Like most developed countries’, inheritance tax in France follows a series of tax codes that outline rules on how estates are taxed on death and the allowances available.
For expatriates and internationally mobile people, the challenge is somewhat more complex. Expats have to comply with rules in the country in which they live and in addition, rules in their home, or even a third country.
French Inheritance tax regulations are clearly defined and apply equally to both locals and foreigners. Essentially, there are two situations to consider:
- How to prepare correctly for future French inheritance tax related issues?
- What liabilities occur when the tax becomes due?
Inheritance tax in France: Gifting
Gifting is a popular way of managing the pre-tax situation of an individual’s estate. Knowing what can be done, the tax implications and what procedures need to be undertaken, is of vital importance. The best laid plans can be undone by either misunderstanding the system or not following the correct procedures.
The gifting of property in France
France has specific rules in terms of which assets can be gifted and the tax implications that apply with respect to the relationship between donors and donees. There are particular rules regarding the gifting of property. For example, it is possible to transfer ownership from parents to children. In such circumstances it is mandatory to employ the services of a ‘Notaire’, who will ensure that the correct paperwork is completed and stamp duty paid. Stamp duty is a form of transfer tax on property; it is currently 3% of the value. It should be noted that Notaire fees tend to be quite high. Those seeking to avail of the property transfer of ownership rules should therefore weigh up the costs and benefits of doing so before engaging in what may well turn out to be an expensive exercise.
The gifting of money, or liquid assets such as shares, is a relatively straight forward process. The amount that can be gifted within tax free allowances is dependent on the type of family relationship. The most common form of gifting is between parents and their children. There is a specific tax free allowance for lifetime gifts of up to 100,000 € per child; the allowance is renewable every 15 years. The tax free allowance for gifting to grandchildren is currently 31,865 €.
When gifts are made/received, they have to be registered with the French tax authorities in order to benefit from the allowance. A particular form needs to be completed and dispatched to the tax office; a Notaire can complete the form on your behalf.
Gifting allows individuals to gradually reduce the value of their total estate whilst at the same time avoiding the creation of tax liabilities for their children. If a donor dies before the end of the 15-year period, any gift could potentially be taxable under inheritance tax rules. However, given that each child has a 100,000 € tax free allowance in France on the death of a parent, there would be no tax payable on a gift up to this amount.
What to do with the gift?
What happens thereafter is dependent on where the money is held by the recipient of the gift. If the children are tax resident in France, it would make sense to take advantage of available tax benefits by investing in an Assurance Vie policy. Assurance Vie contracts allow the ‘tax free roll-up’ of funds if no withdrawals are made. In the event of withdrawals being taken, tax rates are lower than most other options.
Children who are tax resident outside of France would have to abide by the tax rules of the country they live in. Donees resident in the UK may wish to consider the placement of the money in a trust for tax planning purposes.