French inheritance finances are notoriously complicated. But with careful planning both French and UK inheritance tax savings can be made, says Bill Blevins
Britons who move to France should think about when and where they may eventually die, and preferably take action before they leave the UK if they want to make inheritance tax savings. Britain and France have a special tax treaty on inheritance and it is worth familiarising yourself with the issues in advance.
It is possible, although you may not have any plans for it now, that you will at some stage return to the UK. Many people do, not because they are disillusioned with the lifestyle that France offers, but because of unforeseen circumstances such as failing health or a need to be with loved ones. If this turns out to be the case, it is important to make the necessary tax planning arrangements early to protect your spouse and heirs from needless tax liabilities.
Your estate is liable to French succession tax on your worldwide assets if you are domiciled in France at the date of death. Under the UK/France treaty, you are likely to be regarded as domiciled in France and not the UK if you are resident in France at the date of death.
If you are a UK resident and domicile at the date of death, then only your real estate in France is liable to French succession tax. UK inheritance tax would, however, be payable on your worldwide assets (including the French real estate), and the French tax would be credited against the UK tax payable.
Under the UK/France inheritance tax treaty, inheritances (not lifetime gifts) from a UK domicile passing to a French resident are not liable to succession tax in France, unless the asset inherited is a French asset.
The treaty aims to avoid double taxation of your estate where you are domiciled in either the UK or France at the time of death.
French succession tax – key issuesFrench succession tax is a tax on gifts and inheritances and is paid by the beneficiary. There is no tax on inheritances between husband and wife or PACS (pacte civil de solidarit�) partners although there is tax on lifetime gifts between spouses and PACS partners above an allowance of €79,533/�67,647 in 2010.
The tax exemption on inheritances also applies to siblings who are single, widowed, divorced or separated providing at the date of the deceased’s death they are aged more than 50, or so disabled they cannot work, and they were living with the deceased during the five years preceding the death. The allowance on gifts for these beneficiaries is €79,533/�67,647 in 2010.
There is a tax-free allowance of €156,974/�133,515 for each child and each parent and other lower exemptions depending on the relationship with the deceased. For more remote relatives and unrelated beneficiaries, which includes unmarried couples not in a PACS agreement, the allowance is a mere €1,570/�1,335 and on inheritances only. Succession tax rates vary from 5% to 60%, although between close family the top rate is 40%. Unmarried couples (or unrelated family members) will pay a flat rate of 60%.
There is a 20% discount on the deceased’s main home if it is also the main home of the beneficiary.
An inheritance or gift is also taxable if the recipient is resident in France and has been so resident for at least six of the 10 tax years prior to the year in which the inheritance or gift is received. This does not apply to inheritances from a UK domicile to a French resident recipient under the inheritance tax treaty between the UK and France. An inheritance or gift from one non-resident to another non-resident is taxable if it is a French asset.
Allowances on lifetime gifts renew every six years. So gifts up to these allowances can be made every six years tax free. French gifts tax automatically applies to gifts that are required to be made by deed or with judicial recognition. A lifetime gift by manual transfer such as cash does not necessarily have to be registered with the tax authorities. However, if not registered at the time the gift is made, such gifts are taken into account when inheritance tax is computed and it may be better for the recipient to declare the gift when it is made, depending on the circumstances.
If a French resident over the age of 75 with a UK pension fund dies within five years of becoming non-UK resident, and the fund is paid out as a lump sum to a non-spouse, UK tax charges can arise on death of between 40% and 70%. Under the inheritance tax treaty, as the fund is a UK asset, UK inheritance tax is payable. Where the fund is also subject to French succession tax, a tax credit is available in France for the UK taxes paid. Credit is only available in France in relation to the UK inheritance tax paid.
There is a specific exemption in French legislation where a purchased annuity reverts to a direct line recipient. Where the income is treated as a purchased annuity in France, and the annuity continues to be taken by a child or grandchild, it is exempt from French succession tax.
There are ways to reduce your French and UK inheritance tax liabilities whether you stay in France or return to the UK, but you need to take professional advice suited to your specific circumstances and long-term plans. For instance, an international scheme known as QNUPS (qualifying non-UK pension scheme) can free your assets from UK inheritance tax whether you are a UK domicile or expatriate in France.
Consult a tax and wealth management specialist with knowledge of the French and UK systems in order to preserve your estate for you and your family. LF
ContactBill Blevins is managing director of Blevins Franks International and advises retired expats www.blevinsfranks.comThe level and bases of, and reliefs from taxation may change. Any statements based on taxation are based upon current taxation laws and practices which are subject to change.Living France March 2011