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France: Love not all you need in inheritance planning
February, being the month of Valentine’s Day, is an apt time to discuss the financial options we have to take care of our loved ones, our families.
I spend a lot of time talking to people about inheritance tax and how to reduce or avoid it. The fact that people worry about their family being well taken care of after their own death is a wonderful part of human nature, demonstrating that the relationship with our families is more important than anything else.
Many people assume all French tax systems are bad and expect no different when it comes to inheritance tax. In many cases, this is simply not the case. The topic does, however, as in the UK, require planning. Leaving assets behind is more complex in France due to succession rules.
The main difference between the UK and France is that the French tax the individual, based on the relationship to the donor, whereas in the UK it is the estate that is taxed and not the individual.
This makes the two systems incompatible, which is why the UK and France have a succession treaty to deal with those incompatibilities.
The good news for spouses is that gifts on death (not those during your lifetime, sadly) between you and your beloved are exempt from any inheritance tax considerations at all.
If you have children, however, it does not necessarily mean that your spouse will inherit everything (in line with your wishes), as would be the case in the UK.
Succession rules protect reserved heirs, such as children. A spouse is not deemed a reserved heir. This means that, in many cases, steps need to be taken to ensure that spouses are well protected and that they will be sure to have a
say in what happens to the joint estate.
This can often be achieved by a simple act of signing a legal document, but this is not a solution for everybody.
What happens to assets left to children?
There is a basic allowance of €100,000 per child, so if you have three children, that will be €300,000.
Capital invested in a French-compliant assurance vie could mean you would be able to leave a further €152,500 per child.
This means that a family of three children can leave €757,500 to their kids without a cent of inheritance tax.
UK fixed property comes under UK rules (courtesy of the UK/France succession treaty), so it is out of the equation.
If you have a property in the UK worth up to £325,000, therefore, you can leave it to them tax free too (under UK rules) so, in this scenario, we can get to well over €1million before paying inheritance tax.
There are all kinds of ways to plan for inheritance tax and appreciating the international dynamic is important, as there are many opportunities that may be taken advantage of.
Also, consider that tax rates start at 5% and do not reach 40% until €902,838, after allowances, whereas inheritance tax starts at 40% in the UK.
There are, however, punitive situations, where serious action is required, such as leaving money to unrelated individuals. In such instances, the inheritance tax rate is a whopping 60% with virtually no allowance.
Again, a combination of legal and investment solutions can work well, so it is a matter of agreeing your objectives and wading through the plethora of solutions, which is where professional advice becomes important.
As the Beatles wisely said: “All you need is love.” But the truth is, a bit of helpful financial advice can also be useful.
This column was written by Robert Kent of Kentingtons financial advisers.
See www.kentingtons.com