Updated Inheritance Tax Laws
What the new inheritance tax laws mean to you
France has updated its antiquated succession tax regime completely, abolishing inheritance tax between spouses and PACS partners. The succession tax system has been reworked to include other generous allowances to inheritances, particularly between close family.
The improved succession tax rules are part of a package of radical new tax legislation that came into force as France’s new president, Nicolas Sarkozy, celebrated his first 100 days in office. During his presidential campaign he had promised revolutionary changes to France’s tax system and a batch of reforms amounting to around €13.8 billion (£9.4 billion) in tax cuts was passed in August.
This will be welcome news to those who are planning to move to France. It brings the legislation in line with the UK’s tax-free exemption between spouses and civil partnerships. However, where inheritance tax in the UK is paid by the deceased’s estate, in France it is calculated for each beneficiary depending on the amount inherited and then paid by the individual beneficiary.
The inheritance tax exemption extends to sisters and brothers who are single, widowed or divorced providing that at the time of succession they are aged over 50 or they are suffering from an illness which prevents them from working and were living with the deceased during the five years preceding the death.
The allowance for children and parents (who inherit from their children) is tripled from €50,000 (£33,935) to €150,000 (£101,805) per person. The allowance between brothers and sisters is increased from €5,000 (£3,394) to €15,000 (£10,181).
The allowance for nieces and nephews (which is currently only available for lifetime gifts) increases from €5,000 (£3,394) to €7,500 (£5,090) and also applies on death. The allowance of €15,000 (£10,181) for brothers and sisters will apply where a niece or nephew inherits by representation (because their mother or father is dead or has renounced the inheritance).
The specific allowance of €50,000 (£33,935) for the disabled is also tripled to €150,000 (£101,805) and can be cumulated with other allowances (eg the €150,000 [£101,805] allowance for a child).
As the allowances have been dramatically increased, the new legislation has abolished the €50,000 (£33,935) global allowance which applied where children or spouses inherited. From now on, the rate bands will be automatically increased each year in line with inflation.
Lifetime gifts made to children over a six-year period are subject to an allowance of €150,000 (£101,805) instead of €50,000 (£33,935). A child can therefore receive up to €300,000 (£203,611) (€150,000 [£101,805] from each parent) tax free every six years.
Although inheritances between married couples can now be made completely tax free, this is not the case for gifts. The allowance of €76,000 (£51,581) remains in place for lifetime gifts between spouses. For PACS partners the current allowance of €57,000 (£38,686) is increased to €76,000 (£51,581) in line with that of spouses. However, the allowance will be withdrawn if the PACS agreement is broken within the same year or the following year for a reason other than marriage to each other or the death of one of the partners.
The specific exemption for cash gifts has increased from €20,000 (£13,574) to €30,000 (£20,361) where the gift is made to a child, grandchild or, if there are no direct line descendants, to nieces or nephews. This is provided the donor is more than 65 years old and the donee more than 18 years old. In addition, the gift should be declared and registered by the donee at his/her local tax office within one month of the gift.
This exemption can be cumulated with other allowances, (ie the €150,000 [£101,805] for children, €30,000 [£20,361] for grandchildren and €5,000 [£3,394] for nieces and nephews). However, it does not renew after six years and can only be used once.
The new legislation will revolutionise the French housing market, according to property specialist Trevor Leggett.
‘Inheritance tax, like so many outmoded ideas such as wealth tax, has long been a sticky subject in France,’ he says. ‘But now, with changes to the inheritance tax threshold, Nicolas Sarkozy is set to revolutionise the economy and boost investment in the housing market. It is estimated that with the new changes, as many as 95 per cent of the population of France will no longer pay any inheritance tax at all upon the death of their parents. These changes will be of interest to British homeowners in France as they will also benefit.’
The new tax changes will affect British expatriates if they are resident in France at the time of death or, if non-French resident, where the asset being gifted or bequeathed is located in France. A gift is also taxable if the recipient is resident in France and has been resident for at least six of the ten tax years prior to the year in which the gift is received.
The six out of ten years rule usually also applies to inheritances received by individuals resident in France. However, under the special UK/France Inheritance Tax Treaty, inheritances (not gifts) from a UK domicile to a French resident recipient are not liable to succession tax in France, even where the recipient has been resident in France for more than six years. The treaty also stipulates that if you die a resident of France and have any assets based in the UK they will be subject to UK inheritance tax, as well as French inheritance tax, although any inheritance tax paid in the UK will be credited against the French tax due.
There are various ways to reduce or avoid French succession tax and one is to take out an assurance vie which is the French term for an insurance bond, such as a personal portfolio bond, which allows you to hold your own choice of assets, excluding property, within a tax ‘wrapper’. If an assurance vie is set up before you become a French resident there is no succession tax liability on death. Setting up an offshore discretionary trust can also avoid French succession tax, although specific advice should be sought.
The succession tax reforms in France are good news for taxpayers. However, it is advisable to review your tax planning and tax mitigation arrangements on a regular basis regardless of changes in the law.