Family SCI: how do you pass property on to your children?

Why shares transfer better than a building

A building is hard to give away in fractions: each gift of an undivided share creates a joint ownership between parents and children, with its rigid rules. Company shares, by contrast, can be given in precise numbers: 50 shares this year, another 50 fifteen years later, aligning each gift with the tax allowances available.

Second advantage: the value of the shares reflects the company's net assets. If the SCI bought with a loan, the outstanding debt is deducted from the value transferred. A discount is moreover frequently applied to the value of the shares, often in the region of 10 to 15%, to reflect their poor liquidity and the constraints in the articles; it must remain justified, as the tax authorities may challenge it.

The 100,000 € allowance renewed every fifteen years

Each parent may give each child 100,000 € free of gift tax (Article 779, I of the French General Tax Code). This allowance resets every fifteen years: gifts made less than fifteen years earlier are added back for tax purposes upon a new gift or upon the inheritance (Article 784 of the French General Tax Code). Beyond the allowance, the progressive scale of Article 777 applies, from 5% to 45% in the direct line.

In terms of capacity to transmit free of tax per fifteen-year period (direct line, Article 779 of the French General Tax Code): one parent and one child, 100,000 €; two parents and one child, 200,000 €; two parents and two children, 400,000 €; two parents and three children, 600,000 €.

Splitting the shares: giving the bare ownership, keeping the usufruct

The most widely used technique consists of giving only the bare ownership of the shares while retaining the usufruct: the parents keep the income and, if they are managers, the management powers. Gift tax is calculated only on the value of the bare ownership, set by the scale of Article 669 of the French General Tax Code according to the age of the usufructuary: 60% of the full ownership where the usufructuary is between 61 and 70 years old, 70% between 71 and 80, for example.

Upon the usufructuary's death, the usufruct rejoins the bare ownership without triggering any tax (Article 1133 of the French General Tax Code): the children become full owners of the shares with no further taxation.

The essential precautions

• Any gift of shares must be executed before a notary, on pain of nullity (Article 931 of the French Civil Code); a disguised transfer under private signature risks both civil nullity and a tax reassessment.
• The articles of association must be drafted with the transmission in mind: management retained by the parents, approval clauses, allocation of voting rights between usufructuary and bare owner (Article 1844 of the French Civil Code: the vote belongs to the bare owner, decisions on the allocation of profits are reserved to the usufructuary, with adjustments possible in the articles).
• The SCI must genuinely operate: meetings held, accounts kept, its own bank account. A sham arrangement or one with an exclusively tax-driven purpose can be set aside under the abuse of law rules (Article L. 64 of the French Tax Procedures Book), and an arrangement with a mainly tax-driven purpose under Article L. 64 A.