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New law lightens inheritance tax

Connexion edition: December 2007

NICOLAS Sarkozy expressed sympathy over the burden of inheritance taxes when he was a presidential candidate. Now the so-called TEPA Law of August 21 is a follow-up to his electoral promises. The law substantially lightens the financial burden associated with inheritance and formal gifts between close relatives.

Notaires will take the new measures into account, for example, when dealing with the purchase of a property in France, whether this is by an individual or a couple, as well as when advising on the use of a tontine clause, drawing up a French will or marriage contract, setting up a company etc. Consulting a notaire as to what measures to take following these changes in the law could also be useful to those who already own property in France.

No more inheritance tax for a surviving spouse: The key measure of this new law is to abolish inheritance tax for a surviving spouse - before, they only benefited from a €76,000 tax allowance. Should they wish to, for example, the children of a British couple living in France, who are automatic heirs to a portion of their estate under French law, could renounce their inheritance from their father who has recently died so as to leave the whole of it to their mother without inheritance tax.

Note that nothing has changed in the case of a gift between spouses when they are both alive. In this case the recipient benefits from a €76,000 tax allowance. If this fiscal aspect of the matter is important, the civil law angle remains paramount, especially in an international context. For example, the law relating to the “réserve héreditaire” (automatic right to a portion of the deceased’s estate) for children must be taken into account, although a marriage contract or a tontine clause can sometimes be ways of getting around this.

PACS partners: Unmarried couples, of the same or opposite sex, can establish a PACS in France, which is the equivalent to a British civil partnership and confers a status similar to marriage. Up to now PACS partners benefited from a €76,000 tax allowance but the tax rate for the remainder of the estate rapidly rose to 50%. The TEPA law gives PACS partners the same fiscal regime for inheritance as married couples. A surviving partner is freed from inheritance tax and, as for gifts during the couple’s lifetimes, a partner benefits from a €76,000 tax allowance after which there is a progressive taxation rate, which should remain below 50%. However these regulations may be brought into question if the PACS comes to an end in the year of the gift or the following year (other than through death or marriage).

Descendants: For direct heirs, the TEPA law raises the tax allowance from €50,000 to €150,000 for each child or, if they have died or renounced their inheritance, their children. It should be noted that this also applies to gifts and that the giver can make another gift which benefit from the same tax allowance, every six years. If undertaken, in most cases people will not pay tax on their inheritance.

To take an example: Mr and Mrs Smith, aged 64 and 65, own a French home worth €1,500,000. While keeping the benefit of this property during their lives (the usufruit in French), they can transfer the remainder (future interest - called la nue-proprieté in French) by gift to their three children with no inheritance tax. It works like this:

1,500,000 x 0.6 (the parents’ life tenancy is valued at 40% of the property) = €900,000 for the total value of the nue-proprieté), or €450,000 per parent. The donation from each parent to each child = 450,000/3 = €150,000. The law also allows the transfer of €30,000 without taxation in the case of a gift by someone who is under 65 to each of their descendants who are over 18.

Other heirs: Most other cases, such as bequests or gifts in favour of brothers and sisters, more distant relatives, and non-family members, remain heavily taxed. However, in certain conditions, there is a complete exoneration from tax, for example a brother or sister living in the deceased’s home (article 796-O CGI).

It is also possible to benefit from an additional tax allowance of €150,000 in the case of a bequest or gift to a person who has handicaps which prevent him or her from earning a living (article 779-II CGI). Brothers and sisters not benefiting from any of these measures, only get a tax allowance, in the case of inheritance, of €15,000, after which the tax rate on their inheritance rapidly reaches 45%. Nephews and nieces get a tax allowance of €7,500, after which the tax rate is 55%.

Grégory Denoyelle, notaire.

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