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Graham Keysell of the Spectrum IFA Group explains the new measures.
Trusts have always been viewed suspiciously by the French authorities. New legislation imposes draconian reporting obligations where any of the settlors, trustees or beneficiaries are French resident.
Failure to disclose information to the French tax authorities could result in a penalty of €10,000 or 5% of the value of the trust, if greater. However cleverly the trust has been constructed, any benefits from it will simply be treated as income and taxed accordingly.
There has been no attempt to distinguish between different types of trust. It is understood that the new legislation applies to all trusts, except those relating to pensions. This poses particular problems since discretionary trusts may include potential beneficiaries who are French resident. Regardless of whether they have received any benefit (and may never even do so), the trust must still be declared to the authorities.
Since the French potential beneficiaries may not even be aware of their interest in the trust, it will be up to the people concerned in the UK to provide the information to the French authorities. The consequences of not doing so will risk the penalties being imposed.
Even worse, when the settlor dies, the beneficiaries in France will find the total value of the trust immediately included in their assets for French Wealth Tax calculations, as they will be deemed to be the settlor.
Failure to disclose interest in a trust on the annual wealth tax return could result in an additional 0.5% tax charge.
Those affected by these measures (whether settlor, trustee or beneficiary) must disclose their interest by 15th June 2012. Such disclosure will need to be accompanied by a formal valuation of the trusts assets as at 1st January 2012 and each subsequent 1st January.
A British accountant, based in France, described the measures as ‘chaotic’. He has been contacted by an investment group responsible for thousands of trusts. ‘They are in absolute ignorance as to how their clients should make their tax declaration’ he said. ‘Despite making numerous enquiries, I cannot find out either.’
Solicitors in the UK have been responsible for drawing up the majority of UK trusts. They could find themselves being pursued by dissatisfied clients if they fail to advise those affected by the change in legislation.
Depending on individual circumstances, there may be a case for drawing up a ‘deed of appointment’ (after taking legal and tax advice) to exclude potential beneficiaries resident in France. Alternatively, the trustees may decide that the reporting and tax implications are so onerous that the best option could be to wind up the trust and divide the proceeds between the beneficiaries.
This is a complex issue, particularly as some expatriates have actually been encouraged to place their investments in trusts. These now need to be carefully re-evaluated since they could be disadvantageous.
EXAMPLES
1) John is resident in the UK. He has set up a discretionary trust worth £500,000 for his two children, Penny and Brian and their descendents. Penny and Brian are the trustees.
Brian and his family now live in France. If the trust’s value is not declared to the tax authorities, the penalty would be £25,000 (5% of the value).
Upon John’s death, Brian would be considered by the French authorities as a new ‘settlor’. As such, the full value of the trust would be added to his existing assets for Wealth Tax purposes. His family assets are currently below the threshold for Wealth Tax but, with the addition of the trust assets, this will take him over the €1.3 million threshold. He will therefore become liable to Wealth Tax.
2) Mary has 3 children and sets up a discretionary trust. Two of the children are the trustees and live in the UK. The third one lives in France and is an eventual beneficiary of the trust.
The trustees are obliged to declare the value of the trust annually to the Fisc. Because the settlor (Mary) lives in the UK, and providing the trust does not hold any French assets, there would be no tax charge. However, as with example 1, the position will be the same in respect of Wealth Tax when Mary dies, even if the French resident beneficiary never actually receives any benefit from the trust.
3) Paul lives in France and, unbeknown to him, he is a potential beneficiary of a trust set up by his great aunt. Unless the trustees in the UK identify him as such and declare the existence of the trust to the French authorities (on a revalued annual basis), the trust risks being fined at least €10,000.
