By understanding how French succession tax and law will affect chosen heirs, British expatriates can take steps to protect their legacy.
By understanding how French succession tax and law will affect chosen heirs, British expatriates in France can take steps to protect their legacy for their family.
You may have put a lot of thought into your financial planning to make sure you have enough for the retirement lifestyle you want. Have you given the same kind of attention to your estate planning? If so, is it up to date?
Writing your will is by no means the only step; there are various things UK nationals living in France need to consider. How will your wealth be passed down to your children, grandchildren and any other chosen heirs? How will they handle it? Will it help give them long-term financial security or will they spend it hastily and make decisions they will regret? How much will they actually receive, and how much will go to the taxman?
With careful planning, you can have peace of mind that your legacy will be distributed as you wish without leaving your heirs a hefty tax bill.
Who will receive your legacy?
If you are a French resident, you need to take account of the ‘forced heirship’ succession law. This imposes strict restrictions on how your legacy is divided. Children are ‘protected’ heirs who can automatically inherit up to 75% of your estate, regardless of what your will says.
An EU regulation, ‘Brussels IV’, allows UK nationals to override forced heirship by applying the relevant British law to your estate. While Britons will continue to have this option even after Brexit, it is a new and complex development. Carefully examine how this approach could work for your personal circumstances and explore the alternative options available under French law to achieve your aims in the most suitable way.
Note that Brussels IV does not affect taxation – you cannot choose to pay UK inheritance tax over French succession tax. Although Brussels IV offers more flexibility to leave assets to indirect family and non-relatives, they can still potentially lose more than half their inheritance in French taxes, so effective planning is essential.
Where will your heirs pay tax?
If you are resident in France when you die, your beneficiaries will attract succession tax when inheriting your worldwide assets, even if they are not themselves French resident. The exception here are UK-based assets, which are taxable only in the UK under the France/UK tax treaty. Heirs of UK residents will only pay French succession tax when receiving French assets like property.
If you have UK assets worth more than the £325,000 nil-rate band (£650,000 for a couple), your heirs may also be liable for 40% UK inheritance tax. See five things you may not know about UK inheritance tax
Like the UK, ownership of an asset cannot be transferred until the tax is paid in France. As you cannot sell the asset to pay the tax – generally payable within six months – this can prove difficult for some beneficiaries.
How much tax will your heirs pay?
French succession tax can be very high, so you should take steps to legitimately protect your heirs from paying more than necessary. This especially applies if your family is more complex; for example, if you have stepchildren or children from previous marriages.
The French regime is generous for natural or adopted children, with a tax-free allowance of €100,000 per parent and progressive rates from 5% to 45%. Stepchildren, however, are treated as ‘non-relatives’ – their allowance is only €1,594 with the rest taxable at 60%. The same applies for unmarried couples who are not in a recognised civil partnership.
Note that, while inheritances between married partners are not taxable at all, passing it on to the next generation could generate a large tax bill for heirs that are not blood-related. For example, children inheriting their parent’s legacy following the death of a stepparent will pay significantly more tax than if they inherited it directly on the first death.
If you and/or your partner have children from previous relationships or are unmarried, there are often steps you can take to avoid such high tax liabilities. For example, you could start gifting within your lifetime, as tax-free allowances renew every 15 years and gifts can be passed tax-efficiently to stepchildren, or use an ‘usufruit’ to give away property while retaining a right to live in it. With specialist advice, you can put an appropriate strategy in place to mitigate the tax issues that affect you and your unique family circumstances.
Download our guide to taxes in France
It is not just inheritance tax that you need to think about. If you are leaving savings and investments, once your heirs receive the funds they will start to pay tax on the income and gains. Explore arrangements you can use to hold your investment capital so that it is tax-efficient for them. Also consider how these investments will pass on to your chosen heirs – will it be a drawn out and costly process, or can ownership easily change hands?
See more about investment management for expatriates
You may also want to establish a way to gift with certainty, where you keep some control over when your heirs receive your legacy and how they can use it. This could be important if you worry they might spend their inheritance unwisely or you have reservations about their partners. For example, you could delay the timing of an inheritance until your heirs reach an age where they are likely to be financially mature. Or you could ring-fence what you leave, so it can only be used for something specific, such as your grandchildren’s education.
See other ways you can make things easier for your heirs
Don’t forget your own needs
While you may want the best for your heirs, make sure you enjoy your wealth in the meantime. Look for arrangements that allow you to benefit from what you have, providing tax advantages during your lifetime as well as for your heirs in the future.
Estate planning is a specialist and complex area, especially when you have to consider the rules of two countries and how they interact. Every family is different, so your approach should be tailored to meet your personal objectives and unique situation. Take specialist professional advice for peace of mind that you have got the right plans in place, for yourself and your chosen heirs.
Contact your local adviser for an estate planning healthcheck
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; individuals should seek personalised advice.