French vs UK Inheritance Tax
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When it comes to the inheritance of property, the UK and France have very different tax systems. But which is better and are you able to choose? Charlotte Macdonald, an associate solicitor in the International and Cross-Border (ICB) team at Stone King LLP, explains
Most people, ideally, wouldn't want any inheritance tax to be paid following their death - however if tax must be paid my clients often ask me whether it would be better for their family to have to pay UK inheritance tax or French inheritance tax.
A quick overview of the UK inheritance tax system
In the UK inheritance tax is assessed on a person's estate. Following your death, your executors will ascertain the value of your assets, minus any outstanding debts, and what remains is your 'estate'.
Each person in the UK has an inheritance tax allowance of £325,000 (this is known as the Nil Rate Band or NRB). However, this allowance may be reduced if gifts are made in the 7 years before your death.
There is also an additional tax free allowance which only applies when leaving a property that has been your home to your children, or to more remote descendants (this is known as the Residential Nil Rate Band or RNRB'). The RNRB is worth £150,000 this tax year.
Assuming that a person has made no qualifying gifts in the 7 years before their death, their estate must be worth over £325,000 before any inheritance tax is payable. If their estate is valued at less than this, there will be no inheritance tax payable.
Spouses/civil partners and a few other organisations, such as charities, can receive their inheritance tax free. Everyone else, regardless of their relationship to you, will pay tax at the rate of 40%.
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In some instances the inheritance tax free allowance can be much higher than £325,000. This is because it is possible to transfer the NRB and RNRB between spouses. For example. Mr and Mrs A are married. On his death Mr A leaves Mrs A all his assets, so at this time there is no inheritance tax to pay. On Mrs A's death she leaves all her assets to her children equally. Her estate has the following tax free allowances available to it:
Mr A's NRB:£325,000
Mrs A's NRB:£325,000
Mr A's RNRB:£150,000
Mrs A's RNRB:£150,000
Total tax free allowance:£950,000
This means that a married couple, leaving their home to their children could have a combined inheritance allowance of up to £950,000 this tax year.
A quick overview of the French inheritance tax system
The French inheritance tax system works differently to that in the UK. Instead of a person's estate having the tax free allowance, it is the person inheriting (the beneficiary) who has their own tax free allowance.
As in the UK, if you leave your assets to your spouse or civil partner there is no inheritance tax to pay. Each of your children has a tax free allowance of €100,000. Children pay inheritance tax on a sliding scale between 5% - 45% on the amount they inherit over their tax free allowance. A non-related beneficiary, such as a friend or a step-child is taxed at the very high rate of 60%, and they only have a tax free allowance of €1,594 each. Therefore the amount of inheritance tax payable in France on your death will depend on how much you leave, and who you leave your assets to.
The Anglo/French Double Taxation Treaty
There is a 1963 double taxation treaty for inheritance taxes between France and the UK. This treaty confirms which country has primary taxation rights for individuals who have assets in both France and the UK and/or spend time living in both countries. It is not possible to simply choose French inheritance tax, or UK inheritance tax to apply on your death. There are a number of tests listed under the treaty which will confirm which country can tax which assets.
In 2015 the European Succession Regulation came into force, which allows a person to elect for the law of their nationality to apply to their will in France. It is important to note that this Regulation only applies to succession (eg, who gets what when you die) and it does not directly apply to taxation.
Is it better to be taxed under the French or UK system?
Ultimately it will depend on your circumstances as to whether it is better to be taxed under the French or UK system.
For example, if you are a single person with a home and one child, under the UK system you could leave up to it £475,000 free of UK inheritance tax (taking into account the NRB and RNRB).In France, based on the same circumstances, you could only leave €100,000 tax free to that child.
If however, instead of one child, you had six children you could leave them €600,000 free of French inheritance tax.
As mentioned above it is not possible to 'choose' UK or French tax law to apply, but you are able to choose in which country you decide to have assets, and you are able to choose how you leave those assets on your death.
Please note, inheritance tax is complicated. It has not been possible to explain in detail all the tax allowances available, and the examples above use very basic details. If you need inheritance tax advice please approach a professional to assist who can ensure that all relevant details and allowances can be applied to your circumstances.
For assistance with your Anglo/French estate planning please contact the International and Cross-Border team at Stone King.
All tax allowances and rates correct as at July 2019.
About the author
Charlotte Macdonald is an associate solicitor in the International and Cross-Border (ICB) team at Stone King LLP. The specialist ICB team deals with nothing but international and cross-border work.
Charlotte regularly provides cross-border succession and taxation advice to clients who are either living in France or are living in the UK but own property in France.
All past and present solicitors in the Stone King ICB team have been trained in-house to the highest standards. Charlotte has completed the STEP benchmark qualification in cross-border estates with a distinction and is a member of the STEP Cross-Border Estates Global Special Interest Group.
Stone King are able to deal with every jurisdiction of the world, but about 50% of the work they do involves UK clients with French assets, or French clients with UK assets.
For further information email [email protected] or speak to one of the Stone King International and Cross-Border team on +44 (0)1225 337599.
If you found this helpful, why not read Stone King LLP's guide to French will problems and misconceptions