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New rules on trust are a major change

This column is by Bill Blevins of Blevins Franks financial advice group who has written for the Sunday Times.

This column is by Bill Blevins of Blevins Franks financial advice group (www.blevinsfranks.com) who has written for the Sunday Times on overseas finance for 10 years. He is co-author of the Blevins Franks Guide to Living in France.

PERSONAL trust law developed in England at the time of the Crusades to allow landowners heading for the Holy Land to transfer legal ownership to a third-party to manage their affairs in their absence and avoid confiscation under the feudal system.

Tax mitigation was not the original purpose and there are many non-tax reasons for using a trust; such as ensuring assets pass at the right time to the right people in the right proportions. However, in France under the Code Napoléon, the treatment of trusts has always been at odds with the common-law treatment afforded in the UK.

Until last year, although France did not have an established trust law, courts would recognise the legal effect of foreign trusts. However, French authorities became wary of trusts, viewing them as a mechanism for tax avoidance despite their non-tax benefits.

When the Loi de Finances Rectificative pour 2011 came into force on July 31, 2011, it introduced legislation on trusts. The aim is to treat trusts as transparent for tax purposes. It set out new taxation rules, making trusts subject to gift and inheritance taxes and wealth tax.

This affects any French resident setting up a trust or who is a beneficiary of a trust, and any trust holding French assets.

It covers pretty much every form of trust, whether revocable, irrevocable or discretionary, including trusts set up before the individual became French-resident.

Even where the person who set the trust up is excluded from benefit, there is a reporting requirement. Other similar succession planning structures are also encompassed within the new requirements. Pension trusts set up outside France are specifically exempt.

The new rules are complex. There is a lot of misinformation around (including in the UK press), so it is important to take professional advice if you have (or had at July 31 2011) a trust or are the beneficiary of one. One particular confusing issue is that of the reporting requirements and possibility of a €10,000 fine – I’ll explain more below.

Here’s a summary of the key points of the new regime:

Trustees' reporting requirements

All offshore trustees must now report annually to the French tax authorities if a trust has a French tax resident Settlor, even where the Settlor is an excluded beneficiary and regardless whether any benefit has been paid out.

If all the original Settlors have died, any French tax resident beneficiaries become “deemed Settlors” – so the trustees must also report the trust.

If a trust has any French assets they must be reported, even if there are no French resident Settlors or deemed Settlors.

The trustees have no choice: they have to report if any of the above conditions are met.

They must report:
* The market values of the worldwide trust assets as at January 1 each year.
* When a trust is set up
* When a trust is wound up
* When any change is made to a trust

If the trustees fail to report correctly, an annual charge of 5% will be imposed, based on the value of the trust assets – with a minimum of €10,000 that is collectible across borders. This fine would therefore be imposed on the trustees if they fail to report, though it could be passed on to the settlor / beneficiary if it cannot be collected from the trustees.

Reporting start date

The trust law issued last summer stated that the trustees’ reporting obligations apply from January 1, 2012 (in line with wealth tax filing obligations).

However, on December 28 the authorities issued new guidance (a rescrit) retrospectively changing the rules. Suddenly, trusts in existence as at July 31 2011 became reportable.

Any changes made to a trust between July 31 and December 31, 2011 must also be reported – additions, distributions, winding up etc. So even if you wound up a trust after July 31 but before the end of 2011, or if there are no assets in the trust, your trustees must still report.

The trustees have no option but to make the report (even if you have declared the trust assets for wealth tax purposes yourself, as legally obliged to).

At the time of writing (June 19), we are still waiting for the authorities to release their formal instructions on exactly how and what the trustees need to report and when.

However the principle that reports have to be made will not change. It is expected that this year the trustees’ deadline for reporting will be August 31 for everyone

Wealth tax

Trust assets are now fully chargeable to wealth tax if you have set up a trust (the Settlor), even if you do not receive any benefit. This applies from January 1, 2012. If you die, the assets are treated as belonging to your beneficiaries if they are resident in France.

Wealth tax only applies if your total chargeable assets exceed the threshold (€1.3 million at the time of writing). The valuation of your main home is reduced by 30%.

If you have any trust assets you need to include them in your annual wealth tax return. If you are French resident this was due by June 15. There is a 10% penalty for a late return. If you are non-resident your filing date is July 15.

Succession tax

If you are the Settlor of a trust and French resident, there will now be a tax charge on your death, even if the assets are not distributed at the time, and regardless of where your beneficiaries are resident. Previously tax was only applied when the assets were actually distributed.

If the assets remain in the trust, the succession tax position will depend on who your beneficiaries are and whether their entitlements within the trust can be identified. Tax could be charged at the progressive rates, or at a flat 45% if your beneficiaries are descendants, or at 60% if the beneficiaries are not your descendants.

If you have a trust it is vital you seek professional advice on the best way forward for your circumstances. Likewise take expert advice if you are looking for ways to legitimately reduce your tax liabilities in France. The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.

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