of €70,000, she might then receive a monthly rent of €1,380.
A lady, aged 90, wants to sell her property valued at €400,000. Based on a 30% deduction for the fact that she wishes to remain in the property, the price is calculated on €280,000.
If she wants a lump sum of €110,000, she might then receive a monthly rent of €2,100.
If she wants a lump sum of €150,000, she might then receive a monthly rent of €1,625.
Calculating a viager libre
This is calculated in a similar manner to a viager occupé, but there is no deduction for occupation. Often, if the seller wants to remain in the property for a limited period (perhaps a year or so) the calculation is done as a viager libre, but the monthly rent which would be due by the buyer is not payable whilst the seller is in occupation.
What can be bought as a viager?
In principle, anything can be purchased in this manner, although generally most viager contracts involve real estate. There is no restriction on the type of real estate property involved. Whilst the process is used most frequently for residential properties, commercial and agricultural properties can also be purchased in this manner. Care will need to be taken with any leases in place in relation to these. There is no reason why an offshore trust could not make a purchase in this manner depending on the nature of the property purchased. Much of the market in viager sales in France is by people trying to create an additional pension pot for themselves. If you do purchase through a trust, extra care must be taken to ensure that the contract complies with all the relevant rules relating to the trust.
Advice on buying a viager property
Given the fine legal distinctions involved in such transactions it is important to get independent and specialist legal advice. The subtle distinctions between similar but different options involved in a given transaction may not be adequately explained by an estate agent. They may simply have their preferred formula to which they always work. You should seek independent advice in order to establish what the precise parameters of any transaction are and the (potential) consequences for you.
Careful drafting of the contract up front will leave you more flexibility at a later date. For example, inclusion of certain specialised clauses will facilitate you selling on the property before the original seller’s death if you so choose. You should also be advised carefully on what will happen if you die before the seller. Simply put, the payments have to be met by your estate. You should seek advice as to which people might be liable and how best to deal with the potential liability arising on them.
Selling on the property
It is possible to sell on the property purchased as a viager. There are restrictions as if you do so during the original seller’s lifetime, you will remain liable for the monthly rent payments. You may also require the seller’s consent. Broadly, there are two options:
- You sell on the property with the new purchaser undertaking to pay the monthly rent (which remains as per the original contract). In this hypothesis the property remains charged in favour of the original seller, you cease to make the monthly payments, and you receive a lump sum. This lump sum will be roughly equal to the lump sum you originally paid to the original seller, plus the value of the monthly payments you’ve made, plus any increase in the value of the property. The downside is that you are still liable for the monthly payments if the new purchaser fails to make them.
- You sell the property to the new purchaser as is and you continue to pay the monthly rent to the original seller. This is more likely to be attractive to a buyer if your purchase was of a viager libre. If you sell a viager occupé like this, the sale price you receive will be the value of the underlying interest where the original seller has retained either a usufruit or droit d’usage et d’habitation (see above). There may be issues with the original seller releasing their charge over the property and you may need to offer an alternative guarantee that the monthly rent will continue to be paid.
Capital gains tax may be payable, and expert advice should be sought to ensure that the correct calculations are made. This is the case even if you sell after the viager has come to an end.
Ownership of a property purchased en viager
Who pays the taxes?
The principal taxes related to French property ownership are taxe foncière (Landowner’s Tax) and taxe d’habitation (Occupancy Tax) which are charged at different rates according to where the property is situated. Although there is no legal obligation to divide them as follows, the division below follows very strong custom which it might be hard to overturn.
The taxe d’habitation is paid by the person occupying the property as at 1st January of each year. Therefore if you buy with a viager occupé, the seller will continue to pay the taxe d’habitation whilst they inhabit the property. If it is a viager libre, you will be liable even if the property is only a holiday home (unless you rent out the property to a tenant, in which case they are liable).
Taxe foncière is payable by the owner of the property as at 1st January of each year for the calendar year. Therefore, the buyer is normally liable for the taxe foncière, although it is normal for the rubbish collection tax to be paid for by the occupant if that is billed with or as part of the taxe foncière.
Each year the buyer is under an obligation to file a specific return to the French tax authorities by 1st February declaring the amount of monthly rent paid in the previous year and to whom it was paid.
How are repairs paid for?
If you occupy the property yourself, having purchased with a viager libre, this issue does not arise; you will be liable for all repairs yourself. You may however require the seller’s consent to works which you intend to carry out. As the property is charged to guarantee the monthly payments to the seller, the contract generally provides that the seller can recover the property if the buyer diminishes its value. To avoid any issue arising on this point, you may wish to obtain the seller’s consent to any works you plan.
In a viager occupé payment of repairs is trickier. The starting point for dividing the costs of running the property (other than the taxes dealt with above) is generally a division similar to that between landlord and tenant or usufruit and nue-propriété. Simply put the division is that larger expenditure, particularly of a structural nature will be paid for by the buyer and everyday maintenance is paid for by the seller who occupies the property. It is safest to draw up a detailed list rather than to rely on convention which is subject to interpretation.
Renting out the property
Where the property is bought in a viager libre, a buyer may choose to rent it out, thereby gaining an income. It is not possible to deduct the monthly rent paid out to the seller from the monthly rent received from the tenant, or from any other income in France.
The monthly payments are only deductible for French income tax if they are made as a form of gift or form another exempt category. The monthly payments which represent part of the purchase price are deemed onerous (i.e. not a gift) and not otherwise exempt.
Taxation of the seller
This is very attractive. Capital gains tax is levied in the normal way (although care must be taken to be taxed on the correct sale price). For tax purposes the sale price is calculated to be the capitalised value of the monthly payments (i.e. what they will total if the seller lives for their life expectancy) plus any lump sum payment. For most French resident sellers this means that their gain is capital gains tax exempt if the property is their primary residence.
Even if it is not a primary residence, if you have held the property for 15 years it will also be exempt from capital gains tax based on taper relief. The monthly payments are taxed to income tax, but under special rules based on the seller’s age on the day the first became entitled to the rent. The calculation is done once and for all and not revised as time goes on. On the basis that the rent is paid onerously (see above), the following rules are applied:
- Only 70% of the rent is taxed if the seller is under 50 years old,
- Only 50% of the rent is taxed if the seller is between 50 and 59 (inclusive) years old,
- Only 40% of the rent is taxed if the seller is between 60 and 69 (inclusive) years old,
- Only 30% of the rent is taxed if the seller is 70 or more years old.
Calculating the exact taxation where more than one person is receiving one or more rents or the rent will pass to the survivor in full has additional specific rules. If the seller is French resident, French social contributions may also be levied.
The advantages of buying a property en viager
The primary advantage for a buyer is that the upfront purchase price will be far lower than if the property were bought outright. Often the monthly repayments are also reasonably low. For French Wealth Tax, a property owned with a viager is initially taxed on the value of the purchase as calculated for tax purposes (i.e. the lump sum and the value of the monthly rents based on the on the seller’s age), less the capitalised value of the rental payments, thereby reducing the total value for French Wealth Tax. If you owned a property en viager libre which was worth €2,500,000 and the capitalised value of the rental payments was €1,500,000, French Wealth Tax would be levied on the net value of €1,000,000.
From a French capital gains tax perspective the base cost is the value of the purchase as calculated for tax purposes (i.e. the lump sum and the value of the monthly rents based on the on the seller’s age) which gives a higher base cost than the true cost if the seller dies earlier than expected. Conversely, the base cost does not represent the true cost if the seller survives for longer than expected.
If you pay the monthly rent out of funds which you have in the UK, you will be subject to exchange rate fluctuations on a monthly basis. If you are of the opinion that sterling is going to appreciate against the Euro, this may be an added bonus to this type of transaction.
The disadvantages of buying a property en viager
- The monthly rent will be indexed link.
- Selling on the property is harder and you generally remain liable for the monthly rent if the new purchaser defaults. This may be mitigated by marketing the property through specialist agencies.A seller may live far longer than anticipated; so you pay more rent.
- On a practical level, especially if you are abroad, it may be difficult to find out when the seller (or sellers) has died.
- If the seller outlives you, then your heirs are bound to pay the rent.
- The property is generally charged in order to secure the future payments by the buyer, and therefore getting a mortgage or securing a loan against the property can be more difficult.
- If you default on a payment the seller may be able to recover the property.
- As the property guarantees the future payments by the buyer, the seller can generally reclaim the property if its value is diminished by the buyer’s actions. If you plan to carry out works you may need the seller’s approval.
- In the rare situation where the property is destroyed or subject to compulsory purchase, you remain liable for the monthly rent although you will no longer own the property.
There are a variety of steps you can take to diminish some of the risks outlined above. As always, although the purchase may be an attractive proposition, given the potential pitfalls, it should be considered very carefully and expert advice should be sought.