UK Inheritance Tax V French Succession Tax
This is an area that many expats find very confusing: what and where to declare, what and where to pay, where to even start!
It doesn’t help that UK and France have completely different rules. In the UK the estate pays the tax and the net proceeds are paid to the beneficiaries. In France, the proceeds are paid to the beneficiaries. The beneficiary will then complete a Succession tax form and pay the inheritance tax, the amount of which is based on their relationship to the deceased.
What many expats do not realise is that if you are a French resident and inherit from someone who was a UK resident you need to complete and submit a French Succession tax form to URSAAF within 12 months of their death. No actual tax is payable in France as there is a tax treaty in place between the two countries.
Let’s look at a couple of different scenarios:
You are a UK resident and own a property in France. When you pass away your estate will be taxed in the UK on your worldwide moveable assets. However, your property in France will be subject to French inheritance tax.
If you are a French resident, when you pass away French inheritance tax will apply to your worldwide assets. If you still have UK assets, it may be that you will also pay some inheritance tax in the UK, however there is a tax treaty in place to ensure that you do not pay tax twice on the same assets.
In the UK the law says you can make a will naming whoever you wish as your beneficiaries. If you have not made a will, then the rules of intestacy apply and the distribution of your estate is based on these. If you have no living relatives, even long lost and distant, then everything you have will go to the Crown. Anyone born in Scotland would have some restrictions on who they could leave their estate to.
In France you cannot freely dispose of “la réserve” which must be held for your children. You are only free to dispose of as you wish the “quotité disponible”. A spouse is not a protected heir in France, however unless you specifically disinherit them, they are entitled to a quarter of your estate. The amount freely disposable from your estate will depend on the number of children you have.
- If you have one child they are entitled to half of your estate with half freely disposable
- Two children are entitled to two thirds with one third freely disposable
- Three children are entitled to three quarters with one quarter freely available
Since August 2015 it has been possible, in your French will, to adopt the inheritance rules of your country of nationality. This means if you are from the UK then you can adopt UK inheritance rules and leave your estate to whoever you wish. However, it is important to note this applies to inheritance rules not tax, French inheritance tax will still apply. I think this change in legislation will be of particular importance to people in second marriages with children from previous relationships and maybe from the current relationship also. For some reason, the UK and Ireland have chosen not to sign up to this change, which means if you are from the EU and living in the UK your estate will be subject to UK inheritance rules and tax.
Inheritance Tax Rates:
In the UK, the first 325,000 GBP of a person’s estate is free of inheritance tax. From the tax year 2017/18 if you have a family home that will pass directly to your children, then an additional allowance of 100,000 GBP will apply, rising to 175,000 GBP by 2020. This means that by 2020, married couples and those in civil partnerships with a family home to pass to children, could pass a total of 1m GBP free of inheritance tax. Inheritance tax in the UK is 40% of everything above your allowance.
In France, each person can leave 100,000 Euro to each of their children free of inheritance tax. Above this there is a sliding scale starting at 5% and rising to 45%. However as a guide, between 15,932 Euro and 552,324 Euro, the rate payable by the beneficiary is 20%.
For siblings, the first 15,932 Euro of what you leave them is free of inheritance tax, then they pay 35% on the next 24,430 Euro and 45% on everything else
Nieces and nephews can have just 7,967 Euro free of tax then pay a whopping 55% on the rest.
Everyone else (including non-married partners) can inherit a measly 1,594 Euro free of tax and will pay a massive 60% on amounts above this.
An important tax planning tool is the Assurance Vie. Providing it is set up before age 70, you can name beneficiaries and each beneficiary can inherit 152,500 Euro free of inheritance tax, amounts between 152,500 Euro and 852,500 Euro will be taxed at 20% and anything over this at 31.5%. As you can imagine, this could make a huge tax saving, especially for non-married partners, nieces, nephews and beneficiaries not related to you, with potential tax savings of up to 60%. The great thing is, it remains your money until you die which means you have full access if you need it, unlike when you put money in a trust in the UK to try and reduce your inheritance tax liability. In addition, it is the nearest thing the French have to an ISA as your money grows tax free.
If you want any more information or would like some advice, please contact me on the number or email below.
I also hold a free financial surgery in Café de la Tour in Les Arcs on the last Friday morning of each month where you can discuss your own situation in confidence over a cup of coffee.
This article is for information only and should not be considered as advice and is based on current legislation. 04/05/2016.
Overseas rental property – have you thought about this………?
Financial markets are very quiet at the moment. From my view point the financial world appears to be almost at stand still.
The world appears to be awaiting the UK vote on whether to leave Europe or not!
In the meantime, life goes on and whilst the UK celebrates the Leicester City win of the Premier League with a Roman manager, I continue to get contacted by various people asking my opinion on how they should manage their finances as residents and non residents in Italy. The majority of those people also have rental property in their home country as part of their overall financial arrangements.
A review of taxation on overseas rental property for Italian residents
The most common question I am asked is how income from property held overseas is taxed in Italy. Is it exempt from Italian tax because tax has been paid on it overseas first and is it subject to the same taxes as Italian domestic rental income?
I would like to dispel any myths and confirm that, as a resident in Italy, you do have to pay Italian tax on the profit from any rental income on properties held overseas.
The law for Italian tax residents clearly states that the net profit (after allowable expenses in the country in which the property is located) must be declared in the Italian end of year tax return. The net profit is then assessed as income by adding it to the rest of your income for the year and then tax paid at your highest rate of income tax in Italy (that could be as high as 43% depending on your cumulative income for the year).
Let’s not forget the IVIE tax as well which is 0.76% of the property council/cadastrale/rateable value (or whatever you choose to call it) of the property.
If tax has been applied in the country of origin, this can be reclaimed through your tax return. You are protected through a double taxation treaty as long as your country of origin has signed one with Italy.
To clarify, any rental income from properties held overseas must be declared in Italy. This is the NET income (after allowable expenses) and this net figure is added to your other income to determine at which rate of income tax it is assessed in Italy.
But wait a minute. Have you thought about this?
Now, this is all well and good but as most landlords of properties overseas discover, if they are relying on the income from the property to live on then any income benefit can quickly be diminished by additional tax to be paid in Italy.
Do you have useful relatives?
Do you have trustworthy relatives/family members in the country where the property is located? If so, then you might think about gifting the property to them (effectively signing it over to them) and getting them to send the rental income to you as a gift.
The recipient of a gift is not taxable in Italy and therefore you could have a non taxable income stream
However, before you start looking to sign your properties over to family members you need to think of a number of tax consequences of doing this. Mainly the inheritance tax obligations that it imposes on your estate, any tax considerations and administrative burdens it now places on the holder of the property (they would have to be the sole recipient of the money and the sole named owner of the property). That person would have to receive the money in their accounts and submit their tax returns accordingly. They would have to send the money to you under a word of mouth agreement and you would have to trust the other party implicitly, not to mention a number of other tax questions it may pose.
However, assuming those problems could be overcome you might find that you could have the rental income from your overseas property paid to you in Italy, without detraction of Italian tax but through a gift arrangement.
Cross border financial planning at work!
Are your investments tax compliant in Spain?
Many UK nationals resident in Spain will have premium bonds, ISAs, unit trusts, and other vehicles which, although tax efficient in the UK, are not in Spain and are therefore non-compliant for tax purposes. Tax on the growth on these investments may need to be paid in Spain each year, whether withdrawn or not. The advantage of a Spanish Compliant investment, “wrapped” within an insurance policy, is that tax is only payable on gains when these are withdrawn. The gains are charged at SAVINGS TAX rates and NOT INCOME TAX rates. Tax savings can be significant when investments are organised in line with Spanish regulations.
Tax increase on pension funds
The lifetime allowance on pensions will reduce from 6th April 2016. For those who have pension funds over £1 million, 55% tax will be payable on the excess taken as a lump sum. A 25% charge will apply to income although, for a higher rate taxpayer, this extra tax could mean an overall rate of 55% as well. For every £10,000 of income, £5,500 would go in tax. There are people who have not reached this level of pension fund. However, let´s say that there is currently £800,000 in pension savings. With 5% increases each year, in 5 years´ time the funds will be worth over £1 million. There are ways to protect against this charge, up to certain limits and with restrictions. This is one of the reasons why a QROPS arrangement could be suitable for those living overseas as these additional tax charges do not apply to QROPS.
Additional Spanish Succession Tax for non-EU membership
With effect from 1st January 2015, any non-resident who inherits a Spanish asset, and is an ascendant (parent or grandparent), descendent (child or grandchild), or a spouse of the deceased, will be treated in the same way as a Spanish resident, receiving the same allowances and benefits. The tax will then be dependent on the autonomous region in Spain where the deceased was resident or where the asset is situated. This treatment only applies to EU citizens. The EU referendum on 23rd June in the UK could have a serious impact on what future taxes could be due for residents of the UK who inherit Spanish assets.
Impending changes to French inheritance laws
In England, we are used to being able to decide who should inherit our assets when we die. However, once you are considered a French resident, the ‘Code Civil’ stipulates that a set proportion should go to your ‘protected heirs’ (i.e. your children).
For example, if you have two children, they are entitled to 2/3 of the value of your estate. It is only the remaining proportion that you have some control over. If you are not married, and there is no will, the entire estate will pass to the children.
Whatever your will might say (e.g. leaving 100% to your spouse or a friend), these ‘protected heirs’ can insist on receiving their percentage. It is possible to insert a clause in a will whereby your spouse has lifetime ‘use’ of the matrimonial home. They can also continue to receive income from any investments for life, but they cannot sell any assets, (or spend any money), destined to go to the children (e.g. money in a bank account).
Unmarried couples face a tax bill of 60% of any inheritance, after an allowance of the first 1,594 euros. The same applies to anyone you are not directly related to.
‘PACS’d couples have the same rights as husbands and wives and are not liable to pay inheritance tax.
Recent changes in legislation have improved the rights of the spouse to a certain extent, but the situation is still far from ideal.
The good news is that France has signed up to a recent EU law under which citizens of other countries will be allowed to opt for the inheritance laws of their country of birth. This is due to take effect from 17th August 2015.
Providing you have written a will stipulating that your estate should be disposed of under English law, you are at liberty to leave your assets to anyone you want (and in any proportion). This will take precedence over the Code Civil and completely eliminate the question of ‘protected heirs’.
It is worth mentioning that Scottish inheritance law has some similarities with the French ‘Code Civil’. Anyone born in Scotland would still have some restrictions on whom they could leave their estate to (although the limits are far more generous for spouses and it would almost certainly be preferable to take advantage of the new laws).
For reasons best known to themselves, the UK and Irish governments have not signed up to this EU legislation. Nevertheless, this in no way prevents UK citizens living in France taking advantage of the new rules.
If you have any assets (e.g. a bank account) in the UK, it is usually advisable for you to have both English and French wills. Whilst not compulsory, it does make the winding up of the estate far simpler (and cheaper!).
Wills do not need to be complicated and it is quite likely that a standard version for both English and French wills would suit your purposes. Anyone who would like to discuss this with me can contact me on firstname.lastname@example.org.
There are other factors to bear in mind before deciding whether it is in your interests to take advantage of the new legislation. If you have a ‘classic’ French will and are on good terms with your children, they can simply sign away their rights to the inheritance. Mentioning the new law may confuse the notaire in charge of winding up the estate.
Also, you could lose the valuable tax-free limits that your children would otherwise be able to take advantage of.
Personally, I believe the people most likely to benefit from the change in legislation are those who have children from previous relationships, those who want to leave money to their beneficiaries in unequal shares and those who want to leave money to people other than their direct descendants.
You should bear in mind that this new ability to leave your money to anyone you wish in no way affects the inheritance tax rates. As previously mentioned, there is no inheritance tax between spouses. However, after an allowance of €100,000, children will pay a sliding scale of tax (usually with the majority of the excess being taxed at 20%). If you leave your money to third parties, or charities, they can expect to pay 60%.
Assurances Vie policies are frequently used to avoid inheritance tax. Providing these are set up before age 70, each named beneficiary can inherit up to 152,500 euros, totally tax-free, and it is not considered part of the estate. Any sum in excess of this is taxed at a flat rate of 20%. This is particularly beneficial if you were leaving money to an unmarried partner, a charity, nieces and nephews, etc where they would avoid paying the 60% tax!
This is one of the reasons that these policies account for the majority of the investments in France (as well as being the nearest thing the French have to a UK ‘tax-free ISA’).
This report is intended simply as a summary of some aspects of French succession law and inheritance tax. It is based on my understanding of current legislation, which may be subject to change. No liability can be accepted for any change of interpretation or practice relating to any tax or legislative measure that may affect the accuracy of the content.
The EU Succession Regulations
What a month it has been since I wrote my last article. The Greek crisis has waxed and waned and as the prospect of increases in UK interest rates comes closer, now the Sterling Euro exchange rate has hit new highs. All of this while the temperatures continue to soar in France and the effects of the canicule are felt!
August is almost upon us and this means that the long-awaited EU Succession Regulations will come into effect. From that point, as French residents, we will be able to opt for the succession rules of our country of nationality to apply (whether or not that country is within the EU). If you do nothing, the default position is that the succession rules of your country of habitual residence will apply. However, regardless of which country’s succession rules are to apply, this will not change the tax situation. French succession taxes will still be due, which can be up to 60%, depending upon your relationship to your beneficiaries.
I am not going to go into the detail of the EU Succession Regulations here, as I have done this before and so I invite you to read my article on this at: www.spectrum-ifa.com/eu-succession-regulations-the-perfect-solution
As the months have passed since writing that article, I have discussed the implications of the Regulations with several legal professionals who operate at an international level and so they are already highly experienced in dealing with cross-border succession situations. Unfortunately, the further clarification on the practical application of the Regulations that we were hoping for has not appeared and so still we can only wait for the results of actual cases.
What is clear though is that if you elect the succession rules of your country of nationality, then your French property and any other assets that you own would be administered by a French notaire trying to apply another country’s law and this is likely to cause complications, delays, additional expenses and delays. So I, like many other professionals, hold the view that if there is a tried and tested ‘French way’ to achieve your objectives, then this should still be used. The ‘French way’ is another subject that I have written about in detail and the full article can be read at: www.spectrum-ifa.com/inheritance-planning-in-france
There will be cases where the EU Succession Regulations will be welcome for some couples. Typically, this might include situations where children are estranged from parents or step-children just will not accept the step-parent, regardless of the length of the relationship. The Regulations will be a relief for couples in such situations, as they will be able to circumvent the French forced succession rules, but they will still need to address the taxation issues that may occur. As concerns financial assets, this is an area where we can help.
Everyone’s situation is different and this is why it is very important
to seek professional advice on this subject.
Are you concerned about the EU Succession Regulations and how this affects you? If you would like to have a confidential discussion about this please contact me from the contact box below.
Are you thinking of moving to France?
I am planning to move permanently to France but am not sure where to go for information on the differences in regulations regarding tax, inheritance and pensions between France and my current country of residence?
Whilst there are a number of forums and websites offering opinion and suggestions regarding the differences in French taxation from where you currently live, it is worth considering the following points before you make any decisions:
What experience does the person/site/forum have in this field?
- Ensuring that the information you want is accurate, relevant to the country you will be living in and free of any personal bias and opinion, is vital in enabling you to make the right choices going forward.
Is the information you will receive regulated in the country you will be living?
- Rules and regulations in the country you are leaving will most likely be different to France. Making sure the recommendations you receive are based on what is best for you as a French resident is very important.
Has the person providing you the information personal experience of your questions?
- It is always a comfort to speak to someone who has ‘walked the walk’ and not just a casual or second hand grasp of your questions. Personal experiences can often assist people getting used to new legislations and bureaucracy.
Whether you want to register for our newsletter, attend one of our road shows, Le Tour de Finance or speak to me directly, please call or email me on the contacts below & I will be glad to help you. We do not charge for reviews, reports or recommendations we provide.
Can You Avoid Spanish Inheritance Tax?
Savings with UK banks and investment companies could form part of a Spanish Inheritance Tax (IHT) calculation.
If you have money in a Spanish bank, the Spanish tax authorities know about it. If you have money in a UK bank, they probably know about this too due to information passed over by the UK tax authorities. Of course, if you have over €50,000 in a UK bank account you will have reported this to Spain within your Modelo 720 form.
For a Spanish tax resident inheritor, Spanish IHT is due on worldwide assets. Therefore, a Spanish resident wife, inheriting from her husband, could pay tax based on their Spanish property and other Spanish assets PLUS tax on the overseas assets.
The English Will does NOT stop the Spanish tax authorities claiming Spanish IHT (Succession Tax) on overseas assets. The Will governs the distribution of the estate, not its taxation directly.
We can help mitigate, delay and even sometimes completely avoid Spanish IHT by placing money in a Spanish compliant insurance bond based outside Spain. Suitably arranged, the bond could save many thousands of euros in inheritance tax.
Inheritance Tax in Italy
You may not be aware but from an Inheritance tax point of view, Italy is actually considered a bit of a fiscal paradise (after you have picked yourself up off the floor because I just called Italy a ‘fiscal paradise’, you might want to read on). If your estate or part of it is likely to be subject to Italian Inheritance Tax on your death then the latest developments could interest you.
Italian Inheritance tax law dates back to the Napoleonic period which requires parents, on death, to leave a major proportion of their wealth to their children instead of just their spouse.
At the moment Italy’s Inheritance tax works as follows:
* If the estate is passed to your spouse or relatives in a direct line (i.e children) then they are required to pay 4% on the value of the inheritance that exceeds € 1million.
* Brothers and sisters must pay 6% with an allowance of €100,000
* Other relatives must pay 8% but without any allowance.
Despite Italy having approximately 1.5 million people who are subject to Inheritance tax each year with a combined value of approximately €56 billion, the tax collection is relatively small due to the high allowances and also the fact that that ‘successione’ for a property is based on the catastale value, not the market value.
WHAT ARE THE PROPOSED CHANGES?
Italy, like most other countries, is in desperate need of cash and they naturally see inheritance tax as a way of increasing tax revenues. In addition, the EU is encouraging Italy to review the present system to bring it into line with other, ‘less financially rewarding’, European countries.
The ideas, which are just ideas at this stage, are as follows:
* For spouse and direct line relatives, to increase the taxable rate to 5%. But, reduce the non-taxable allowance from €1 million to €200,000.
* Whilst the taxable rate will rise from 6 to 8% for brothers and sisters, and the allowance will reduce to between €50,000 and €100,000.
* The rates for other relatives will likely increase to 8% without any allowance.
This means that a lot of people will now be caught in the Italian Inheritance tax trap whereas previously they might not have been. Although, it should be said, the rates are still quite low.
However, as part of any inheritance tax /succession planning that you may undertake you may want to look at ways in which you can hold any asset, in a more tax efficient way. The polizza assicurativa (or Life Assurance Bond) meets exactly that criteria.
Any money that you hold in one of these tax efficient accounts is completely free from Italian Inheritance tax and is kept outside of the estate when the value is calculated. The not so good news is that if the majority of your estate is in your property, unfortunately, this cannot be placed inside the tax protective structure. However any other invested/investable assets can be, generally, from €50,000 upwards.
One of the great advantages is that there is no upper limit to contributions. You can protect a large part of your estate from Italian Inheritance tax easily and with maximum flexibility to access the capital and any income from it during your lifetime. The other big advantage is that the monies (whilst held inside the account) are not subject to Italian income and capital gains tax.
Tax and residency in Italy
No 1. Expat tax Grief
Not a week goes by these days, where I am not contacted by someone who has a question about their residency in Italy, and what that means for them fiscally. Either by people who are about to move to Italy or others who have already been living here for some time and want to become ‘in regola’.
The conversation then naturally flows into the minutiae of exactly what are the taxes that need to be paid in Italy.
So, I would write and explain those pesky taxes that apply to expats who have income being paid and/or assets held in other countries. It may act as a good guide for those who are thinking about, or in the process of, doing something about their Italian tax returns for 2014.
Where to start?
Well, firstly I start by confirming that, as a resident in Italy, you are subject to taxation on your worldwide assets and income (with some exceptions). That means that if you are a resident in Italy then you are required to declare your assets and income, wherever they might be located or generated in the world.
TAX ON INCOME
If you are in receipt of a pension income, for example, and it is being paid from a private pension provider overseas or a state pension, then that income has to be declared on your Italian tax return (nb. different rules apply to Government service pensions, where tax is generally deducted at source in the country of origin and there is no further requirement to report the income in Italy). If tax is deducted at source in the country of origin, the income must still be declared again in Italy. A tax credit will be given for the amount of tax paid in the country of origin (assuming that country has a double taxation agreement with Italy), but any difference between the tax rates in the country of origin and Italy will have to be paid.
It is a similar picture for income, generated from employment. This is a slightly more complicated issue that depends on many factors and, therefore, I shall not dwell on it here. If you have any questions in this area you can contact me on the details at the bottom of this page.
INVESTMENT INCOME AND CAPITAL GAINS
This is one area where Italy excels above other countries, in that its system of calculation is very simple. As of 1st July 2014, interest from savings, income from investments in the form of dividends and other income payments are taxed at a flat 26%. Capital gains tax is the same rate of 26%.
** Interest from Italian Government Bonds and Government Bonds from ‘white list’ countries is still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means it is more convenient, from a tax position, to invest in Government Bonds in Pakistan or Kazakhstan, than it is to buy corporate Bonds from Italian corporate giants ENI or Unicredit. **
Property which is located overseas is taxed in 2 ways. Firstly, there is the tax on the income and, secondly, a tax on the value of the property itself.
1. Income from property overseas.
Unlike rental property located in Italy, which is taxed at the rate of approx 23% depending on what kind of rental you operate, overseas income from property is added to your other income for the year and taxed at your highest rate of income tax.
There is one advantage to this, in that tax in the country of origin has to be applied to the income in the first instance. Therefore, the net income (after expenses) in the country of origin is added to your other income in Italy for the year. This can be quite useful if the property/ies are investment properties, the expenses are high, the country of origin allows multiple deductions and the net income position is low. However, as I have written before, if you are reliant on the income to live on, then a high net income position (before declaration in Italy) can result in a much lower net amount (after Italian tax) depending on the amount of other income you receive each year. Once your total income for the year moves above €28,000 you enter into the punishing 38% tax bracket in Italy.
This can prove to be a tax INEFFICIENT income-stream for those hoping to live in Italy by relying on income from property overseas.
2. The other tax is on the value of the property itself, which is 0.76% of the value.
However, value must be defined in this instance. For EU based properties, the value is the Italian cadastral equivalent. In the UK (the area I am most familiar with), that would be the council tax value NOT the market value. You will find that the market value will, in most cases, be more than the cadastral equivalent value.
In properties located outside the EU, the value for tax purposes is defined as the market value of the property ONLY where evidence cannot be provided of the purchase value of the property, in which case this would be used instead.
TAXES ON ASSETS
It would not be right that other assets escaped Scot free!
BANK ACCOUNTS AND DEPOSITS
A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. However, from 2014 every deposit account that you own overseas with an ‘average’ balance of €5,000 in it, each calendar year, is taxed at the rate of 0.2% of the average balance throughout the year. This includes fixed deposits, short term cash deposits, CD’s etc. The charge is the equivalent of the ‘imposta da bollo’ which is applied to all Italian deposit accounts each year.
Lastly, we have the charge on other foreign-owned assets (IVAFE). This covers shares, bonds, funds, portfolio assets or most other types of assets that you may hold. The tax on these is 0.2% per annum, (from Jan 1st 2014) based on the valuation as of 31st December each year.
This guide is only meant to be a broad outline of the taxes that affect most expats. It is not a full tax list and does not take into account personal circumstances. It is intended to be a guideline to help you make the right decisions.
My experience over the last 4 years has been, in most cases, that expats will end up paying more by being resident in Italy (which most seem to accept as OK, for the lifestyle they can lead) but, there are often a number of financial planning opportunities, to protect, reduce, and avoid certain taxes, that few take advantage of.
If we haven’t discussed these already or if you would like an initial chat to discover whether any of those opportunities are open to you then please feel free to contact me. There are no fees for enquiries and consultations.