French succession and inheritance tax revisited

Foreign nationals living in France have to find their way around unfamiliar, bureaucratic systems and legislation, with the French succession regime being particularly concerning.

We always get enquiries on this topic, particularly from British expatriates since the regime here is different from the UK’s.

To add to the complexity, they are now also worried about the UK inheritance tax reforms and how much tax their pension beneficiaries will pay.

Here I look at some of the issues UK nationals living in France need to be aware of right now.

Read more: How does French inheritance tax work for UK heirs?

Non-French assets remain liable for succession tax

A surprisingly common misconception among British expatriates is that assets they own outside France are exempt from French succession tax.

But the rule is clear: if you are residing in France at the time of your death, your worldwide estate is assessed for French succession tax. This includes any property you have in the UK or elsewhere in the world and all overseas investments and bank accounts.

 Read more: How do I declare deceased husband’s pension for French taxes?

Succession tax allowances

My January feature mentioned the impact of the frozen UK tax thresholds on people’s tax bills, particularly with inheritance tax. It is actually a similar situation here in France with the succession tax allowances.

While the income tax bands are usually indexed with inflation, the succession tax allowances have not increased for many years. In real terms, the value that you can leave to your children or other beneficiaries has diminished. As people’s wealth increases over time (possibly at a faster rate than inflation), keeping allowances frozen results in increased tax revenue for the government.

Currently, you can leave €100,000 to each child tax-free. This has remained unchanged since it was reduced from €159,325 in 2012.

Thanks to inflation, €100,000 has much less buying power than it did 12 years ago, and it will have less in 10 years’ time than it does today.

France is not very generous in terms of what you can leave to heirs. Once you exceed the allowances the tax rates can be punitive. For children, the rates reach up to 45%. It is much worse for other heirs. Grandchildren do not get the €100,000 allowance (just €31,865 for gifts), and for siblings, nephews/nieces etc and non-relatives it ranges from €15,932 to just €1,594.

During the debate over former Prime Minister Michel Barnier’s ill-fated Budget, the Assemblée nationale did propose doubling the allowances for siblings, nephews, nieces, children and grandchildren of the spouse. Hopefully this bodes well for the future.

Stepchildren are classed as non-relatives and pay tax at 60%, with just the €1,594 allowance. This can be disastrous for unaware couples with children from previous relationships when an inheritance does not pass directly down the bloodline.

Read more: French Justice Ministry: Why we consider 2021 inheritance law to be fair

Succession planning

Fortunately, there is much planning that can be done with liquid assets, cash and investments to reduce or potentially eliminate succession tax liability.

Savings and investment structures available in France can provide significant succession tax planning benefits, as well as tax advantages for yourself. Additionally, they may fall outside French succession law allowing you to nominate your choice of beneficiaries, and can also be easily transferred to them on your death.

When it comes to property, there are fewer opportunities to reduce succession tax (which is why we sometimes suggest people consider reducing their exposure to property), but planning can still be done.

Gifting all or part of a property is feasible in some situations. If it is done in a timely manner within the gifting allowances, it can result in a significant reduction in tax. In many cases, you can retain a life interest or use of the property, so you can continue living in it while reducing the tax bill for beneficiaries. Take care to ensure your approach suits your objectives and family situation.

Another big challenge when it comes to property is the forced heirship rules. Essentially, children are automatically considered to be protected heirs and entitled to inherit a proportion of your French estate (up to 75%), which can be problematic for the surviving spouse.

You can use the EU succession regulation to opt for UK law to apply on your death, but under French domestic law children have the right to make a claim for their reserved share of your French assets – ie. your home in France.

Fortunately, there are solutions. Where the couple have children in common it can be relatively straightforward, such as a change in marriage regime or a clause in the contract at the point of purchase.

However, it gets much more complex when you have children from a previous relationship, and you will need personalised advice and solutions.

Read more: Is it aways possible to correct an error in French tax income declaration?

UK inheritance tax and pension funds

Any assets you own in the UK remain liable for UK inheritance tax, regardless of residence or domicile. From April 2027 this will also include your UK-registered pensions, a move that will push many more families into the UK IHT net.

If your UK private pension is passed to UK resident beneficiaries, they could potentially pay not only the 40% inheritance tax but also, if you die after age 75, income tax of up to 45% on the residual funds.

Unfortunately, transferring a UK pension into a Qualifying Recognised Overseas Pensions Scheme (QROPS) is no longer tax-free for French residents. Since October 30, 2024, a 25% Overseas Transfer Charge is imposed on the amount transferred.

Fortunately, there still exists a path to extract a pension fund from the UK system tax efficiently, subject to certain conditions and, of course, your circumstances and objectives.

Read more: Why are UK authorities asking about French work for pension top-up?

Conclusion

There is no one-size-fits-all solution regarding UK pensions and cross-border taxation – you need highly personalised advice from a suitably regulated professional.

Likewise, your estate planning should be tailor-made for your family situation and goals, and carefully structured around the French and UK inheritance regimes.