Inheritance Planning in France
If you are resident in France, you are considered also to be domiciled in France for inheritance purposes and your worldwide estate becomes taxable in France, where the tax rates depend upon the relationship to your beneficiaries.
There are strict rules on succession and children are ‘protected heirs’ and so are entitled to inherit a proportion of each of their parents’ estates. For example, if you have one child, the proportion is half; two children, one-third each; and if you have three or more children, then three-quarters of your estate must be divided equally between them.
You are free to pass on the rest of your estate (the disposable part) to whoever you wish, through a French will and in the absence of making a will, if you have a surviving spouse, he/she would be entitled to 25% of your estate.
If you are not French resident, but own property in France, the same French inheritance rules and tax rates will apply in respect of that property – in effect, as if you were French resident.
You may also be considered domiciled in your ‘home country’ and if so, this could cause some confusion, since your home country may also have the right to charge succession taxes on your death. However, France has a number of Double Taxation Treaties (DTT) with other countries covering inheritance. In such a case, the DTT will set out the rules that apply (basically, ‘which’ country has the right to tax ‘what’ assets).
For example, 1963 DTT between France and the UK, specifies that the deceased’s total estate will be devolved and taxed in accordance with the person’s place of residence at the time of death, with the exception of any property assets that are sited in the other country.
Therefore, for a UK national who is resident in France, who has retained a property in the UK (and does not own any other property outside of France), the situation would be that:
- any French property, plus his/her total financial assets, would be devolved and taxed in accordance with French law; and
- the UK property would be devolved and taxed in accordance with UK law, although in theory, the French Notaire can take this asset into account when considering the fair distribution of all other assets to any ‘protected heirs’ (i.e. children).
If a DTT covering inheritance does not exist between France and the other country, with which the French resident person has an interest, this could result in double taxation, if the ‘home’ country also has the right to tax the person’s estate.
Hence, when people become French resident (or own French property), there are usually two issues:
- how to protect the survivor; and
- how to mitigate the potential French inheritance taxes for other beneficiaries.
At this point, there are probably many people saying “but the law has changed and now I can leave my assets to whoever I wish”.
This, of course, refers to the fact that legislation has been passed by the European Union, which will give non-French nationals, who are resident in France, the ability to choose the succession rules of their country of nationality, rather than being subject to the French rules. However, this will not be effective until 17th August 2015 and even at this stage, following analysis by the international legal profession, certain difficulties with the practical application have already been identified.
A big issue, however, is that when the EU legislation is in effect, this will not change the inheritance tax rules that apply. Therefore, even if we have the freedom to decide who inherits our estates, this will not reduce the potential inheritance tax liability. Hence, there will still be a need to shelter financial assets from French inheritance taxes.
As concerns protecting the survivor, currently, there are a number of solutions that exist in France. For example:
- You can change your marriage regime to one of “Communauté Universelle avec une clause d’attribution intégrale de la communauté au conjoint survivant”, so that all of your combined assets are held within a ‘community pot’. Subsequently, on the death of the first person, the assets in the ‘community pot’ are transferred to the survivor with little administration, thus, providing full protection for the survivor.
However, the downside of taking such a course of action is that your children will only have one set of inheritance allowances from the surviving parent (€100,000 per child) and so depending upon the value of your combined estates, this could result in a potential French inheritance tax bill. Therefore, an extra solution may be needed for financial assets, in order to mitigate the potential inheritance tax bill for your children or other beneficiaries.
In any event, this possibility is not usually open to couples who have children from previous relationships, since step-children may challenge such an arrangement.
- When purchasing property, it is possible to do this ‘en tontine’. Subsequently, on the death of the first person, it will be considered that the property has been owned by the survivor since the outset. However, this does not provide protection for financial assets and so an additional solution is needed.
Furthermore, a potential disadvantage of purchasing a property en tontine exists, if either (or both) of the couple have children and the natural parent of those children is not the survivor. This is because the step-children will no longer be protected heirs and so will not have any right to inherit a share of the property. Should the step-parent subsequently leave the disposable part of his/her estate to the step-children, they will be faced with a French inheritance tax bill of 60% above an allowance of €1,594 (2014 rate).
- You can make a ‘donation entré epoux’, which provides for the survivor to have outright ownership of the disposable part of the deceased’s estate and usufruit (life use) of the remainder.
For property, the ‘right of use’ is easily definable, since the survivor can live in the property, receive any rental income and make any alterations necessary. However, he/she cannot sell the property, without the agreement of the other ‘shareholders’ and would have to distribute their share of the proceeds to them, when the property is sold.
For financial investments, keeping the ‘right of use’ is complicated and often creates problems. There can be doubt as to whether the survivor can draw capital as well as income and what the ‘income’ actually signifies. Hence, it is preferable to find another solution for financial assets.
- It is possible to enter into a ‘family pact’ with your children. This is a complex arrangement, whereby the children effectively agree to give up their French inheritance rights, at least until the death of the survivor. However, this gives the survivor greater control over assets and keeps the step-children’s potential inheritance tax bill to a minimum.
Since giving up inheritance rights is considered to be such a serious matter in France, two Notaires would be involved in this process – one of whom would represent the children and thus, would be appointed by the Association of Notaires.
Whether or not any of the above solutions is the right one for you will depend upon your personal situation and, in effect, the value of your combined estates. In any event, all of the above must be carried out at the Notaire’s office and so it is very important to take the Notaire’s advice on the solution that is best for your particular situation.
As concerns potential inheritance taxes, fortunately, French inheritance tax between spouses (and partners who have entered into a Pacte Civil de Solidarité, commonly known as a PACS) was abolished in 2007, and so this is not an issue for the survivor.
Furthermore, the allowance between a parent and a child is reasonably generous at €100,000. However, at the other end of the scale, i.e. for ‘non-related persons’ (which includes step-children), the tax rate is 60% on anything inherited above €1,594.
In reality, there is little that can be done to mitigate any potential French inheritance tax bill in respect of property assets, once the standard French allowances have been used up. Hence, in such a situation, it becomes very important to shelter financial assets, as part of the inheritance planning solution.
This can be done by using Assurance Vie, which is highly beneficial for:
- protecting the survivor;
- mitigating the potential French inheritance taxes for your beneficiaries; and
- providing you with control over who receives your financial assets after death
For a quirk of historical reasoning, the benefits payable on death from an Assurance Vie investment, fall outside of your estate. For amounts invested before age 70, each beneficiary (whatever their relationship to you) is entitled to a tax-free allowance of €152,500 and taxation is limited to 20% on any benefit paid above this amount (although a higher tax rate of 31.25% applies for amounts exceeding €700,000 per beneficiary).
There is no limit to the number of beneficiaries that you can name. Hence, whatever your family situation, it is possible to pass on your capital to whoever you like, without them suffering excessive rates of French inheritance tax. Thus, the survivor can be protected and the capital can subsequently pass to your other beneficiaries, following the death of the survivor.
For amounts invested after age 70, the inheritance allowance for all of your beneficiaries is reduced to a total of €30,500 (plus the investment return on the total amount invested). In effect, therefore, it is only the amount invested that exceeds €30,500 that would be taxed at standard French inheritance tax rates.
Sadly, social contributions are now chargeable on any gain in the policy paid out as a death benefit. Despite this charge, this type of investment is still highly effective for inheritance planning, particularly since Assurance Vie is also personally tax-efficient, since the tax treatment is more favourable than most other types of French investments.
Inheritance planning is a highly specialised and complicated subject. Everyone’s family situation and level of wealth is different and it is very important to seek professional advice, so that the best course of action for you can be established.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of French taxes.
The Spectrum IFA Group advisers do not charge any fees for their time or for advice given, as can be seen from our Client Charter