New EU Succession Law and Its Implications on Inheritance Tax

When UK nationals buy property in France and/or move to live there, one significant difference between the UK and France that they need to be aware of is the French succession (inheritance) law, and the implications on inheritance tax.

In the UK, you are generally free to leave your assets to whomever you wish when you die (Scotland and Northern Ireland law does have some restrictions), as stated in your will.

French law, however, imposes significant restrictions. The key issues are:

• Under French law assets do not automatically pass in accordance with your will (unless your will happens to match French succession law, which for most British residents in France is unlikely).
• Children are protected heirs, inheriting up to 75% of the deceased parent’s estate.
• In the absence of a will, the surviving spouse is only entitled to 25% of the nue propriété, or 100% in usufruit, of the deceased’s assets. Spouses are not protected heirs.
• There are ways of circumventing these laws, but care must be taken to ensure that these have the effect you are looking for.

Note that the term “children” includes children from an earlier marriage and adopted children, and their age is not relevant – they could be 8 or 80!

This succession law applies to your worldwide assets if you are French domiciled (i.e. permanently French resident). It always applies to French real estate, even if you are not resident in France.

New EU Succession Law

The French law itself is not changing, but a new EU directive from 17th August 2015 allows expatriates living in the EU to elect for the succession law of their country of residence to apply on their death, as opposed to that of their country of residence.

The increased global mobility of individuals over recent years has created confusion when it comes to the settlement of cross-border inheritances. Individuals can own estates in more than one country, which can trigger the application of multiple inheritance laws and create conflicts of law. The new European Succession Regulation, or “Brussels IV” as it is commonly called, was devised to address this issue and simplify and lower the costs on cross border succession issues.

The main mission of Brussels IV is to make sure that the court of a single jurisdiction will apply a single law to the entire estate of the individual. The aim is to provide total clarity and reduce the opportunity for conflict. The three main pillars of the regulation are:

• The default position and most important criterion is that the law of the state in which the deceased was “habitually resident” at the time of their death applies to succession of assets located across the Brussels IV zone.

• However, an individual can elect to apply the law of their nationality to all their assets across the zone. If they have more than one nationality, they may choose either law. This selection must be made before death, through a statement in their will or a similar document.

• The default position may also be overturned if there is a jurisdiction to which the deceased was “manifestly” more closely connected.

Inheritance Taxes

It is important to note that Brussels IV does not apply to succession/inheritance taxes. The situation remains as before – where an individual has assets in more than one country, and different inheritance tax regimes apply, the double tax treaty (if any) or the national tax rules will determine where and how succession tax is paid.

Therefore, if you are resident in France at the date of your death or if you have assets in France, the French succession tax rules continue to apply. You cannot choose UK inheritance tax instead of French succession tax.

So, UK nationals living in France can now elect for UK succession law to apply on their death, thereby avoiding French succession law. But is this the right choice for you? It may well not be.

For a start, the UK, along with Ireland and Denmark, has opted out of the new regulation, and so are not Brussels IV states. The effect of this on UK nationals in France is not entirely clear yet.

Secondly, even though the law does not cover tax as such, there are tax issues to be aware of. The French succession tax rates are high for distant and non-relatives, up to 60%, with negligible allowances. Even closer relatives like brothers and sisters only get €15,932 tax free, and then pay tax at 35% or 45%, depending on the amount of inheritance.

Also, because of the wording of the UK/France double tax treaty, it is possible that if you opt for UK law to apply, your estate may be liable to the UK inheritance tax rules, as well as French succession tax. This could have significant consequences.

Brussels IV may therefore not be the panacea for estate planning in France. Although it was designed to simplify matters, it also changes the succession landscape. You need to understand all the implications for you and your heirs. There are tools available to help with estate planning in France but, to ensure that the arrangements you use achieve the results you are looking for, it is important to seek specialist, personalised advice, to review your existing plans and help you establish which law would work best for you.

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