As part of the amended Finance Act for 2011, which came into force on 30th July 2011, the French authorities have introduced legislation relating to the taxation of Trusts, in an attempt to clarify existing practice and set out rules covering certain specific situations.
The aim of the legislation is to treat Trusts as transparent for tax purposes, essentially deeming the assets within the Trust as belonging to its ‘creator’ or the Settlor. It also should be noted that as a result of the broad definition in the legislation that this also applies to foundations and similar succession planning structures.
The rules will bite where the Settlor or a beneficiary is resident in France, or where the Trust has French assets.
There is no distinction made in the legislation between different types of Trusts, so all Trusts (whether life interest, discretionary, revocable or irrevocable) are to be treated in the same way.
Strict reporting requirements fall on the Trustees. In addition to reporting the market value of the Trust assets at 1st January each year, the Trustees must report to the French authorities when a Trust is set up, wound up or when any change is made to the Trust. Non-compliance carries hefty penalties.
In recent years, the French authorities have become wary of Trusts, seeing them as a mechanism for tax avoidance. In an attempt to stop the creation of new Trusts by residents of France, a flat tax rate of 60% has been introduced where new Trusts are created by a French resident after the date the new legislation came into force.
For wealth tax purposes, the assets of the Trust are treated as belonging to the Settlor and must be included in the Settlor’s wealth tax declaration each year, even if he is excluded from benefitting from the Trust. This will apply from 1st January 2012. If the Settlor is deceased, then the Trust assets will be treated as belonging to any French resident beneficiaries. If the appropriate declarations are not made by the Settlor or beneficiaries, then the Trustees can be liable to pay wealth tax at a flat rate of 0.5% on the total value of the assets held within the Trust.
As far as succession tax is concerned, the most significant change is the creation of a tax charge at the time of death of the Settlor. When a Settlor dies as a French tax resident, succession tax will always be payable on the Trust assets, regardless of whether a distribution is made to the beneficiaries at that time or not, and regardless of where the beneficiaries are resident. As a result of this new rule, the tax charge has been brought forward from the date of distribution (former practice) to the date of death of the Settlor.
If the Trust assets remain in Trust following the death of the Settlor, the succession tax position depends on who the beneficiaries are and whether their entitlements within the Trust can be identified:
- If, at the date of the Settlor’s death, a beneficiary’s entitlement can be determined, it will be added to any other inheritances the beneficiary receives from the Settlor, and charged to succession tax at the progressive rates depending on the beneficiary’s relationship with the deceased Settlor. Therefore, if the beneficiary is a child, their share of the Trust assets will be added to any other inheritance received from the parent, and charged at the normal succession tax rates.
- If the beneficiaries are collectively descendants of the Settlor, with no specific allocated entitlements, succession tax at 45% will be applied to the Trust assets on the Settlor’s death.
- If the beneficiaries are not descendants, the Trustees will be liable to succession tax at a flat 60%. If the Trustees do not pay the tax, the beneficiaries are jointly liable. The 60% rate will also apply where the Trust is set up in a non co-operative state, i.e. a country which does not have a tax treaty or information exchange agreement with France.
If the assets remain in Trust, the beneficiary is treated as the new Settlor of the Trust, and will be assessable to wealth tax on the Trust assets. On their death, succession tax will again be due. This measure ensures that succession tax is payable on the death of each beneficiary, so that the assets within the Trust cannot tumble down the generations tax free.
One piece of good news is that any income or gains on the underlying assets within a Trust will continue to accumulate tax free. Income and gains will only be taxable when distributed.
At this stage the rules are rudimentary, and there are still many areas of uncertainty. If you are the Settlor or beneficiary of a Trust, then you should seek specialist advice to determine how the new legislation will affect you and if there is any action that can be taken to mitigate its impact.
Statements relating to taxation are based upon current taxation laws and practices which may be subject to change.
By David Franks, Chief Executive, Blevins Franks
12th September 2011