Succession law and inheritance taxes in France both work very differently to the UK. If you are unprepared for this, your legacy might not be distributed as you intended, especially if you have remarried or have stepchildren.
Some heirs could even lose more than half of their inheritance in taxes!
Here are four things you should understand and act upon to make sure your legacy ends up in the right hands without attracting more tax than it needs to.
1. Your estate may not be distributed according to your wishes
French succession rules are based on Napoleonic law and are designed to keep property within the bloodline through ‘forced heirship’. If you are resident in France, this could automatically allocate a minimum proportion of your worldwide estate (excluding non-French real estate) to specific heirs – even if your will states otherwise.
Children, for example, are protected heirs that are automatically in line to inherit at least half your estate – 75% if you have three or more children. Spouses, on the other hand, do not have the same standing, so would only be accommodated after the children’s portion has been allocated. See the third point for a potential workaround here.
2. Stepchildren and unmarried spouses may not be recognised as ‘family’
France’s very traditional view of the family treats stepchildren and unmarried partners as ‘non-relatives’ for the purposes of succession law and taxation.
As a result, stepchildren do not have the same right to automatically inherit as natural or legally adopted children. They will also be liable for much higher rates of succession tax, as will couples who are not in a recognised civil partnership (pacs – pacte civil de solidarité).
French succession tax applies when the worldwide assets of a French resident pass on death or as lifetime gifts. Tax rates and allowances depend on the relationship the beneficiary has with the donor and how much they receive.
‘Family’ tax rates and allowances are relatively generous. Biological/adopted children each receive a tax-free allowance of €100,000 and pay tax at progressive rates of 5% to 45%. Married couples and pacs/civil partners can pass on inheritances (but not gifts) tax-free. Meanwhile, ‘non-relatives’ – stepchildren and unmarried partners included – receive an allowance of just €1,594 with an eye-watering flat tax rate of 60%.
If you remarry and have adult children from a previous relationship, you may not think of them as your spouse’s stepchildren. But if you leave assets to your partner (tax-free), who then passes them to your children when they die, they would be taxed at the highest possible rate as non-relatives.
A €400,000 inheritance, for example, would present a tax bill of €58,195 for a biological child, but a staggering €239,044 for a stepchild.
It is possible to overcome these punitive taxes through strategic planning, so take time to explore your options.
3. ‘Brussels IV’ can override local succession rules
Since 2015, the EU’s ‘European Succession Regulation’ – known as ‘Brussels IV’ – offers expatriates the ability to apply the law of their nationality to their estate instead of local succession law. This lets you override forced heirship rules and distribute your legacy according to your written wishes under the law of your ‘home’ country (England and Wales, Scotland or Northern Ireland).
However, beware of rushing to apply the relevant UK law to your estate as Brussels IV is a relatively new and complex development that may have unexpected consequences.
For example, it is obligatory for a French notaire to handle the estate of French residents, so in this scenario they would have to work under a law they are not experienced with.
There may be other, more suitable ways to achieve your estate planning objectives than using Brussels IV, so take care to fully understand the consequences and available options.
Note that Brussels IV only affects succession law – opting to apply the relevant UK law does not allow you to choose UK inheritance tax over French succession tax.
4. You could still face UK inheritance tax
Even if you are a French resident liable for French succession tax on your worldwide estate, your UK assets are subject to UK inheritance tax of 40%.
Fortunately, France and the UK have a specific tax treaty to prevent double taxation on inheritances. This specifies that UK nationals who are long-term residents of France are domiciled in France for inheritance tax purposes and only liable for UK tax on UK assets.
Beware, however, that if you use Brussels IV to nominate that your estate comes under British jurisdiction, this could potentially determine that you are UK- not French-domiciled.
In this case, UK inheritance tax would apply to your worldwide estate as well as French succession tax.
While you would get credit for tax paid in one country, this will be the lower amount, so you are likely to pay a minimum of 40% (the UK rate).
Ultimately, it is important to understand how French taxation and succession rules apply to your personal objectives and unique situation, and how they affect your UK liability.
You should also consider how your legacy will be received by your heirs – an extra gift you can leave them is having their inheritances structured in a tax-efficient way to maximise their value.
Cross-border taxation and domicile law are extremely complex, specialist areas and seen by many as too important for DIY planning.
Every family is different, so expert advice can give peace of mind that you have the most suitable estate planning approach in place – for yourself and your chosen heirs – without attracting unnecessary taxes.
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. www.blevinsfranks.com
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.
