The election of Nicolas Sarkozy has brought with it some interesting implications for the British expat community, and for British people who own properties in France. As has been much highlighted in the French sector press recently, M Sarkozy had promised as part of his election manifesto to institute a new law to amend the inheritance tax regulations in France.
This was set out as a very brief note on his manifesto in which he said that he would, ‘Suppress gifts and inheritance tax for all but the richest, so that families can freely transmit the fruits of their life’s work to their children.’
While this may on the face of it seem to be of great benefit to all, there were a number of points arising from this. Inevitably a sentence in a manifesto cannot cover all possible aspects of a proposed law. Was there, for example, any benefit for unmarried couples, for step-children, for same-sex couples? More importantly, how high up the list of priorities did this proposed new law sit – was it an issue that would sit until a quiet moment or would it be one of the first draft laws to be put before parliament?
In respect of the latter questions, and to the surprise of some, the situation is clear. M Sarkozy has just placed a draft of the new law before the Conseil d’Etat, less than a month after taking office. This is of course only the first step in the process of the Bill being passed into law, and much may yet change in the drafting, yet it is a good moment to consider what the potential implications may be.
The first proposal is that inheritance tax is to be abolished between spouses. At the moment the general position is that a surviving spouse has a right to a tax-free allowance of €76,000 (£xx,xxx), with the remaining amount of any inheritance tax being paid at a sliding scale of rates, running from 5 per cent up to 40 per cent depending on the size of the legacy. There is also a further €50,000 (£xx,xxx) allowance which is divided between the spouse and children of a deceased person; the division being dependent on the relative amount each beneficiary would take.
While this explanation may appear a little complex, the new position would be somewhat simpler: no inheritance taxes between spouses. This would then bring the situation in France closer to the position in the UK. Readers will no doubt be relieved at that thought.
It may well follow from this that the relatively common practice of completing a change of matrimonial regime will not be quite so popular now. A change of regime is a practice under which a married couple can ensure that their joint estate would pass free of inheritance tax to the surviving spouse, depending in part on whether they have no children from other relationships.
If the new law is passed, then there may be less call for a change of regime. Indeed the much maligned tontine clause could possibly become more popular – this costs nothing to insert in a purchase deed, unlike the deed of change of regime that would cost several hundred euros.
It is important to note that the new Bill would not apparently override the rights of children to inherit, so if it is imperative that the surviving spouse takes the whole of the property, then some extra estate planning, such as a tontine, change of regime etc, would need to be considered, and this prior to completion of the purchase.
Another area of some concern up until now has been the question of unmarried couples and how they would be taxed when inheriting anything from their deceased partner. If a couple, whether same sex or heterosexual, has entered into a French Pacte Civil de Solidarité agreement (PACS), then they currently enjoy a tax-free allowance of €57,000, with the remainder of the legacy being taxed at 40 per cent or 50 per cent.
Under the current regime this is not as attractive as the provision for a married couple, yet it is substantially better than would be the case if they had not completed a PACS, as in this case any legacy would be taxed at 60 per cent, with only a very small initial tax-free free sum.
In the new draft law, a couple with a PACS will be able to enjoy the same exemption to inheritance tax as a married couple. This certainly goes some way to put France in line with the position in the UK, where a couple with a Civil Partnership agreement (CPA) will not need to pay inheritance tax on legacies to each other.
What still remains to be clarified is whether the French legislator has rectified the anomaly under which the tax benefits afforded to a couple with a PACS would not be available for a couple with a CPA. If that is not included in the new law, then a British same sex couple under a CPA may be substantially discriminated against in France, while they could be treated just as if they were a married couple under English law.
The existing tax-free allowance of €50,000 which is currently shared between the children and surviving spouse would be abolished by the new law. However the basic tax allowance to each child will be increased from €50,000 to €150,000. This is the first time for several years that the allowance has increased, save for a small rise a couple of years ago. The increase is substantial, perhaps reflecting the increase in house prices across France over the past few years.
There is a further new allowance to be instituted, in relation to the legacies to nephews and nieces to the sum of €5,000 each. There is also an allowance for cash gifts, in the sum of €20,000, in favour of any recipient child, grandchild or great-grandchild, or even nephews and nieces in the absence of children.
As with all such estate planning matters, there can be implications in the UK as well as in France, depending upon one’s personal circumstances; and it may well be sensible to take advice from a solicitor as well as a notaire to establish the most suitable position.
Matthew Cameron is a solicitor specialising in French law, particularly property law. He is also a partner of Prettys Solicitors