While it can be immensely rewarding to retire to and live in France, it will also be necessary for you to familiarise yourself with the country’s highly complicated rules in relation to tax. There is, of course, a long list of financial, legal, and practical matters that you will need to deal with when you move to France from the UK.
Apart from French inheritance tax, for those who wish to retire permanently to France, one of their greatest priorities will need to be getting to grips with the strict succession laws.
Many people confuse French succession rules and inheritance tax, which is understandable, as they are often discussed in tandem. Tax, however, is French fiscal law, has nothing to do with French civil law, and understanding this key difference may help to avoid confusing the two.
This article is covering only inheritance tax and not French succession law.
One of the most important things to acknowledge is that French Inheritance tax differs significantly from its apparent UK equivalent. As a French resident, you can be assured that each of your children will be entitled to receive €100,000 without them having to pay tax on it.
However, the situation can be very different for other relatives, as well as non-relatives such as stepchildren, who may be subject to very low allowances and extremely high tax rates.
In addition, the succession law in France exercises a lot of control over exactly who will be permitted to receive large parts of your estate. This is something else you will need to carefully account for when it comes to succession planning, so that you can set everything up in accordance with your wishes and family circumstances.
What is French inheritance tax, and what are the rates and rules?
In France, beneficiaries become liable for inheritance tax when they receive assets as lifetime gifts, or when those assets pass to them on the previous owner’s death. Each beneficiary is individually charged this tax, although much depends on the exact worth of the assets they receive, and what their relationship was to the deceased previous owner of those assets.
Being resident in France, at the time of your death, will mean that each of your heirs is required to pay inheritance tax on what they inherit from you, even if your heirs live in the UK. This is applicable to assets around the world.
Your heirs might also need to pay French inheritance tax in the event that you have spent six out of the last 10 years living in France, and an inheritance or gift is passed on to you from another country. To determine the exact situation, you will need to consult the relevant double tax treaty between France and the country where the assets are located.
Property assets in the UK, for example, the UK-France double tax treaty outlines that such inheritances would only be taxable in the UK, rather than in France.
- Spouses and what are known as ‘PACS’ partners – the latter referring to “pacte civil de solidarité”, or civil partners – do not need to pay inheritance tax on what they receive. As for lifetime gifts, these are taxed at progressive rates ranging from 5% to 45%, albeit with the first €80,724 being tax-free.
- Tax rates of 5% to 45% also apply to children receiving inheritances and gifts, with each beneficiary having a €100,000 tax-free allowance. Stepchildren do not enjoy this allowance unless they are legally adopted, and they will be expected to pay higher rates.
- The rates for other heirs, in the direct line, such as grandchildren, are the same as those for children, but they do not benefit from the €100,000 allowance.
- For brothers and sisters, their tax free allowance is typically €15,932, and they will be expected to pay a 35% or 45% tax rate. They might be exempt from tax, however, if they are over 50 or invalid, unmarried, and living with you on a long-term basis.
- Nephews and nieces can expect a €7,967 allowance, and to pay tax at 55%.
- Anyone else will only get the standard allowance of €1,594, and will need to pay a 60% rate of French inheritance tax. People in this category can include a long-term partner to whom you are not married or in a PACS partnership, as well as stepchildren, the latter potentially presenting a major headache to couples who have children from past relationships.
So, depending on the exact situation and people involved, French inheritance tax can be hefty, potentially wiping out as much as half of the inheritance you might have wished to leave to someone.
So, how can you lower the French inheritance tax your heirs need to pay?
The good news is that it is possible to mitigate some of the impacts of French inheritance tax in a variety of ways.
There are many options such as giving away assets to children through the use of what is known as a usufruct, or “usufruit”. This mechanism would involve you continuing to have a lifetime right to live in the property, and/or to the income. It is a method for splitting the overall inheritance of a property between deaths, at the same time as enabling high allowances and low rates of tax.
The “usufruit” option, then, could be attractive if you intend to leave assets to your children, but would also like your spouse to be entitled to have use of those assets during their lifetime. It works on the basis that as your partner will never have full ownership of the given estate or asset, it will be deemed to come from the natural parent, which will enable you to avoid the possible 60% inheritance tax that applies for anything that non-relatives – such as stepchildren – receive.
There is an even more flexible version of this when applied to certain investment structures.
For a more in-depth conversation about your requirements, contact Kentingtons
As you may have gathered the subject of French inheritance tax can be a complex one and assessing the impact of tax regimes and succession laws of different countries on your own situation can be an equally complex matter.
There are various ways to potentially structure savings and investments to enable you to unlock major inheritance tax planning benefits when you retire to France, and it is in your interests to ensure you explore and consider all of those options of possible relevance to you.
For this reason, it is extremely important that you seek expert advice to ensure that you are setting up your estate planning correctly for your heirs. To get that process started, please feel free to reach out to Kentingtons today.