How to pass on your French property to your children in a tax-efficient way
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If done right, gifting your home in France to the next generation can save them from a big tax bill as Matthew Cameron explains
Sensible wealth protection planning, for those who can afford it, will often include an intention by people to pass assets down to their children. In accordance with UK tax law (and subject to some other points we shall discuss below), provided a property owner survives for seven years after having made a gift, the value of that asset will not be included in their estate for the purposes of inheritance tax calculation.
One of the most obvious assets to pass on to one's children would be a second home. This can even be the case where the holiday home they own is in France.
Inevitably though, when a person lives in the UK and wants to gift a property in France to their children, there are potential legal and tax consequences that can arise in both France and the UK. In addition, methods of completing a gift that may be very commonplace in France - and highly beneficial for French tax-saving purposes - can be equally disadvantageous for UK tax purposes.
Let us presume that a person living in the UK wishes to leave their house in France to their children; they understand that this could be good for tax planning, but are not fully sure why. Let us consider some of the points they will need to bear in mind when deciding whether to proceed with the gift.
The property is based in France, and is therefore subject to French taxation rules. French tax rules impose a potential gift tax charge at the point the gift is made. Gift tax is calculated on the same basis as French inheritance tax - with each beneficiary entitled to inherit a certain amount before any tax is paid, and then with the tax being applied at varying rates. One of the early steps in considering whether to proceed with a gift is to calculate the overall tax liability that would arise.
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Gifting in France can be carried out on a 15-year cycle. For example, if a person makes a gift now to the maximum level of the tax-free allowance, they would be able to repeat that gift in 15 years and the beneficiaries would be entitled to their allowance again. This may sound like an unreasonably long period of time, but hopefully this article will help you see that it may not be a problem overall. If the whole of the property is transferred, it will not be necessary to anticipate a further gift in any event.
It is important to bear in mind that as the donor is living in the UK, their worldwide estate is going to be subject to UK inheritance tax as well (there are some exemptions to this, but space does not allow them to be considered here - this is a point upon which specialist advice should be sought). Therefore, the gift in France will result in the donor's estate having been reduced for the purposes of UK inheritance tax. One proviso for this reduction in UK inheritance tax is that the donor needs to have survived the gift by a specific period. However, unlike the 15-year requirement in France, the period in the UK is seven years. If the donor dies before that seven years has expired, there is some tapering to reduce the UK tax burden. Another proviso to be observed before the property is to be treated as outside of the donor's estate on death is that they must not have given the property to the children while retaining any ability to occupy or control it.
If the donor has exercised control, HMRC would treat the French property as continuing to be included in the donor's estate for the purposes of calculation of UK inheritance tax. Quite simply, that would entirely defeat the object of the gift. This means that extra care must be taken if the donor has any intention of using the property for more than a week or two each year.
One way that control can be retained by the donor can actually be achieved inadvertently through one method of completing the gift that could well be the default option that a French notaire may choose. A notaire might suggest that a donor should retain a right of use over the property, as this is a way of reducing the likely exposure to French gift tax and notaire's fees. It is highly advantageous for French tax planning, yet similarly disadvantageous for UK tax.
Capital gains tax
So far, we have looked at the implications of French gift and inheritance tax, as well as UK inheritance tax. While we have seen that problems can clearly arise in the absence of careful planning, it is nevertheless the case that substantial savings can be made.
We should also bear in mind that the gift of the French property by the donor can give rise to a liability to capital gains tax (CGT) in the UK. UK CGT applies when a person disposes of an asset (excluding their main residence). The key point here is that the tax applies on a disposal, not just on a sale: it does not matter that the asset is given away rather than sold at a profit. So if the French house is gifted to the donor's children, UK CGT is applied by taking the original purchase price from the value at the time of the gift. Expenses incurred during the ownership of the property - such as the cost of works and professional fees - are also deducted from the value at the time of the gift. The result constitutes the profit made, and this is subject to tax in the UK.
It is evident that this application of capital gains tax can result in a further reduction in the benefits that would otherwise arise from the gift. Nevertheless, the tax may not itself be particularly onerous, and the overall benefits should be compared against the initial costs.
You also need to bear in mind the notaire's fees for completing a deed of gift. These are calculated by reference to fixed scales imposed by law, taking into account the value of the property. They can typically amount to around 2-3% of the value of the property.
In order to decide whether this outlay is worthwhile, the family should understand fully the implications of, and consequences arising from, a gift of French property, since structuring the gift in an unsuitable format can expose the donor and their family to substantial costs, both in France and the UK. It can even result in the whole value of the property being included in the donor's estate on death, effectively defeating the object of the gift in the first place!
Matthew Cameron is a Partner and Head of French Legal Services at Ashtons Legal