Deferred capital gain in succession: when the tax is not a deductible debt

Imagine: you own an investment property in Nice, in the Musiciens district. You contributed this asset to a family SCI a few years ago, benefiting from a deferral of taxation on the capital gain (the difference between the purchase price and the contribution value). Then you pass away. Your heirs, in the midst of the succession, ask themselves: "This future tax bill, can we deduct it from the estate assets to pay less inheritance tax?" The answer, given by the Court of Cassation in a judgment of 25 January 2005, is no. And it is a lesson worth thousands of euros.

Behind this technical question lies a concrete issue: inheritance tax can heavily burden the transfer of real estate assets, especially on the Côte d'Azur where properties are often highly valued. But what makes a future tax debt non-deductible? This is what this judgment explains with relentless rigour.

In short, the Court of Cassation held that the deferred tax is not "certain" on the date of opening of the succession, because its triggering depends on future and uncertain events (sale, buyback). Therefore, it cannot be deducted from the estate assets. This is a decision that confirms a strict interpretation of Article 151 octies of the General Tax Code. But let's take it step by step.

The facts: a story like many that happen every day

Mr. X, a Nice entrepreneur, had set up a company to contribute his sole proprietorship. In return, he received shares (shares or units). In accordance with Article 151 octies of the CGI (General Tax Code), he benefited from a deferral of taxation on the contribution capital gain (the capital gain realised upon the contribution). In other words, he did not pay the tax on this capital gain immediately, but undertook to pay it later, in principle upon the transfer of the shares.

At his death, his heirs inherited the shares. They then asked the tax authorities to deduct from the estate assets the tax debt corresponding to the latent (not yet taxed) capital gain. Their reasoning: since the deferral of taxation is maintained for their benefit (if they take the required undertaking), this debt already exists and must be taken into account to calculate inheritance tax.

But the tax authorities refused. The heirs then brought the case before the Tribunal de Grande Instance (TGI) to have the deductibility of this debt recognised. Did the TGI rule in their favour? No. The case went up to the Court of Cassation, which rejected their claim.

The reasoning of the court — dissected

The Court of Cassation, in its judgment of 25 January 2005, upheld the judgment of the Court of Appeal. Its reasoning is based on a precise reading of Article 151 octies of the CGI. This provision states that in the event of a transfer for no consideration (inheritance, gift) of the shares received as consideration for the contribution, the deferral of taxation is maintained if the beneficiary (the heir) undertakes to pay the tax on the capital gain upon the subsequent transfer of the shares or fixed assets. But, and this is the crucial point, as long as the triggering event (transfer, buyback) has not occurred, the tax debt is not "certain".

The judges recalled that the deferral of taxation is not a definitive exemption: it only suspends the enforceability of the tax. However, this suspension does not create a certain debt on the date of death. Why? Because the taxable event (the transfer) has not yet occurred. In other words, as long as you have not sold the shares, you owe nothing. And the uncertainty is twofold: the sale may never happen, or the amount of the capital gain may vary.

The Court therefore rejected the heirs' argument that the debt already existed in embryo. It emphasised that the deferral of taxation does not transform a future debt into a certain debt. This is a strict application of the principle that only debts that are certain, liquidated and due (i.e., whose amount is fixed and whose due date has arrived) are deductible from the estate assets.

What few people know is that this solution is part of a consistent line of case law. The Court of Cassation has already held that future or contingent taxes are not deductible. Here, it confirms that the deferral of taxation is no exception.

What this means for you — concretely

For heirs, this decision means a heavier tax burden at the time of succession. Let's take a numerical example: an asset contributed to an SCI with a capital gain of €200,000. At the owner's death, inheritance tax is calculated on the total value of the assets, without deducting the future tax. If the heirs are in a 20% tax bracket, this represents an additional €40,000 in inheritance tax (on the capital gain).

For landlord owners who have contributed their property to a company, as is often done in Sophia-Antipolis to optimise management, planning is essential. If you plan to transfer your wealth, be aware that the deferred tax will not reduce inheritance tax. You must therefore provision for this charge or take out life insurance to cover the tax cost.

For real estate professionals (notaries, wealth management advisors), this case law requires increased vigilance when drafting deeds. Clients must be informed that the deferral of taxation is a cash flow advantage, but it does not reduce the basis for inheritance tax.

However, note: if the heir transfers the shares shortly after death, the capital gains tax will then become due. But at the time of death, it is not yet owed.

Four tips to avoid this type of dispute

• Anticipate the succession by gifting the shares during your lifetime. A gift of shares with a deferral of taxation can allow the capital gain to be crystallised and prevent the tax debt from weighing on the succession. Consult a notary to assess the suitability of a gift-settlement.
• Include a clause in the company's articles of association. Insert a clause requiring the heirs to take the undertaking provided for in Article 151 octies, and specify the arrangements for financing the future tax. This avoids disputes.
• Take out life insurance to cover the amount of inheritance tax and the latent capital gain. The capital paid to the beneficiaries is exempt from inheritance tax within certain limits, and can be used to pay the tax.
• Assess the latent capital gain precisely each year. Keep a dashboard of the value of the shares and the potential capital gain. This allows your heirs to know the amount to provision.

Further reading: related case law and developments

This decision is part of a line of judgments confirming that the deferral of taxation does not create a certain debt. One can cite a judgment of the Court of Cassation of 15 December 2009 (No. 08-17.532) which held, in the same vein, that the deferred capital gain is not a deductible liability. The case law is therefore well established.

On the other hand, a recent legislative development is worth noting: the 2020 Finance Act amended Article 151 octies for certain contributions, but the principle remains the same for transfers for no consideration. The courts continue to apply this solution, and no reversal is in sight.

undefined, I have come across cases where heirs tried to contest by arguing that the undertaking made the debt certain. But the Court of Cassation has always rejected this argument: the undertaking does not create the debt, it only conditions the maintenance of the deferral.

What you absolutely must remember

Here is a FAQ to answer your immediate questions:

Can I deduct the deferred capital gain from the estate assets?
No, according to the Court of Cassation, as long as the shares have not been transferred, the tax debt is not certain and cannot be deducted.

What should I do if I inherit shares with a latent capital gain?
You must undertake to pay the tax upon the future transfer, and provision the amount. Do not count on a deduction to reduce the tax.

Is there a way to reduce the tax impact?
Yes, you can consider a gift of the shares during your lifetime, or take out life insurance to finance the tax.

Does this rule also apply to gifts?
Yes, the same principle applies to gifts: the deferral of taxation does not create a deductible debt on the date of the gift.

What are the risks if I do not take the undertaking?
The deferral of taxation is lost, and the tax becomes immediately due. It is therefore essential to take the undertaking within the deadlines.

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