It is very common for parents to wish, through a donation, transmit property belonging to them to their children during their lifetime. Often, this involves the donation of bare ownership of real estate.
The donation of bare ownership makes it possible to optimize transfer rights free of charge. By transmitting bare ownership, the parents retain the usufruct, which allows them to enjoy the income provided by the real estate (or to have the enjoyment of it) until their death (in the case of life usufruct ).
The donation of bare ownership in place of full ownership makes it possible to reduce the tax base subject to donation tax. Indeed, in such a scenario, only a fraction of the value of the full ownership is taxable. The younger the usufructuary donor, the less important this fraction is.
The scale linked to the evaluation of bare ownership and usufruct, covered by the article 669 of the General Tax Code, is as follows:
The difficulty, however, lies in assessing the value of full ownership. Although the temptation is great to minimize this value, this choice can nevertheless prove very costly.
Indeed, given the importance of the rates applicable to gift taxes (the marginal rate of which can reach 45% in the event of a donation to a child), the tax reminders are often important. The taxpayer is then strongly encouraged to appoint a tax lawyer competent in the matter to defend him.
Tax sanctions and limitation period
The tax administration controls this type of operation enormously and does not hesitate to issue extremely significant duty reminders when it considers that the declared value is distance from the market value (the NR lawyers firm deals with around ten cases each year relating to this type of adjustment).
The tax administration, in its rectification proposal, will first proceed to recall duties taking into account the real market value ( according to her). It will also sometimes add penalties of 40% for deliberate failure plus late payment interest.
When the donation has been registered or has been sufficiently revealed by a declaration, the tax administration can control it until December 31 of the third year following this registration or this declaration (so-called “abbreviated” prescription).
Please note: the starting point of the deadline does not correspond to the day of the donation but to the day of the revelation. Thus, if a donation of real estate is made to the notary in November of year N but the latter does not register it until January of year N+1, the tax administration will have until by December 31 of year N+4 to notify its proposed rectification and not that of year N+3. It is therefore better not to hesitate to contact the notary on this point…
In the event that the donation has not been revealed to the tax administration, or in an imprecise manner such that it requires “subsequent research by the administration” , the latter may be subject to a legal reminder until December 31 of the sixth year following the donation.
How does the tax administration assess the market value?
The tax administration has several methods to assess the market value.
Comparison method
The method that the administration uses as a priority is that of comparison with “intrinsically similar” goods.
The Court of Cassation thus considered that the tax administration must specify the internal condition of the real estate used as comparables in order to ensure that the latter are indeed intrinsically similar to the property to be valued (Cass. Com, May 30, 2000, no. 97-17.361).
The aim of this approach is to determine a price per average m2 and to apply it to the property to be evaluated. With regard to the valuation of a building (as opposed to an apartment), the tax administration generally refers in its rectification proposals to the weighted developed surface area (SDPHO). Without going into technical detail, this surface area is made up of the overall surface area of each level (including attics and cellars) by assigning it a weighting coefficient (for example 1 for the ground floor), approximately 0 .8 for an attic floor, etc.).
In its rectification proposal, the tax administration therefore uses certain terms of comparison (sales of buildings that it considers comparable), which which allows it to obtain a price per m2 of SDPHO.
It then determines the SDPHO of the property to be evaluated and applies the price per average m2.
In practice, the terms of comparison mentioned in the rectification proposal are surprisingly quite prestigious goods…
Yield method
In addition to the comparison method, the tax administration will sometimes also use the yield method in its rectification proposal.
This method is used in the presence of properties generating real estate income (land income in the case of bare rental, or industrial and commercial profits in the case of furnished rental).
Concretely, the tax administration will determine the income generated by the property (gross or net depending on the case) and will apply a rate of return to it (the market rate according to She). If a property generates, for example, €100,000 per year, and the rate of return on this type of property is, according to the tax administration, 3%, the market value of this property will be, according to them, 100,000/3% = €3,333,333.
Naturally, the role of the tax lawyer will be to contest the choice of this rate.
The tax administration will then combine the yield method with the comparison method to determine the market value.
These two evaluation methods constitute the two main evaluation methods but there are others, which will not be detailed in this article.
Haircuts
The tax lawyer must, in response to the proposed rectification, invoke all of the applicable case law on haircuts. Indeed, numerous discounts exist (joint ownership, block sales, specific clauses in the deed of donation, discount for illiquidity, etc.) and the tax administration rarely takes them into account spontaneously in its rectification proposal….< /p>
Me Nicolas Rozenbaum, tax lawyer in Paris, is at your disposal to assist you and use all legal and procedural means applicable in the event of a tax audit relating to this type of problem, regardless of the geographical location of the property transferred.
In the vast majority of cases, he obtains a substantial reduction in rights and penalties, particularly in the context of a transaction.
You can contact him by clicking here.
Please note that this information, up to date as of September 14, 2023, has been voluntarily simplified and summarized for educational purposes and does not constitute legal advice.