Ways to reduce inheritance tax

Financial queries answered by Hugh MacDonald

30 October 2012
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I WAS dismayed that the inheritance tax threshold for children has been reduced to €100,000. My 44-year-old son, who is my only child, lives with me in France in our sole residence. The property is worth around €200,000, which means that on my death he would have taxes to pay on around €100,000 of it. He does not earn a lot and, as I am a pensioner, there will be no cash left in my estate. I have been told that if he does not pay the tax within six months he would be forced to sell the property and would effectively be homeless.

Are there any steps I can take to avoid this? D.W.

At the time of your death, your son can apply to pay the tax liability by six-monthly installments, over a maximum period of 10 years.

However interest at the prevailing legal rate (0.71%) is added to the payments.

Another option could be to give your son a share in the house now as a gift, while retaining the other share and lifetime use. Lifetime gifts share the same tax allowance as inheritance (which is renewed after 15 years in this case). What is more, gifts of a (share of a) house where you retain lifetime use are discounted in value for tax purposes by a percentage according to the donor’s age:

60 - 70: 40%
70 - 80: 30%
80 - 90: 20%

So, if you are 72, for example, €142,757 of real value in the house can be given to your son while remaining under the tax allowance limit, if you retain a life interest.

His tax allowance would be restored after 15 years, allowing him to inherit your remaining share tax-free.

This arrangement, called a donation partage, does come at a cost, however, as, apart from the notaire’s fees, there are land registry fees and stamp duty to pay.

The best thing would be to contact a notaire and ask how much it would cost to carry this out on a property worth €200,000 and make an appointment to see a professional who will be able to advise you based on your actual situation.

Tax office refused charges exemption

IN JULY you explained how to reclaim social contributions (CSG) made by British pensioners in France. Armed with S1 [the old E121] forms for my wife and myself, we went to the tax office, which refused to accept them as evidence of non-liability to CSG. They also argued that CSG was “just another kind of income tax” and had nothing to do with the social security deficit. It seems only a statement of non-liability from a French source will persuade them. Do you know of any such document? M.H.

With regard to your points about the CSG, you could call it what you want but it will not change the fact that this is a kind of social charge. The French are adept at arguing that social charges are or are not part of the tax system according to what suits them. The exemption is, in fact, for the CSG, which helps finance the social security system, and the CRDS, which helps the government reimburse its social security debt.

One question which arises is what the contributions are being levied on, since you state you are British pensioners resident in France. It is only if you are in receipt of a UK old age pension that your pension income (and only pension income) is exempt from social charges. All other income is assessable to them.

As to your question of a document confirming nonliability, there is note 17 to the tax form 2047 (for foreign income declarations): www.tinyurl.com/Form2047, which states that the charges are due if the following four conditions are met: 1. you are a French-resident taxpayer; 2. you are a liability, in any way at all, to French state healthcare; 3. the CSG has not already been accounted for on your earnings and 4. you are not exempt due to a double taxation treaty.

For pension income, condition three does not apply since pension income is not earnings. Condition two also does not apply since your healthcare costs are paid for by the UK through your having the S1 certificate.

Therefore, by the French fiscal authority’s own documents, you are not liable to the social contributions on your pension income if you are in receipt of a British old age state pension.

Can I rent elsewhere while trying to sell?

I LIVE in the east but wish to move to the west (where I might enjoy a more active life in a more lively village). Having had the house on the market for two years without interest from buyers my questions are:

* Can I rent a house in another area while waiting for mine to be sold? I have no mortgage.

* If so, what taxes am I still liable to for the house in the east? I would be moving out all my furniture so the house would be empty. Water could be drained down and electricity switched off. D.H.

There is nothing fiscally to prevent you from moving from one area to another.

Yes, if the house were empty you could reduce the taxe d'habitation and taxe foncière charges, otherwise they would remain due at the usual rates.

Yes, you can rent another house while waiting for your house to be sold, but the tax office usually gives a two-year time period before it will cease to accept that the house being sold was your main home.

Accordingly, it would be prudent before moving to write to the tax office and inform them that you are leaving your home to rent accommodation in the west, giving them your address, and asking them for their indulgence in continuing to treat the house in the east as your main home, thus exempting you from capital gains tax on an eventual sale. It would also be wise to confirm that the house is being shut up and not rented out.

Will our French house attract CGT?

WE HAVE owned a house in France for 10 years. We are UK-resident but do not own property in the UK - our house comes with my work. I am unsure of the capital gains tax implications of our French house. We may move to France permanently when retired and will probably sell our existing house and buy a smaller one. G.G.

As a UK fiscal resident, you are liable in France to capital gains tax on the profit made from the sale of your French house. You will also be assessed in the UK, your country of fiscal residency, on the same gain, but at UK tax rates and bands, though you will be able to use any French tax paid as a credit against the UK capital gains tax liability.

Were you to move to France as a fiscal resident, then as your French house would be your main home, you could sell the property tax-free since principal private residences are exempt from CGT. This said, you would need to spend some time in the French property as fiscal residents in order for the tax authorities to be able to see you residing there and using the house as your main home, else they will seek to reclassify the sale a secondary property sale. The fiscal authorities here are quite careful on this point, and do need to see that the property has been used as a home in order to give the exemption to a liability under capital gains tax, so it would be wise to ensure that you submit at least one tax return whilst residing in the French property as your main home before you sold it.

Officials say pension is not ’government’

I COMPLETED my income tax return for 2011 income following the Connexion tax guide and treated my NHS pension, paid by the Paymaster General, as a “government” one. My tax office has queried this, showing me an internal document listing UK pension types, stating this is not treated as a “government” one. J.W.

WE have checked with the NHS and a spokesman told us their pensions have now been contracted out to a private company, Xafinity Paymaster. When filling in the French income tax forms next year they should be inserted in the foreign income form 2047, section 1, item 2; and in the main form 2042 in section 1, item 4, box 1AS.

CLARIFICATION: In this feature in last month’s edition it was stated that the revenu fiscal de référence (RFR) only includes French income. This referred to income assessable in France, that is, not including government pensions or UK rental income, which are assessed for tax in the UK. As explained, a zero RFR exempts you from taxe d’habitation in France.

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