Double tax treaty is key to inheritance plans

Estate planning is a key cause for concern among UK nationals in France. French succession tax and law are complex pieces of legislation, and it becomes more of a minefield when you have to take the UK regime into account as well. Make sure you get it right if you want your assets to be distributed according to your wishes and your heirs to be as protected as possible from inheritance taxes.

The domicile issue

The UK domicile regime, with its ‘domicile of origin’, ‘domicile of choice’ and ‘deemed domicile’ statuses, is particularly complex.

Generally, the liability to UK inheritance tax depends on domicile, not residence. You can live outside the UK for years and remain UK domiciled, potentially making you liable for death duties in two countries.

The situation is different in France though. France and the UK have a specific tax treaty on inheritances, designed to avoid double taxation.

Both countries tax worldwide assets but under this treaty, UK nationals who are long-term residents of France are deemed to be domiciled in France for inheritance tax purposes. Tie-breaker rules will determine domicile if you are considered domiciled under both UK and French rules.

Take care, however, now with the EU regulation 650/2012, the “Brussels IV” law, covering cross-border inheritance issues which allows foreign nationals living in France to opt for French or their national succession law to apply on their death. If you choose UK law HMRC says you may not be deemed French domiciled (it is one factor it may consider), and so UK inheritance tax will apply to your worldwide estate as well as French succession tax. Depending on your circumstances, there may be other ways of circumventing French succession law.

French residents leaving or gifting worldwide assets - If you live in France permanently, any assets you gift during your lifetime or pass on death are subject to French succession tax, subject to any tax treaty. Provided you do not elect for UK succession law to apply to your assets, you are not liable for UK inheritance tax on assets outside the UK (lifetime gifts may still have UK inheritance tax implications).

French residents leaving UK assets – In this case tax is due in both countries. However, credit is given in France for any tax paid in the UK. So you do not pay tax twice, but do pay whichever is the higher amount.

French residents receiving an inheritance or gift (general rule) – If you have lived in France for at least six out of the last 10 years, you generally have to pay French succession tax on inheritances or gifts you receive (subject to tax treaty terms). This applies even if the donor and assets are outside France. There are severe penalties for failing to declare such inheritances/gifts.

French residents receiving an inheritance from the UK – Under the tax treaty, you do not need to pay any French succession tax, provided the deceased was UK domiciled and there are no French assets. The inheritance will have been subject to UK tax.

French residents receiving a gift from the UK – The France/UK treaty only applies to inheritances. So if you receive a gift from a UK domicile you have to pay tax in France if you have been resident here for six of the last 10 years.

UK residents owning assets in France – As a UK resident, assets you own in France are liable to French succession tax and also form part of your estate for UK inheritance tax purposes, though your heirs are entitled to a credit for tax paid in France.

Key differences between UK and France inheritance taxes

In the UK, tax is calculated on your estate as a whole and paid by the estate. Spouses are generally exempt, but otherwise it makes no difference who the beneficiaries are. The fixed 40% tax rate after a fixed £325,000 allowance apply to everyone.

The UK has just introduced an additional “residential nil rate band”. Starting at £100,000 for this tax year, it increases to £175,000 by 2020/21 (after which it should rise with inflation). This is a welcome reform but there are limitations.

It only applies to residential property you have lived in, and only where received directly by descendants (so excluding many trusts). The relief tapers away for estates worth over £2million, so, on its introduction, estates over £2.2m do not receive any residential nil rate band at all.

In France, spouses/civil (“PACS”) partners also receive inheritances tax free, but do pay tax on gifts. Tax is calculated on, and paid by, each beneficiary. Every person you leave assets to has to personally pay the tax due. The rates and allowances vary according to beneficiary, with immediate family being much better off than distant or non-relatives.

For example, children pay tax at progressive rates starting from 5% to 45%, after a €100,000 allowance. On the other hand, non-relatives pay a fixed 60%, with only €1,594 being tax free.

Note that “non-relatives” includes unmarried partners (unless you have entered into a PACS) and step-children.

If you have adult children from a previous relationship, you may not think of them as your spouse’s step-children. But if you leave assets to your spouse, who then passes them to your children when he/she dies, this is giving assets to step-children/non-relatives.

Your children will therefore pay tax at 60% and lose the €100,000 allowance. Research all your options to see how you can protect both your spouse and children.

For British expatriates, estate planning may be the most complicated part of living in France. There are too many possibilities to get it wrong, resulting in unwelcome surprises for your family. But there are also planning opportunities to achieve your wishes and lower taxation for your heirs. A little time and effort, with specialist, professional advice, will prove extremely beneficial and provide peace of mind.

This article is by Bill Blevins of Blevins Franks financial advice group who also writes for the Sunday Times on overseas finance. He is co-author of the Blevins Franks guide to Living in France

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 is advised to seek personalised advice.