Many people might not be aware of the potential tax consequences of an English trust in France. Until recently there was no legal concept of a ‘trust’ under French law, however the legislation has recently been modified to fill the regulatory gap. This means that English trusts can now be taxed in France on death, provided there is a connection with France.
A UK trust will be subject to French Inheritance tax if:
1. The settlor is resident in France, or
2. Any of the beneficiaries are resident in France, or
3. The assets under the trust are located in France
Getting your will drafted – be wary of the non-specialist
If you are a resident in France, one of the problems of having your will drafted by a non-cross-border specialist is that they may not be aware of the different tax implications that the choices you make in your UK will might have upon your death under French law.
Trusts are commonly included in English wills, especially where there are second marriages or parents feel that one of more their adult children should not have direct access to their inheritance. A non-cross border English solicitor may therefore include a trust in your English will, which could lead to a significant amount of French inheritance tax being paid by your beneficiaries.
The non-specialist may also overlook the fact that a second, foreign will might already be in place. This can result in either contradictory wills or one revoking the other. Where this happens your estate would be partially intestate and would follow the local rules, rather than what your will requests.
So if you have assets in both France and the UK, make sure you get specialist advice tailored to your circumstances to ensure that your beneficiaries are not inadvertently left with a large tax bill on your death.
Differences between UK inheritance tax and French succession tax
In the UK, when you die the value of your estate is assessed for inheritance tax. Your estate has a tax free allowance (usually £325,000). Assets passing to your spouse go inheritance tax free, generally any assets passing to other people in excess of your tax free allowance is taxed at 40%. Your executors arrange for the tax to be paid and the rest of your estate is distributed to your beneficiaries.
In France a succession tax – ‘Droits de succession’ – is paid by each beneficiary personally. The tax free allowance that the beneficiary has and the rate of tax they will pay depends on how closely related they were to the deceased and how much they inherit.
Spouses (or civil partners) do not have to pay French inheritance tax on the death of a partner. Children have a generous allowance, whilst other family members have a smaller tax free allowance. Non-related beneficiaries have a very low allowance and pay tax at a very high rate.
So what are the tax consequences of English trusts in France?
Amongst other tax consequences while the settlor is still alive, such as wealth or income tax when money is paid out of the trust, it is worth highlighting how an English trust is taxed in France on death.
As explained above, in France each beneficiary will be liable for a different amount of inheritance tax to pay depending on the amount they are inheriting and how closely they are related to the person who has died.
However, under French law and subject to double taxation treaties, property in a trust may be taxed at the highest rate applicable (60%) with no tax free allowance available.
Frustratingly, this result may happen regardless of whether or not the assets held in trust are distributed to the beneficiaries.
If you are French resident it is therefore important to check whether your wills contain trusts, and if so whether it is appropriate to amend your wills to remove the trusts.