Charlotte Macdonald is an associate solicitor in Stone King’s international and cross-border team.
Over a new 12-part series of articles Charlotte answers legal and practical questions that are often asked by her clients in relation to France; whether that be buying or selling property in France, inheritance law, or how inheritance and capital gains tax are treated between the UK and France.
Giving away French property – what you need to think about if you live in the UK
If you are thinking of giving away your French holiday home and you live in the UK, it is very important to consider both French tax laws and UK tax laws.
As individuals grow older they sometimes consider giving away their French holiday home to the next generation. This could be for a number of reasons: perhaps they don’t use the property anymore, or they think it will be easier for their children to receive the property before they die, or they may want to reduce inheritance taxes payable on their death.
If you wish to make a gift of your French holiday home you will need to visit a French notaire who will be able to carry out the transfer for you and inform you of whether any French tax will be payable. What your notaire will not be able to advise you on is whether any UK tax will be payable.
Why do I need to consider UK tax when my holiday home is in France?
If you are a UK tax resident then your worldwide property is subject to the UK capital gains tax regime. If you are UK-domiciled then your worldwide assets are subject to the UK inheritance tax regime.
If you live in the UK, it is therefore vital that you contact a UK specialist who can provide you with advice before you give away your French property. If you do not do so, you or your family may end up with an unexpected tax bill to pay to HMRC.
UK tax on gifts
There are two principle taxes to consider when making a gift of property; inheritance tax and capital gains tax.
In the UK we do not have a ‘gift tax’ as such, but if you have made a gift in the seven years before your death, it will be taken into account to calculate any inheritance tax on your death. This is often called the ‘seven-year rule’.
On death in the UK, each of us can leave up to £325,000 free of inheritance tax. Any amount in excess of this is taxed at a flat rate of 40%. This is the broad position but there are a few additional tax allowances, such as the residence nil rate band, and exemptions for charities and spouses who inherit free of inheritance tax.
Sue is divorced and has two adult children. She rents her home in England and owns a holiday home in France. Her Will leaves all her assets to her two children equally.
At the time of her death her assets are worth £500,000, including her French holiday home worth £100,000.
The first £325,000 of Sue’s assets pass free of inheritance tax. The remaining £175,000 is taxed at 40% meaning that there is £70,000 of inheritance tax to pay in the UK.
We will use Sue as our example again, except in this scenario at the time of her death her assets are worth £400,000. It turns out that Sue gave away her French holiday home to her two children the year before she died.
Sue’s tax free allowance is reduced by the value of the gift because it was made within seven years before her death. Therefore Sue’s tax free allowance is now only £225,000 (£325,000 less the value of the French holiday home, £100,000).
Only the first £225,000 of Sue’s assets pass free of inheritance tax. The remaining £175,000 is taxed at 40%, meaning that there is £70,000 of UK inheritance tax to pay.
If you decide to give away your French holiday home, it is important that you are aware of both the seven-year rule (discussed above) and the Gift with Reservation of Benefit rules. These rules can mean that the value of your holiday home will still be counted for inheritance tax purposes in the UK, even if seven years have passed from the date that you gave your holiday home away, if you continue to use the holiday home as you did before you made the gift.
Please note that the examples given in the article have been simplified. In reality, more information would be required before an accurate tax calculation could be made for Sue.
Capital Gains Tax
Many people think of capital gains tax as arising only when a property is sold.
Capital gains tax is levied on the profit that you make when you ‘dispose’ of a property. Usually, disposal of a property means a sale, but it also covers gifting of a property.
The main exemption to capital gains tax is principal private property relief – which means there is no capital gains tax payable when you sell or give away your home. This relief does not extend to holiday homes.
Sue decides to give away her French holiday home to her two children. It was valued at £20,000 when she bought it and it is now worth £100,000, so has made a gain of £80,000. She has owned it for 30 years so is told by her notaire that there is no capital gains tax to pay in France.
However, because Sue is UK tax resident there will be capital gains tax to pay in the UK if she gives the French holiday home to her children. Sue is a higher rate taxpayer so she must pay tax at the rate of 28% on the value of the gain. As she has made no other gains this tax year, she can use her annual exempt amount to help reduce her tax bill (in tax year 2021-22 this is £12,300).
Sue’s capital gains tax bill on giving away her French holiday home is likely to be in the region of £18,956 (£80,000 – £12,300 = £67,000. £67,700 x 28% = £18,956).
French estate tax planning
There are a number of French estate tax planning opportunities that your notaire may discuss with you if you are considering giving away your French holiday home.
A common way of making a gift of a property is to split the property into two different legal interests (démembrement d’un bien immobilier). You keep one of the interests (the usufruit) and give one away, usually to your children (the nue-propriété).
Although this can be a tax-efficient way of gifting a French property, if you live in the UK it is essential that you take UK tax advice before doing this so that you know the UK capital gains tax and UK inheritance tax consequences.
Steps to take if you are thinking of giving away your French holiday home
- Get an updated valuation of your property.
- Talk to your French notaire about making the gift and any French fees and taxes that may be payable.
- Talk to your UK advisor (preferably somebody who is familiar with types of French gifting) and find out what the UK tax consequences will be.
- Once you know both the UK and French tax consequences you can decide if you can afford to make the gift and if so, your advisors can help you choose the best way to make the gift.
For more information please contact Charlotte Macdonald, Dan Harris or Raquel Ugalde at Stone King LLP either by calling +44(0)1225 337599, or by emailing: [email protected]