Looking ahead

When you buy a property in France, it’s important to consider the implications of inheritance tax, says Vincent Morand...

Immediately after his election, President Sarkozy introduced profound changes to French inheritance tax. These had a particularly significant impact with regard to the exemption of inheritance tax between spouses. The various rules are set up by the French Code G�n�ral des Imp�ts and the double taxation treaty signed between France and the UK on 21 June 1963. Most of these rules also apply to gift tax. Naturally we cannot consider these rules in their entirety but here are five points that you should bear in mind.Scope of taxFrench inheritance tax is paid by each beneficiary (not by the deceased’s estate as is the case in the UK) and the amount is calculated in relation to the value received after the deduction of all liabilities. If you die domiciled in France, French inheritance tax is payable by each beneficiary on their share of your worldwide assets. If you die domiciled outside France, then only your assets in France are liable to French inheritance tax including immoveable property held through a company such as a soci�t� civile immobili�re.If you are resident in the UK, an asset initially taxable in France is also likely to be taken into account in the UK for inheritance tax purposes. Similarly, if you are living in France then any property you may own in the UK would initially be taxed there and then subsequently in France. However, under the double taxation treaty mentioned above, the same tax cannot be paid twice, so tax paid in one country can be deducted in the other country. In practice the larger tax only is finally payable.Time for paymentIf the death occurs in France, inheritance tax is payable within 6 months whereas you will have 12 months to pay if the death happens outside of France. The tax form to be filled in is known as a d�claration de succession and tax is payable on registration. Should the beneficiaries miss these deadlines, penalties and interests for late payment may be due.Rates of taxRates and allowances vary between each class of beneficiary. A transfer on death between spouses and members of a pacte civil de solidarit� (PACS) are now exempt from inheritance tax, following recent changes in tax law. There has been some development in French law regarding the English civil partnership agreement (CPA) and although it might be too soon to affirm that there is no longer inheritance tax in France between two individuals having signed a CPA, the evolution is clearly on its way. It should shortly be the case – thankfully – that there will no inheritance tax on any legacy between partners under a CPA. French inheritance tax varies from 5 per cent to 60 per cent. The rates are as shown below. Ascendants and descendants have an allowance of €156,359 (�134,745). The current rates of French inheritance tax payable by surviving children and surviving parents are as follows: Band of value: Rate of tax• First €156,359 (�134,745): tax free • Less than €7,922(�6,826): 5 per cent • From €7,922 to €11,883 (�10,204): 10 per cent • From €11,883 to €15,636 (�13,474): 15 per cent • From €15,636 to €542,043 (�467,117): 20 per cent • From €542,043 to €886,032 (�763,557): 30 per cent • From €886,032 to €1,772,064 (�1,104,778): 35 per cent • Greater than €1,772,064: 40 per cent • Brothers and sisters are currently taxed at a rate of 35 per cent if the band of value they inherit is less than €23,975 (�20,660) – 45 per cent if more – with a tax-free allowance of €15,636 (�13,474). • Relatives to the fourth degree are charged at a flat rate of 55 per cent with a tax-free allowance of €7,818 (�6,737). • Relatives above the fourth degree or other beneficiaries who are not related to the deceased by blood or marriage pay a flat rate of 60 per cent with a tax-free allowance of €1,564 (�1,347).GiftsLifetime gifts may be a tax-efficient way of disposing of your assets. Rates of tax and allowances are generally the same as for inheritance although there are certain other allowances that depend on the relationship between donor and donee.In the event of a lifetime gift between spouses or for a couple having completed a PACS, there is a tax liability, which differs from the position on death. Indeed, gift tax remains payable with a tax-free allowance of €79,222 (�68,271).The current rates of French gift tax payable between spouses or between individuals having signed a PACS are as follows: Band of value: Rate of tax • First €79,222 (�68,271): tax free • Less than €7,922 (�6,826): 5 per cent • From €7,922 to €15,636 (�13,474): 10 per cent • From €15,636 to €31,272 (�26,949): 15 per cent • From €31,272 to €542,043 (�467,117): 20 per cent • From €542,043 to €886,032 (�763,557): 30 per cent • From €886,032 to €1,772,064 (�1,527,114): 35 per cent • Greater than €1,772,064: 40 per centLife interestsOne popular method of reducing the impact of French inheritance tax is for property owners to give away their house to their children while retaining a lifetime right (usufruit) to remain in occupation.The person owning this lifetime right is also entitled to any income (such as rent) that the property may produce. The younger the donors are, the more effective this technique is.The usufruit is valued on a sliding scale. Similarly, the value of the reversionary interest (in the example above, the children of the donor) is calculated on the same sliding scale. In French this is known as the nue propri�t�. The valuations depend on the age of the life-interest holder. The older the donor is, the greater the value of the reversion.Calculations of inheritance or gift tax are based on the value of the nue propri�t�. No taxes are payable when the property vests absolutely in the nue propri�taire on the death of the life-interest holder.It is important to note, though, that while in some instances there can be a substantial reduction in the exposure to inheritance tax in France, there can nevertheless be substantial fiscal disadvantages to such a structure particularly regarding liability of inheritance in the UK.Although it would probably be a mistake not to consider this matter, it would not be wise to structure the ownership of your French property taking into account only the inheritance tax payable in case of death. In the same manner, it may also be worth considering making a gift to your beneficiaries during your lifetime but there may also be inconveniences. This all depends on your personal circumstances, and a specific analysis of your situation would be advisable to establish which option would be right for you.