Inheritance reforms protect spouse

I read with interest your July article on protecting a surviving spouse. We are residents in Jersey and have a second home in France where we spend the maximum amount of time possible.

Q. Firstly, will the new proposed law on inheritance tax affect the situation? Would our children still have the same benefits?

Also, what is the current situation regarding capital gains? We have owned our French house for 10 years. If we were to sell, what would be the procedure and pitfalls?

A. If you were French tax residents then it would be French tax and laws that would apply to the whole of your estate, worldwide. This is a matter of fact, not choice. For example, if you spend most of the tax year in France or have your main economic interests there, you are considered a French tax resident.

If you are not a French tax resident, then French taxes and laws only apply to property owned in France, “property” being in the “bricks and mortar” sense of the word. The next stage is to consider how your property is owned, as it could be owned directly by yourselves, or through a company. In the latter case, it is then the shares of the company which will be assessed for inheritance tax, even though this value is based on the value of the underlying asset of the company - the property. A possible advantage of assessing share values (rather than the property directly) is that they are assessed under the normal tax laws of your country of residency, not those of France.

Assuming you own your property directly and not through a company and also that it is owned jointly with your spouse although with regards to your first question, inheritance tax in France has not been abolished, there is no longer any inheritance tax between spouses, although testamentary dispositions still have to be taken to ensure this tax exemption between spouses will be effective.

Likewise, the rights of the children have benefited from the reforms in that their tax free allowance has been increased from €50,000 each to €150,000.

The rights of inheritance - the rules determining who is entitled to inherit what - have not changed. As to your second question, about capital gains tax, then if you were to sell the property you would be liable to French capital gains tax.

Stage one is to assess the capital gain itself, being the difference between the cost of the property (including legal fees), and the sale value of the property (after legal fees where applicable, and estate agency fees). Other costs are allowed to reduce further the amount of the gain, such as those for improvements but you do need proper invoices made out to the owners and at the property’s address.

The resultant gain is taxable in France at a flat rate of 16% for EU non-residents, and is then tapered - for the first five years of ownership there is no reduction, but thereafter there is a 10% annual reduction in the gain, and thus the tax. As a result of your having owned the property for 10 years, and removing the first five years, which do not qualify for anything, only five years remain assessable and, at 10% per year, this means that you are entitled to a 50% reduction (five years x 10%) in the assessable gain, leaving only 50% of the gain as taxable.

There are some other small rebates dependant on whether you have dependant children. Do not forget that just because you have been assessed and paid capital gains tax in France, this does not mean that you will not be assessed in your country of residency. However, one comforting point may be that any French capital gains tax paid should be used as a credit against the tax liability created in the country of residency.

You should seek professional advice so, in light of the full facts, a definitive position can be presented.