One of the most worrying issues facing retired UK nationals living in France is succession law which imposes strict restrictions on how residents can divide up their estate. From next August a new EU Directive will allow expatriates to distribute their estate in accordance with the law of their nationality. This only applies to succession law, and not to succession tax.
One of the most worrying issues facing retired UK nationals living in France is the outdated Napoleonic code that imposes strict restrictions on how French residents can divide up their estate. Children are “protected” heirs and may inherit up to 75% of your estate. Spouses are not protected heirs!
The situation changes next August, when a new EU Directive comes into force that will allow British expatriates the freedom to distribute their estate in accordance with the law of their nationality. However, do not be confused – this change only applies to succession law; your beneficiaries will still be liable to French succession tax rates.
The increased global mobility of individuals in recent years has created confusion when it comes to the settlement of cross-borders inheritances. Individuals can own estates in more than one country, which can trigger the application of multiple inheritance laws and create conflicts of law. In response, in July 2012 the European Parliament and the Council of the European Union adopted regulation 650/2012, the rather long-winded, ‘Jurisdiction, applicable law, recognition and enforcement of decisions, and acceptance, and enforcement of authentic instruments in matters of succession’. Commonly known as Brussels IV, it was devised to provide increased flexibility in deciding which law would apply in governing succession.
How it works
Brussels IV will apply to the succession of persons who die on or after 17th August 2015, although certain transitional provisions are now in force.
It provides a general rule that the “law applicable to the succession in its entirety, shall be the law of the State in which the deceased had his habitual residence at the time of death”.
However, an individual may elect (by way of a statement in his Will) that on his death and when dealing with his estate, the laws of his country of nationality may apply instead.
British nationals can therefore elect for UK succession laws to apply, where you are generally free to distribute your estate as you wish (Scotland and Northern Ireland law does have some restrictions).
Vitally, the choice of your national code of succession must be made before death. If not, then restrictive French succession law will apply. Your family cannot opt for UK inheritance law in respect of your assets after your death.
It is important to make a new Will, or revise or add a codicil to your existing one. It is advisable to have a notaire confirm the Will is correct. If you have both a French and UK Will covering assets in each jurisdiction, make certain that one does not revoke the other.
While we are on the subject of estate planning, remember that Wills need to go through probate before the assets can be distributed, which can be costly for your heirs and take time. Seek specialist advice to find out if you can avoid probate on some of your assets. For example, it is normally possible to circumnavigate the demands and delays of probate and pass assets directly to your beneficiaries, using a range of tax planning structures.
Adoption of Brussels IV
The Regulation is binding on all EU member states – except for the UK, Ireland and Denmark who have opted out.
This may affect French nationals living in the UK, but not UK nationals living in France – so British expatriates in France can choose UK law.
When it comes to UK residents with property in France, the applicable law would be that of habitual residence – the UK.
We need to stress that Brussels IV regulations do not apply to tax. UK nationals therefore cannot opt for UK inheritance tax rates to apply instead of French succession tax.
It is very important to consider your personal tax position when deciding to opt for French or UK succession law.
It is of course good news that you will now be able to more freely leave assets to more distant relatives and also non-relatives, but remember that this comes with a much higher tax price, as French tax rates apply. The tax rates and allowances vary according to who the beneficiary is. Transfers between spouses and civil partners (Pacte Civil de Solidarité – PACS) on death are tax free; for everyone else the tax rates range from 5% up to 60% and some exemptions can be very low.
Any assets you own in France are always subject to the tax, regardless of whether you or the recipient lives here or not. Unlike in the UK, where inheritance tax is charged on your estate, French succession tax is calculated on and paid by each individual beneficiary.
The tax rates for children (including adopted children, but not step-children) and other relatives in the direct line range from 5% to 45%. Their tax free allowance is €100,000.
In comparison, if you leave assets to a brother or sister, they generally will pay succession tax at 35% or 45%, and their allowance is just €15,932. Relatives to the fourth degree pay tax at 55%, with nephews and nieces receiving a €7,967 allowance.
More distant and non-relatives will lose 60% of their inheritance to tax, and their tax-free exemption is a mere €1,594. Unmarried partners who have not entered into a PACS arrangement, step-children and god-children are all classed as non-relatives.
It is important to understand the full tax impact on your heirs. Seek specialist advice on how to lower the tax burden for them, so that they receive most of the inheritance you have planned for them, rather than the taxman in either France or the UK being the largest beneficiary!
18th August 2014
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.