Entering in a PACS agreement

There are advantages to entering into a PACS for unmarried couples living in France, says Bill Blevins…

Unmarried couples moving to or living in France would do well to consider entering into a French PACS (Pacte Civil de Solidarit�) which would give them tax and social advantages over remaining single; in fact, for some, it even has advantages over being married.

PACS (a civil partnership registered before a French court) were introduced in France 10 years ago specifically to give homosexual couples some measure of legal and taxation protection. However, in France, a PACS is open to both same- and opposite-sex couples, and now around 90 per cent (135,000 out of 150,000 PACS per year) are being entered into by heterosexual couples. This is a striking contrast to the UK position, which is that only same-sex couples can register a UK civil partnership.

Under a very recent change to the law in France (in April 2009), UK civil partnerships are now recognised in France, as are civil partnerships registered elsewhere abroad. The UK has recognised a French PACS between a same-sex couple (but not for an opposite-sex couple), and viewed it as a UK civil partnership for all UK purposes since the introduction of civil partnerships in the UK in 2005.

A PACS is effectively a formal agreement entered into between the partners and a contract is drawn up before the local tribunal d’instance, detailing division of possessions between the two of you. Fifteen days’ notice needs to be given and ceremonies take around 15 minutes.

Legal relationship

Where neither of the participants is a French national, at least one of the PACS partners has to be resident in France. Participants cannot be in a legal relationship with anyone in any other country and to verify this, a certificat de coutume needs to be obtained (British nationals can obtain this from the British Embassy in France), which states that there is no legal impediment to you entering into a PACS in France, ie you are single.

Anyone in a UK civil partnership will not be able to obtain a certificat de coutume and so cannot enter into a French PACS. However, that said, it appears that recently, UK civil partnership couples have managed to circumvent this by producing a document from a lawyer stating that they are not married; however, it is possible that a PACS would fail if it were ever to be disclosed that the couple were in a UK civil partnership at the time of entering into the PACS, so this is not recommended.

It is relatively easy to end a PACS. As it is a contract, it can effectively be terminated through a court procedure by way of a letter from one partner to the other or simply by one partner marrying another person without any notice to the other PACS partner. Once out of the relationship, there is no requirement to provide for the former partner and no risk to assets acquired before entering into the PACS – a significant advantage for many heterosexual couples, particularly those who have been married before and stung by the divorce proceedings.

Once a couple has entered into a PACS, they are treated as holding their assets en indivision, ie they each continue to separately hold the assets they owned on entry into the PACS, and own all assets acquired throughout the duration of the PACS in separately divisible 50 per cent shares. Therefore, on ending the PACS, it is easy to establish who owns what, and neither partner has a claim on the other’s assets.

Couples entering into a PACS undertake to take care of each other and certain rights and responsibilities are associated with such a contract. While not fully equal to marriage, many French councils treat PACS couples as married couples when assigning benefits or accommodation. However, there are certain rights that are accorded to spouses that are not necessarily available to PACS couples, for example pension and inheritance rights.

PACS allows an unmarried couple to be treated as a married couple for income tax purposes and so minimise the income tax liability. PACS partners complete joint tax returns like married couples, and because they are taxed on the total income of the household as a couple, both sets of nil rate and lower rate tax bands are fully utilised in France. Where a PACS is entered into during the French tax year (the calendar year), three tax returns must be completed: one for each of the partners for the period of the tax year falling before the marriage, and one joint household return for the portion of the French tax year falling after the PACS.

Efficient investments

Perhaps the biggest tax advantage for unmarried couples of entering into a PACS is where succession tax is concerned. Assets passing between PACS partners on death are tax free, as they are between married couples. Without a PACS agreement, those assets are taxed as though the individuals are unrelated, at the highest rate of 60 per cent. For lifetime gifts passing between PACS or married couples, there is a tax-free exemption for 2009 of €79,221 (�74,344) – renewable every 6 years – with tax on the balance increasing progressively from 5 per cent to 40 per cent. For those not related by marriage, PACS or blood, the tax-free allowance on all inheritances is only €1,642 (�1,540) – in 2009, there is none for a gift – and the tax on assets passing to strangers’ is 60 per cent.

While there are no absolute rights for PACS partners to inherit on death (a spouse automatically inherits at least 25 per cent of the deceased spouse’s estate on death), a portion of the estate is usually freely disposable (even if the deceased had children outside the PACS relationship) and this can be passed to the survivor by will. PACS partners should consider the impact of French succession law on their deaths, and take advice as to how to structure ownership of assets and prepare a will to ensure that those they wish to benefit actually do.

There are tax-efficient investments that can be used to minimise income (and therefore income tax and social charges) in France and provide benefits on death, as well as potentially reducing wealth tax in certain circumstances. If these can be combined with a PACS for unmarried couples, tax efficiency, both during lifetime and on death, can be maximised, allowing you to keep more of your own money.

If you are thinking of moving to France and are in an unmarried or non-civil partnership relationship, you may be significantly better off financially entering into a French PACS. Such a legal relationship can also save time and money if the relationship ultimately breaks down, regardless of whether you are in a same- or opposite-sex relationship.

It is important to seek advice from a tax specialist who is knowledgeable in both French and UK tax law, particularly if you are unmarried, whether in a same- or opposite-sex relationship.

Fact fileBlevins Franks www.blevinsfranks.com