Whether you live in France or have a holiday home,
This article by Blevins Franks, international tax and wealth management advisers, explains the intricacies of these tax rules.
If you move to live in France, you will escape UK inheritance tax but will be faced with the French equivalent instead – succession tax. It works differently than in the UK, but this does not necessarily mean your heirs will be better off. The rules are more complicated and you need to familiarise yourself with how it works and consider what steps you can take to reduce your tax liability.
If you buy property in France but remain resident in the UK, you need to understand how the tax rules of the two countries interact and where tax will be due.
Succession tax – the basic rules
French succession tax is a tax on inheritance and lifetime gifts. If you are a French domicile (a concept similar to residence in France), you are liable to the tax on your worldwide assets.
Any assets you own in France are always subject to this tax, regardless of whether you or the recipient lives there.
In the UK, inheritance tax is charged on your estate. In France, succession tax is calculated on and paid by each individual beneficiary. The tax rates and allowances vary according to who the beneficiary is. The rates range from 5% right up to 60% and some exemptions can be very low.
Transfers between spouses and civil partners (Pacte Civil de Solidarité – PACS) are tax free. However, lifetime gifts to spouses and partners are liable to succession tax.
The value of your main home can be reduced by 20% for succession tax purposes, but only if it is occupied as a main home by your surviving spouse/partner or by one of your children. Succession tax should generally be paid within six months of death.
The tax rates for children (including adopted, but not stepchildren) and other relatives in the direct line start at 5% for inheritances under €8,072 and rise progressively to 45% for inheritances over €1,805,677. The same rates apply to spouses/partners in the case of gifts.
Under the current rules, your children will each receive a tax free allowance of €100,000 (reduced last year from €159,325). If you make a lifetime gift to your spouse/partner, they receive an allowance of €80,724.
If you leave assets to a brother or sister, they will pay succession tax at either 35% or 45%, depending on the amount. Their tax free allowance is just €15,932.
There is an exception for siblings who have been living with you for the last five years and are either over 50 or unable to work because of a disability. In this case they benefit according to the same rules as those for spouses.
Relatives to the fourth degree pay tax at 55%, with nephews and nieces receiving a €7,967 allowance.
More distant and non-relatives will lose 60% of their inheritance to tax, and their tax-free exemption is a mere €1,594. Unmarried partners who have not entered into a PACS arrangement, stepchildren and godchildren are all classed as non-relatives.
New EU succession law
The higher tax rates for distant relatives have been academic for many people. France’s strict succession law favours your children first, then your surviving spouse, so there has been limited possibility to leave assets to siblings, godchildren, friends etc, even if you wanted to.
This will change from August 2015, when a new EU regulation will allow you to elect, via your will, for the laws of your country of nationality to apply. British expatriates in France will be able to distribute their wealth under the provisions of British law, and so to whomever they wish.
Note that this only applies to succession law. It does not apply to succession tax. You cannot opt for UK inheritance tax to apply instead of succession tax.
There is one important tax impact you need to consider though. If you leave assets to relatives beyond the direct line, or non-relatives, they will have to pay very high tax rates, up to 60%, as outlined above, unless you plan to protect them from this tax.
UK/France double tax treaty
Under the UK/France Double Tax Treaty, long-term French residents are deemed to be domiciled in France for UK inheritance tax purposes. Therefore, if you are resident in France when you die, your worldwide estate will be taxable in France, not in the UK.
The exception is for any assets you own in the UK, since these are always liable to UK inheritance tax. On your death, these assets will be assessed in the UK to see if you have any liability to tax there. If you do, the UK tax paid can be credited against the French succession tax due on your total assets. If no tax is due in the UK, then succession tax is payable only in France.
If you are a UK resident, your French property will be subject to French succession tax under the rules and rates outlined above. It will also form part of your estate for UK inheritance tax purposes, but your heirs will be entitled to a credit for the French tax paid on the asset to avoid double taxation.
Succession tax planning
Succession tax planning is extremely important if you want to ensure your heirs get to keep as much of their inheritance as possible, rather than having to share too much with the taxman. Professional advice and planning can make a significant difference.
For example, assets held within an assurance vie benefit from succession tax savings if the policy was established with lives assured under age 70. The subscriber need not be a French resident, so you can set up the policy before you to move to France, or to cover assets held in France if you are non-resident.
French taxation is always complicated, more so if you have assets in more than one county, and it is important to seek specialist advice. If you have not yet moved to France, do not wait until you do. It usually pays to start planning early and to make sure you get your tax planning right from the outset, so seek specialist advice now.
The 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 should take personalised advice.