What succession and inheritance tax issues do British expatriates in France need to be aware of right now? French succession tax thresholds have not increased for years, the forced heirship regime continues to give rights to children over spouses, and UK pensions will become subject to UK inheritance tax.
Foreign nationals living in France have to find their way around unfamiliar and often bureaucratic systems and legislation, with the French succession regime being particularly concerning. We always get many enquiries on this topic, particularly from British expatriates since the regime there is different from the UK’s. And now, to add to the complexity, they are also worried about the UK inheritance tax reforms and how much tax the beneficiaries of their pension funds will pay.
Here, we look at some of the issues UK nationals living in France need to be aware of right now.
Non-French assets remain liable for succession tax
First of all, a surprisingly common misconception among British expatriates is that they assume the assets they own outside France are exempt from French succession tax. But the rule on this matter is very simple: if you are residing in France at the time of your death, your worldwide estate is assessed for French succession tax. This includes any property you might have in the UK or elsewhere in the world, and all overseas investments and bank accounts.
Succession tax allowances
The UK tax thresholds have been frozen, and this has had an impact on people’s tax bills, particularly with inheritance tax. It’s a similar situation in France with the succession tax allowances.
While the income tax bands are usually indexed with inflation, the succession tax allowances have not increased for many years. In real terms, the value that a person can leave to their children or other beneficiaries has diminished. As people’s wealth increases over time (possibly at a faster rate than inflation), keeping allowances frozen results in increased tax revenue for the government, even though the tax rates and thresholds themselves remain unchanged.
Currently, you can leave €100,000 to each child tax-free. This has remained unchanged since 2012, when it was reduced from €159,325. Thanks to inflation, €100,000 has much less buying power than it did 12 years ago and will have less in 10 years’ time than it does today.
France is not very generous in terms of what you can leave to your heirs. Once you exceed the allowances the tax rates can be punitive; for children, the rates reach up to 45%. It’s much worse for other heirs. Grandchildren don’t get the €100,000 allowance (just €31,865 for gifts), and for siblings, nephews/nieces etc and non-relatives it ranges from €15,932 to just €1,594.
During the debate over Prime Minister Michel Barnier’s ill-fated budget, the Assemblée Nationale did propose doubling the allowances for siblings, nephews, nieces, children and grandchildren of the spouse. Hopefully this bodes well for the future, though it did also want to increase the top rate for children to 49%.
Stepchildren are classed as non-relatives and pay tax at 60%, with just the €1,594 allowance. This can be disastrous for unaware couples with children from previous relationships when inheritance does not pass directly down the bloodline.
Download our free French tax guide.
Succession planning
Fortunately, there is a lot of planning that can be done with liquid assets, cash and investments to reduce or potentially eliminate the succession tax liability on them.
There are savings and investment structures available in France which can provide significant succession tax planning benefits, as well as accomplishing tax advantages for yourself. Additionally, they may fall outside French succession law allowing you to nominate your choice of beneficiaries, and can also be easily transferred to them on your death.
When it comes to property, there are less opportunities to reduce succession tax, which is why we sometimes suggest people consider reducing their exposure to property, but there is still planning that can be done.
Gifting all or part of a property is feasible in some situations and, if it is done in a timely manner within the gifting allowances, it can result in a significant reduction in tax. In many cases you can retain a life interest or use of the property, so you can continue living in it while reducing the tax bill for your beneficiaries. Take care to ensure your approach suits your objectives and family situation.
One of the big challenges when it comes to property is not just succession tax, but also the forced heirship rules. Essentially, children are automatically considered to be your protected heirs and entitled to inherit a proportion of your French estate (up to 75%), which can be particularly problematic for the surviving spouse. You can use the EU succession regulation to opt for UK law to apply on your death, but under French domestic law, children have the right to make a claim for their reserved share of your French assets – i.e. your home in France.
Fortunately, there is planning that can be done. Where the couple have children in common, it can be relatively straightforward, such as a simple change in marriage regime or a clause in the contract at the point of purchase. However, it gets much more complex when you have children from a previous relationship, and in this case, you need personalised advice and solutions.
UK inheritance tax and pension funds
Any assets you own in the UK always remain liable for UK inheritance tax, regardless of residence or domicile. From April 2027, this will also include your UK-registered pension, a move that will push many more families into the UK IHT net.
If your UK private pension is passed to UK-resident beneficiaries, they could potentially pay not only the 40% inheritance tax, but also, if you die after age 75, income tax of up to 45% on the residual funds. This won’t leave much for your heirs.
Unfortunately, transferring a UK pension overseas, such as into a Qualifying Recognised Overseas Pensions Scheme (QROPS), is no longer tax-free for French residents. Since 30 October 2024, 25% Overseas Transfer Charges have been imposed on the amount transferred.
Fortunately, there still exists a path to extract a pension fund from the UK system tax efficiently, subject to certain conditions and of course, your circumstances and objectives. There is no one-size-fits-all solution with UK pensions and cross-border taxation; you need highly personalised advice from a suitably regulated professional. Likewise, your estate planning needs to be tailored to your family situation and goals and carefully structured around the French and UK inheritance regimes.
Blevins Franks has 50 years of experience supporting UK nationals moving to and living in France with specialist management services that encompass tax planning, pensions, estate planning, and investments.
Contact our team to arrange a personal consultation today.
