These are rather interesting times for British expatriates in France, with the momentous July elections on both sides of the Channel. A common question since then has been ‘what does this mean for tax?’
Given the difficult years we’ve just been through (pandemic, Ukraine, high inflation) and the toll they took on government finances, many countries need to find ways to increase tax revenue and improve their balance sheets, preferably without increasing taxes on income and spending.
It is possible therefore, that governments will try to leave income taxes and VAT alone and focus on levies affecting wealthier individuals – inheritance and wealth taxes, large pension pots, maybe capital gains tax on investment assets.
In the lead up to the French election, the Nouveau Front Populaire talked about reinstating the old wealth tax and strengthening the capital gains exit tax, while pledging not to raise income taxes on lower earners.
The UK Labour Party manifesto promised not to increase income tax, national insurance contributions or VAT. Capital gains tax was missing from the list, though the party leadership said there were no plans to raise rates. Many observers still expect CGT rates to rise in future though, or for capital gains to be classed as income. Pensions also look vulnerable, since the plans were to review the whole pension landscape.
The Labour Party pledged to abolish the non-domicile status and end the use of offshore trusts to avoid UK inheritance tax. It’s possible it will review the whole inheritance tax system and consider other reforms, for example, removing some of the reliefs.
We can only speculate until we have any official announcements, but this seems a good time to review the inheritance taxes UK nationals living in France face.
UK inheritance tax
Many British expatriates in France don’t pay much attention to UK inheritance tax (IHT), assuming it doesn’t affect them since they live and pay taxes in France.
France does have a specific tax treaty with the UK on inheritances to avoid double taxation. Both countries tax worldwide assets, but UK nationals who are long-term residents of France are deemed to be domiciled in France for inheritance tax purposes.
However, if you have assets in the UK, they are always liable to UK inheritance tax. This doesn’t only cover real estate; it includes all property, bank accounts, investments, insurance policies not in trust, household contents, vehicles, etc.
The UK currently offers the individual nil rate band of £325,000 and residential nil-rate band of £175,000. While this residence relief can apply to property anywhere in the world, it must be your primary residence. It won’t be available on your UK property, even if you keep it for your own use, if you die as a habitual resident of France since your home is there.
The Conservative’s last budget kept these allowances frozen until 2028 – the main threshold hasn’t changed since 2009. We wait and see what the new government will do with these frozen allowances, but since they generate a nice income for the Treasury it would be no surprise if they are maintained.
HM Revenue & Customs collected a record £7.5 billion in IHT receipts over the 2023/24 tax year, and another £1.4 billion in just the first two months of this tax year, 16% more than last year.
Before the elections, the Office for Budget Responsibility projected IHT receipts to hit £9.7 billion in 2028/29. As the fiscal drag from frozen allowances drags more families into the inheritance tax net, the OBR forecast the number of deaths resulting in IHT will reach 6.3% – the highest level since the 1970s. Back in 2009/10 it was just 2.7%.
This tax take could dramatically increase under the new government. Its pledge to restrict non-domiciles from moving money overseas is expected to raise a further £430 million a year. If that is combined with frozen thresholds, this unpopular tax will grow even further.
If you live in France with no plans to return to UK, and wish to reduce or eliminate UK inheritance tax liability on your UK assets, the simple answer is to move them out of the country. You don’t need to move them into France necessarily, just out of UK. Take cross-border tax advice first to establish how to reinvest the capital to keep taxes as low as possible, for you today, throughout your retirement, and your heirs in future.
French succession tax
Death is frequently expensive, and not just the funeral costs – it’s the taxes that fall due. While there is no UK inheritance tax or French succession tax between spouses/civil partners on death, beyond that, your heirs could pay tax – potentially a lot of tax.
The UK imposes a flat 40% tax when an estate exceeds £325,000. In France, the tax rates and allowances vary dramatically based on level of kinship and amount received. At one end of the scale a child gets a €100,000 allowance and starts paying tax at 5%. At the other end unrelated heirs suffer a set 60% hit with a mere €1,594 allowance.
We are often asked where it is best to die from a tax point of view – will heirs pay less tax if you die as a UK or France resident? The answer often gets complicated with all the variables to consider. But where there is little or no planning in place, and matters are simply left to take the natural course, the answer is usually France since assets must flow down the bloodline and the French system is designed to minimise the tax those recipients pay.
This doesn’t necessarily mean no tax is paid – even children face a top French succession tax rate of 45%. It’s certainly worth reviewing your estate planning to see what steps you can take now to reduce tax for your family and heirs.
If you and your partner are not officially married or in a civil partnership, the survivor will pay 60% tax – co-habitation can prove expensive in France. Stepchildren too pay 60%.
If you are concerned about how your wealth will pass to your chosen heirs, and with new governments in France and UK, now is the time to review your testamentary wishes and what taxes your nearest and dearest will pay.
Don’t wait until it’s too late, take specialist cross-border advice. The ‘cross-border’ element is important, as your estate plan needs to take account of both the UK and French succession regimes, how they interact, and what planning opportunities are available. Blevins Franks has been helping clients living in France and the UK for almost 50 years. Our local advisers can help ensure your wealth is passed in accordance with your wishes.
Contact us today.
