Over recent years, perhaps the biggest topic for British expatriates and those planning to move to the EU has been Brexit.
It created uncertainty over what it could mean for their future in France, and whether it would make the various rules and regulations harder to navigate.
In truth, many of the French rules differed considerably from UK ones before we ever heard of Brexit, creating various complications for UK nationals setting up life here.
And one very good example of this is estate planning, with France’s complex succession law and tax regimes.
You need to understand how these work and affect your family before you can take steps to ensure your estate will be passed on according to your wishes and with as little tax as possible.
Succession law and forced heirship
In the UK, you are largely free to leave your estate to whomever you wish, in the amounts that you wish.
In France, however, its Napoleonic code was designed to keep property within the ‘bloodline’. Children are protected heirs and must inherit between 50% and 75% of your estate (depending on the number of children).
You can only leave the ‘freely disposable’ part to your spouse or PACS (civil) partner.
EU succession law
While the forced heirship rules may not suit you, since 2015 it is possible to use the EU succession regulation Brussels IV to opt for the succession law of your country of nationality to apply on your death, instead of that of your country of residence.
This applies to all foreign nationals living in the EU, so Brexit does not change this.
You need to make this election in your will, otherwise French law automatically applies.
But first it is important to make sure you understand the pros and cons. For example, opting for UK law could, depending on your personal situation, have the unexpected consequence of making you liable for UK inheritance tax on your worldwide assets, as well as French succession tax (with any appropriate offset).
There may be other ways to achieve your estate planning wishes, so do your research and get professional, personalised advice to establish what will work best for your family situation.
Succession tax
In the UK, inheritance tax is paid by your estate, with the single tax rate of 40% and just two allowances (the ‘nil rate band’ and newer main residence allowance).
In France, succession tax is charged on each beneficiary individually, with the rates and allowances varying considerably depending on their relationship to you.
If you are resident in France when you die, each heir pays succession tax on their inheritance. This applies to worldwide assets.
Likewise, if you have been living in France for six out of the last 10 years and receive an inheritance or gift from abroad, you could be liable for succession tax (this depends on the double tax treaty and inheritances from the UK are only taxable there). Children (natural and adopted) each benefit from a €100,000 allowance and pay tax at progressive rates from 5% to 45%.
Grandchildren pay tax at the same rates, but only receive a €1,594 allowance on inheritances (you can give them lifetime and cash gifts up to €31,865 tax free).
There is no tax on inheritances between spouses and PACS partners, but lifetime gifts are taxable at 5%-45% with a €80,724 allowance.
Brothers and sisters generally receive a €15,932 allowance and pay tax at 35% or 45%. The allowance for nephews and nieces is €7,967 with a 55% tax rate. Anyone else pays tax at 60%, and their allowance is just €1,594.
Stepchildren and unmarried partners
Stepchildren and unmarried partners are unfortunately treated as ‘non-relatives’ for the purposes of succession law and taxation.
This is a problem for today’s families where many couples are not married and/or have children from previous relationships. Stepchildren do not have the same right to automatically inherit as natural or legally adopted children.
They are also liable for much higher rates of succession tax (60%), as will couples who are not in a recognised civil partnership (PACS).
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 (taxfree), 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 €239,044 for a stepchild.
It may be possible to overcome or mitigate these punitive taxes and the restrictions of succession law, through strategic advance planning, so take time to explore your options.
If you have not bought your French property yet, research the various methods of ownership to establish what will work best for your family.
Other considerations
It is not just inheritance tax that you need to think about. If you are leaving investments, once your heirs receive the funds they will start to pay tax on the income and gains.
Explore arrangements you can use to hold investment capital so that it is tax-efficient for them. Also consider how these investments will pass on to your chosen heirs – will it be a drawn out and costly process, or can ownership easily change hands?
And while you may want the best for your heirs, don’t forget your own needs. Look for arrangements that allow you to benefit from what you have, providing tax advantages during your lifetime as well as for your heirs.
Estate planning is a complex area, especially when you have to consider the rules of two countries and how they interact. Every family is different, so your approach should be tailored to meet your personal objectives and unique situation. Take specialist advice for peace of mind that you have got the right plans in place, for yourself and your heirs.
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.
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