If you live in France you need to understand the complex succession tax rules and review your estate planning to reduce tax for your heirs.
There are various aspects to consider when you move to France, particularly if you are retired and plan to spend the rest of your days there. While financial planning for your new life will be high on the list, you also need to take some time to think about estate planning and protecting your heirs from succession tax (inheritance tax) and France’s strict succession law.
French succession tax works differently from UK inheritance tax. While your children can each receive €100,000 tax-free, for other relatives and non-relatives (such as step-children) the allowances can be very low and tax rates very high. Likewise, French succession law dictates who you have to leave much of your estate too, so your succession planning needs to be specifically set up for your family situation and wishes.
French succession tax rates and rules
French succession tax is applied when assets pass on death or as lifetime gifts. The tax is charged on each beneficiary individually, depending on their relationship to the owner and the amount they receive.
If you are resident in France when you die, each heir has to pay succession tax on their inheritance. This applies to worldwide assets.
Likewise, if you have been living in France for six out of the last 10 years and receive an inheritance or gift from abroad, you could be liable for succession tax. This will depend on the double tax treaty between France and the country where the assets are located. Inheritances from the UK, for example, are only taxable there and not in France.
- Spouses and PACS partners (“pacte civil de solidarité” – civil partners) are exempt from succession tax on inheritances. Lifetime gifts are taxable at progressive rates from 5% to 45%, though the first €80,724 is tax-free.
- The tax rates for children (inheritances and gifts) range from 5% to 45%, with an allowance of €100,000 each. This allowance does not apply to stepchildren (unless fully adopted) and they have higher rates.
- Other heirs in the direct line (i.e. grandchildren) pay the same rates as children, but do not receive the €100,000 allowance. They get the standard €1,594 allowance, but you can give them lifetime gifts of up €31,865 tax free, plus the same again for cash gifts.
- Brothers and sisters generally receive a €15,932 allowance and pay tax at 35% or 45%. (If they are over 50 or invalid, unmarried and living with you long-term they may be exempt from tax.)
- The allowance for nephews and nieces is €7,967 with a 55% tax rate.
- Anyone else pays succession tax at 60%, and their allowance is just €1,594. Note that this includes step-children (for couples with children from previous relationships this can be a real problem) and long-term partners if you are not married or in a PACS partnership.
Succession tax can therefore be quite crippling, potentially reducing the inheritance you hoped to leave to someone by over half.
Any questions? Ask our advisers for help.
Succession tax example
Let’s look at an example of a situation that we come across often with clients. Many people are on second marriages and often one or both have children from a previous marriage. If you leave assets to your spouse’s children, or vice versa, they will be considered as ‘strangers’ and pay the full 60% succession tax rate. As assets pass from one spouse to another then to the next generation, it can generate a large tax bill for some children.
- As an illustration, Peter and Jane live permanently in France and have assets worth €2,000,000.
- Peter has two sons from his first marriage, while Jane has a daughter.
- Peter dies and leaves everything to Jane, who is exempt from succession tax.
- When she dies, her daughter receives half of her estate as of right, so receives €1,000,000, and Peter’s sons each get €500,000.
- Her daughter benefits from the €100,000 allowance and has a tax bill of just under €213,000.
- She therefore receives an inheritance of just over €787,000.
- John’s two sons, though, only receive a net inheritance of €200,956 each. Since they are inheriting from Jane, who they are not related to, their tax bill is €299,044 each.
If you and/or your partner have children from previous relationships, there are often steps you can take to avoid such high and unfair tax liabilities.
Likewise, if you are living with someone but not married to them or in a PACS, they will also pay succession tax at 60%. This will even apply if you jointly own a property, and one inherits the other’s share of the property on their death.
Reducing French succession tax
There are various solutions that could help mitigate French inheritance tax. For example:
- the allowances for all lifetime gifts renew every 15 years
- you can make tax-efficient gifts to step-children
- the value of your main home can be reduced by 20%, provided your spouse/PACs partner or children continue to live in it.
Alternatively, you could use a usufruct (“usufruit”) to give away assets to children, while retaining a lifetime right to live in the property and/or to the income. This is a way of splitting the overall inheritance of a property between deaths while utilising maximum allowances and lower tax rates. The younger you are the better, as the value of the gift is reduced on a sliding scale depending on age.
When it comes to your savings and investments, there are structures that can provide significant succession tax planning benefits in France, as well as accomplishing tax advantages for yourself.
Every family is different, so your estate plan must be tailored to meet your personal objectives and situation. Dealing with tax regimes and succession laws of different countries is complex so you need to understand the rules and how the various planning options would work for you. Specialist estate planning advice will give you peace of mind that you are making things as straightforward and tax-efficient for your heirs as possible.
Contact us for personalised estate planning advice for France
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.