Inheritance tax is a cause for concern in the UK today with an ever increasing number of British residents falling victim to this punitive tax. But if you move to France will you still be liable to UK inheritance tax? What if you live in the UK and own property in France, will that asset still be liable to UK inheritance tax? What about French succession tax?
UK inheritance tax (IHT) is normally based on the concept of ‘domicile’, a stronger and more permanent concept than either residence or nationality. Domicile is your ‘connectedness’ to a country. The worldwide estate of a UK domiciled individual is normally liable to UK IHT, whereas, for a non-UK domicile, only UK assets are liable to UK IHT. However, because of a special inheritance tax treaty between the UK and France, if you die a resident of France, UK IHT will only apply to UK assets. Everything including your UK assets will be subject to French inheritance tax (with a credit for any UK IHT paid).
Generally, assets passing between spouses or civil partners are completely exempt from UK IHT, although this is not the case for assets passing from a UK domiciled to a non-domiciled spouse or civil partner. In any case, the UK ‘nil rate band’ (an amount subject to UK IHT but taxed at 0 per cent) will apply to all non-exempt portions of an estate. This increased to £300,000 from 6 April 2007. Any chargeable assets in excess of this amount are liable to UK IHT at a flat rate of 40 per cent.
Recipients of gifts or inheritances from French tax residents are liable to pay succession tax whatever they inherit, regardless of where the asset is located. If you are non-French resident, then only the value of your French property will be liable to French succession tax. Unlike the UK (where the estate pays the tax), the recipient pays the tax on what they inherit/receive, and the rates vary depending on their relationship to the donor, and the amount involved.
In France, assets passing between spouses are taxable, except for the first €76,000 (£xx,xxx). Children (natural or adopted) receive an exemption of €50,000 (£xx,xxx) each. For lifetime gifts, these exemptions renew every six years. The tax rates within the immediate family range from 5 per cent to 40 per cent, but in many cases the rate doesn’t exceed 20 per cent.
Unrelated individuals, eg unmarried partners, step-children and friends, pay tax of 60 per cent and have no exemptions. French nationals or residents can enter into a civil partnership, a Pacte de Civil Solidarité (PACS), open to both opposite and same-sex couples. The exemption for a PACS partner is €57,000, but the rates are 40 per cent and (mainly) 50 per cent on amounts passing in excess of this. A UK civil partnership is not recognised in France as a PACS (although a French PACS between a same-sex couple is recognised in the UK).
Unreserved balance
In France, assets pass according to French succession law rather than by will, and this favours any children of the deceased rather than the spouse (between 50 per cent and 75 per cent of the deceased’s assets must pass to the children). PACS partners and unmarried partners have even fewer rights to the property. This can be circumvented, but if no action is taken to provide for the spouse, they are only entitled to 25 per cent as of right. Any unreserved balance can be left according to your will. For UK residents, this rule will apply to the French property only; if you are French resident, it applies to your worldwide assets, except for real estate situated outside France.
Where assets are taxed in both countries, under the treaty mentioned above, tax should be paid in the country where the property is located, and you can offset this against the tax due in the country of residence to avoid double taxation, even though the UK taxes the estate and the French tax the recipient.
If you are UK resident and domiciled and own a property in France, the French property will be subject to UK IHT as part of your estate, and as it is located in France, it will also be subject to French succession tax, with an appropriate tax credit in the UK.
If you are French resident, from a UK point of view, you will be regarded as if you were domiciled in France, because of the UK/France treaty mentioned above. Therefore, only your UK assets will be subject to UK inheritance tax, with an appropriate double tax credit in France for any UK tax paid.
What about if you, as a French resident, receive a gift or inheritance from a UK-based relative? Normally, under French rules, a gift or inheritance is taxable if the recipient is resident in France and has been so resident for at least six of the ten tax years prior to the year in which the gift or inheritance is received. However, under the UK/France inheritance tax treaty, inheritances (but not gifts) from a UK domiciled deceased to a French resident recipient are not liable to succession tax in France (except for French property), even where the recipient has been resident in France for more than six years.
So how can you avoid French succession law, and leave assets solely to the spouse? In France, the UK marriage contract is seen as a séparation de biens contract (ie assets held in your name are viewed as yours, and you each own a separately divisible 50 per cent share of any joint assets. There is another marriage contract in France, the ‘community marriage contract’, and this approach can be adopted by UK married couples (consult your notaire), regardless of their residence status. If there are children from a previous relationship they would have to renounce their right to challenge any change to the arrangements in advance. The community marriage contract can cover the property, or if you are resident, any assets of the marriage.
Transfer tax
Under a community marriage contract, the marital assets belong to the marriage ‘community’, and when the community dissolves (eg on death), the assets pass directly into the hands of the survivor. This is not seen as a succession in France, and therefore succession tax will not be due on such a transfer – although a transfer tax of 1 per cent can be (along with notaire’s fees).
Another way to avoid French succession law and to pass assets to the spouse (or anyone else) is to have a tontine clause inserted in the French conveyance when you acquire French property – this can only be done at the time of acquisition). A tontine clause ensures that the property passes automatically to the surviving partner. However, there can be considerable problems unwinding a tontine, and a tontine does not avoid succession tax. Moreover, if one person purchases a property with a tontine clause, and if the non-contributing partner dies first, the person who paid for the property in the first place will have a tax bill on the property they bought with their own money! However, this would protect the non-contributing partner if the contributing partner dies first, as they will then not have to pay tax on the full value of the property.
A usufruct can avoid French succession tax, whereby you give away your assets to your children whilst retaining a lifetime right to any income or the right to live in the property until your death (or give this right to your surviving spouse through your will).
Placing your assets (although not a property) in a specialised life assurance bond, called an assurance vie, can avoid succession law on such assets, and will also either avoid succession tax entirely on death, or can certainly reduce the overall liability, depending on whether it is taken out prior to becoming French tax resident, or after. It also has income tax advantages. I will cover the assurance vie in more detail in a subsequent issue.
This is a very complicated area, and ideally people should take advice on ownership structure before buying a property. Those who are moving to France should seek specialised advice on this subject before moving, in order to ensure that their assets will pass as they would wish them to, and any succession/inheritance tax can be minimised.
Bill Blevins is Managing Director of Blevins Franks International, one of the largest independent financial advisers, which specialises in advising retired expatriates in southern Europe.