There are four key components for your financial planning: managing your savings and investments, tax planning, protecting your pension funds and, last but not least, estate planning.
Estate planning always needs careful consideration, but even more so if you live or own assets in France. French succession tax works very differently to UK inheritance tax and some of your heirs may lose more than half their inheritance to tax.
Succession law imposes a ‘forced heirship’ regime – an alien concept if you have been brought up understanding that you are free to leave your estate to the beneficiaries of your choice.
The first step with succession planning is to consider how you want your assets passed down to your family and heirs. The rules vary depending on who the beneficiaries are, so your solutions need to be tailored for your family.
Succession tax is applied when assets pass on death or as lifetime gifts. In France, tax is charged on each beneficiary, depending on their relationship to you and how much they receive. If you are resident in France when you die, each heir pays succession tax on their inheritance. This applies to worldwide assets. If you have been living in France for six out of the last 10 years and receive an inheritance or gift from abroad, you are liable for succession tax.
This does not however apply to inheritances solely from the UK since, under the France/UK tax treaty, they are only taxable there.
Spouses and civil partners (pacte civil de solidarité) are exempt from succession tax on inheritances. Lifetime gifts are taxable at rates from 5% to 45%, though the first €80,724 is tax-free.
Tax rates for children (inheritances and gifts) range from 5% to 45%, with an allowance of €100,000 each. This does not apply to stepchildren, unless fully adopted. Stepchildren are considered as unrelated and so pay tax at 60% and only receive an allowance of €1,594.
You can give grandchildren tax-free gifts of up to €31,865, plus the same again for cash gifts.
Here are two examples of how succession tax can affect your heirs. These are basic illustrations but show how much impact the tax can have without any strategic estate planning.
The first is a situation we often come across, in which couples have children from previous relationships. They therefore effectively have stepchildren, even though those children are grown with children themselves. As assets are passed from one spouse to another, then to the next generation, it can generate a large tax bill.
Peter and Jane live permanently in France and have assets worth €2,000,000. Peter has two sons from his first marriage, while Jane has a daughter from a previous relationship. Peter dies and leaves everything to Jane, who is exempt from succession tax. When she dies, her daughter receives half of her estate as of right, so receives €1,000,000, and Peter’s sons each receive €500,000. Her daughter gets the €100,000 allowance and has a tax bill of just under €213,000. She, therefore, receives an inheritance of a little more than €787,000. John’s two sons, though, only receive a net inheritance of €200,956 each. Since they are inheriting from Jane, to whom they are ‘not related’, their tax bill is €299,044 each.
If you and/or your partner have children from previous relationships, there are steps you can take to avoid such high and unfair tax liabilities.
In another hypothetical example, John and Mary also live in France but are not married. They jointly own a property worth €500,000. John dies, and Mary inherits his share of the house as well as his investment portfolio worth €200,000. Since they are not married or in a civil relationship Mary ends up with a succession tax bill of €269,044. This could have been reduced to nil if John and Mary had married or entered into a PACS.
In each instance, there are various solutions that could mitigate succession tax. For example, allowances for all lifetime gifts renew every 15 years. The value of your main home can be reduced by 20%, provided your spouse/PACs partner or children continue to live in it. It is also possible to make tax-efficient gifts to stepchildren.
You could use a usufruct (usufruit) to give assets to children, while retaining a lifetime right to live in the property and/or to the income. This is a way of splitting the overall inheritance of a property while making the most of more favourable allowances and tax rates. The younger you are the better, as the value of the gift is reduced on a sliding scale depending on age.
When it comes to savings and investments, there are structures that can provide significant succession tax-planning benefits in France, as well as accomplishing tax advantages for you. Make sure the arrangements achieve what you wish, in the way you wish. While some may appear similar, small differences can have big implications and you may miss out on succession tax savings.
Be aware that, although Brussels IV allows you to choose UK succession law over French law, you cannot opt for UK inheritance tax over French succession tax.
Every family is different, so your estate plan must be tailored to meet your situation. Dealing with tax regimes and succession laws of different countries can get complex so you need to understand the rules and how the various planning options work for you. Specialist, professional advice will give you peace of mind that you are making things as straightforward and tax-efficient for your heirs as possible.
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
