estate planning for UK residents with assets in France or
intending to move to France
When dealing with inheritance planning in England one
automatically thinks of making a Will, but in France we soon
realise that drafting a Will is only one of the options available.
The statutory rules of succession, which apply to the Will, may
indeed not allow clients to bequeath their assets as they wish.
There are, however, ways to override or postpone the civil and tax
implications of this such as holding assets with a specific
structure of ownership, or varying a marital regime for married
couples.
Various factors will influence the limits of one's freedom under
French rules: whether or not there are any children and whether
they are from the current or previous relationship; the way the
couple hold the French property; whether they are relocating to
France; and the value of the estate.
the law applicable to the estate
Under the French rules of Private International Law, a
distinction is made between immovable and movable assets. The laws
of the country where the immovable asset is situated apply to
immovable property such as a house, a flat or a farm. However, bank
accounts, investments, shares, etc., are subject to the law of the
deceased's domicile.
For those who are not French residents, their French bank
accounts and other movables in France will remain subject to their
English Wills. Only the French property will obey the French
rules.
British nationals relocating to France will see the French rules
apply to their worldwide movables and French immovable. If they are
deemed to be domiciled both in France and in England, a conflict of
laws may arise as regards the movables because of the differing
concept of domicile.
French domicile for the application of the rules of
succession
From a French point of view, the domicile is the place of one's
habitual residence and is therefore synonymous with residency.
However, in English law, an Englishman will not acquire a foreign
domicile unless it can be shown that he formed an intention to make
his home permanently or, at least, indefinitely in the country
where he is currently living. It is therefore possible to be
regarded as French resident/domiciled by French Law and English
domiciled by English Law.
The conflict may be resolved in the future if the EU
institutions adopt the Draft Regulation proposed by the Commission
in October 2009 regarding the determination of the laws of
succession for international estates. Although UK has currently
opted out, it would become part of French law so is likely to be of
use for British nationals with an interest in France.
French domicile for tax purposes
As far as the tax concept of domicile is concerned, any conflict
of laws is resolved by applying the Treaty for the avoidance of
double taxation in place between the UK and France since 21 June
1963 as far as Inheritance Tax is concerned.
An individual will be deemed to be considered domiciled in
France for tax purposes if he satisfied any of the following
tests:
- his main home is in France;
- his primary place of residence is in France, ie he visited
France for more than 183 days per calendar year or if he spent more
time in France than in any other country in a calendar year
- he performs a professional activity in France (unless it can be
shown that this is not his main activity)
- he has the centre of his economic interests in France (where
his major investments are made or annual income is obtained).
Therefore, British nationals relocating to France will be
considered French domiciled for tax purposes. However, if there are
also deemed to have retained their English domicile, the test laid
out in the Treaty will come into play and would supersede both
national laws in the determination of the domicile.
The first test under the treaty is where the individual has a
permanent home available to him. If he has a permanent home
available to him in both countries, he will be treated as resident
of the country where his personal and economic relations are
closest (centre of vital interests). This is probably the most
difficult criterion to deal with as it requires him to go through
various steps, which would reveal where his personal and/or
professional social links are. If that test is inconclusive, the
individual will be considered to be a resident of the country where
he maintains a habitual abode. If this is still inconclusive, he
will be treated as a resident of the country of his
nationality.
If we take the view that a deceased person was French domiciled
for tax purposes both internally and according to the test above,
France will his worldwide assets. However, any UK Inheritance Tax,
for example on assets situated here, would be offset from the
French tax in accordance with Article 3 of the Treaty.
the French statutory rules
without a Will
Under the French intestacy rules, the deceased's children will
inherit 75% of the estate subject to French law and the surviving
spouse the remaining 25%. When the deceased's children are all from
the marriage, the spouse can instead choose a life interest
(Usufruit) on the whole of the estate instead of the above quarter
share. When there are no children, 25% will go to each of the
surviving parents if any and the balance to the spouse.
A life interest (or “usufruit” in French) is an interest in the
estate of the deceased, which grants the right to use the property
during the lifetime of the surviving spouse and the right to
receive any letting income. However, the surviving spouse would not
be entitled to sell the property without the children’s agreement.
The children or the surviving spouse could also force a sale if
they want to sell their share in the property. Upon the subsequent
death of the life tenant, the property will revert to the
children.
with a Will
In order to draft a Will however, we would look at the testate
rules. The number of children now becomes important. With one
child, the "reserved" portion of the testator's estate is 50%,
with two children: 2/3 and with three children or more: 3/4.
This portion must go to the children (or the children of a
deceased's child). The remaining "free" portion of the estate is
50%, 1/3 or 1/4 and this can be bequeathed by Will.
Therefore, under a Will, it is not possible for a couple with
children to bequeath their estate to each other on the first death.
The spouse will only be entitled to the free portion outright, or
the whole of the estate in Usufruitt, or 25% outright + the balance
in Usufruit.
It is worth mentioning that the reserved heirs may sign a waiver
so they cannot use their right to bring a claim against the
surviving spouse / beneficiaries if the deceased went over the free
portion of his estate. The waiver must be signed in France in front
of two notaires.
the French Will
The most usual Will is the testament olographe. The only
requirement is that it must be written out entirely in the hand of
the testator, dated, and signed by the testator. The signature does
not need to be witnessed. The administration of the estate in
France is easier with a separate French Will. It is more
straightforward and avoids any problem of misinterpretation on the
French side. Care must be taken not to revoke inadvertently the
English Will and vice versa.
Under the Hague Convention, dated 5 May 1961 on the form of
Wills, it is possible for British nationals to choose an English
Will to cover their French property for instance. However, the
content of the Will as far as the property is concerned will need
to respect the above rules of succession. This is why a separate
French Will is likely to be more appropriate.
the French Inheritance Tax rules
Unlike the UK, France does not tax the deceased's estate as
such. Instead, the Inheritance Tax (IHT) is levied on the
beneficiaries on their respective shares. The Nil Rate Bands and
the rates vary according to the family relationship with the
deceased and the beneficiary.
Married couples or couples under a civil partnership recognised
in France have enjoyed a full exemption from IHT (but not on gifts)
since August 2007 for assets passing to each other (whether
outright or in Usufruit).
Then come the children, who benefit from a personal allowance of
€156,974 in each of their parents' estate. The balance would be
taxed in accordance with a sliding scale from 5% to 40%. The middle
rate is 20% for the share comprised between € 15,697 and €
544,173.
Siblings and nephews and nieces are the last family members to
qualify for an allowance of respectively € 15,697 and € 7,849 and
flat rates will apply on the balance.
All other beneficiaries including stepchildren or non-married
partners would only qualify for an allowance of € 1,570 after which
their share is taxed at 60%.
further inheritance planning
To conclude, the French statutory rules dictate what a testator
can include in his Will. However, there are other ways to set aside
the property from those rules, subject to conditions, by buying
with a tontine clause (similar to the English joint tenancy),
signing a marriage contract or (for non French residents only)
purchasing through a company. This is especially relevant when a
couple wants to secure each other on the first death without any
children being involved.
This article has been published in Elderly Client Adviser, leading
publication and online guide to help professional advisers to best
manage the interests of their clients.
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