We all sleep better when we feel confident that our affairs are in order, and as we get older we think more about the legacy we will leave to future generations. For UK nationals living in France, estate planning is made far more challenging by French ‘forced heirship’ succession law and succession tax rates of up to 60%.
We all sleep better when we feel confident that our affairs are in order, and as we get older we think more about the legacy we will leave to future generations; specifically, how and to whom our assets will pass on our death.
If you set up arrangements in the UK, they are unlikely to be effective in France and may have unexpected consequences, so you need to review them and organise new ones as necessary. For UK nationals living in France, estate planning is made far more challenging by French ‘forced heirship’ succession law and succession tax rates of up to 60%. The regime is particularly daunting for more complex families.
Here are examples of situations we often come across, which may resonate with you. Frequently people do not realise how their family will be affected by the French regime.
Succession tax (French inheritance tax)
Mr and Mrs Smith (all names are fictitious) moved to France permanently on retirement. It is a second marriage for both and they each have two children from their first marriage. The plan is that when the first spouse dies their wealth passes to the survivor, then on the second death it will be split evenly between the four children, expecting them to receive around €300,000 each.
In fact the amount two of them will receive will be very different to the other two, thanks to succession tax.
Based on an inheritance of €300,000 each, the natural children of whoever dies second will each have a succession tax bill of €38,195.
The other two, who are not bloodline relatives of the person leaving them the assets, will each pay tax at €179,044. This means their inheritance is €140,849 less than their step-siblings – not at all what the parents intend.
Natural children receive a tax free allowance of €100,000 and pay tax at progressive rates from 5% to 45%. Stepchildren are treated as non-relatives; their allowance is only €1,594 and their tax rate is 60%, regardless of the amount.
Mr Jones and Ms Evans have just moved to France. They are not married or civil partners and feel no need to change that. Mr Jones owns the property they live in and has some savings; Ms Evans has investments worth over €500,000. With no children, they will leave most of their wealth to each other. What do they do not realise is that they will have to pay tax at 60%, since they not related, married or civil partners.
Mr Stewart is unmarried and is leaving a quarter of this wealth (€200,000) to his younger sister, and the remainder (€600,000) to his nephew and niece.
His sister will receive a tax free allowance of €15,932 and pay tax at 35% on €24,430 and 45% on the rest – making a tax bill of €80,388.
The allowance for the nephew and niece is €7,967 and their tax rate 55%. So each will lose €160,618 of their inheritance to tax.
Succession law is another significant issue in France. It is based on Napoleonic code, first introduced in the 1800s, and protects children above everyone else including your spouse.
Mr and Mrs Taylor each have three children from previous marriages. Mr Taylor’s children do not particularly get along with Mrs Taylor. When Mr Taylor dies, his wife expects to inherit his estate, but in fact under French law his three children must receive 75% of it. This causes significant friction, particularly as Mrs Taylor wants to keep living in what has been her home for 15 years.
Mr Brown and his only son are not at all close and have pretty much lost contact. Mr Brown knows his son is comfortably off, and prefers to leave his French property to his stepdaughter who lives in France, renting a property nearby. Inheriting the house will make a big difference to her and her children. But under French law, 50% of Mr Brown’s assets must go to his son, he can only freely distribute the remaining 50%.
The new EU Certificate of Succession, ‘Brussels IV’ means that both Mr and Mrs Taylor and Mr Brown can opt, through their French will, to have UK law applied on their death, and so leave assets to whomever they wish.
However, before you rush to change your will, you need to understand the potential pitfalls.
In France it is obligatory for a French notaire to administer a French estate, and this will continue to apply even if it is administered under UK law – a law they are unlikely to be familiar with.
Electing for UK law could result in your entire estate becoming liable to UK inheritance tax, and French succession tax will continue to apply too.
Importantly, any effective planning you have already carried out in France, for example to reduce succession tax, could be adversely affected by adopting UK law.
There are options you can use under French law which may be able to achieve your wishes, without the uncertainties of adopting UK law.
Your ‘estate plan’
The first step with estate planning is to decide who you want to inherit your assets, in what amounts, and when. Then you need to establish the most effective structures available for UK nationals living in France to achieve your wishes. With good advice and planning it is usually possible to structure your affairs so your assets pass to your chosen beneficiaries – in many cases with lower succession taxes than under the UK inheritance tax regime.
Do not forget your own needs. You hopefully have many, many years ahead to enjoy, so use arrangements which allow you to continue to benefit from at least some of your assets, and which provide you with tax advantages during your lifetime, such as receiving tax efficient income.
Every family situation is different. You need to find the solution that works for you. This is a very complex area; you need to take specialist advice from a professional wealth manager.
Any questions? Ask our financial advisers for help.
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.