Charlotte Macdonald is a consultant associate solicitor in Stone King’s international and cross-border team.
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 Your French Holiday Home
As you get older, you may start to use your French holiday home a little less. If you no longer want the hassle of keeping a property you do not use, you will likely have two options: sell the holiday home or give it away.
If you are lucky enough not to need the sale proceeds from your holiday home, and if your family enjoys visiting your property in France, giving it away may seem like a sensible choice.
What Are the UK Tax Consequences?
If you are resident and domiciled in the UK, then there are two taxes to think about when giving away property in France:
Capital Gains Tax (CGT)
If you are resident in the UK then you are liable to pay CGT on all your worldwide gains. Although it may seem strange, you will likely need to pay UK CGT on a gift if it has increased in value between the date that you acquired it and the date that you gave it away.
For example, you bought a property in France 20 years ago for £100,000. You decide to give the property to your child this year. Currently the property is worth £150,000 – a gain of £50,000.
Your UK CGT tax bill could look a little like the following:
Market value at date of gift – £150,000
Acquisition value – (£100,000)
Costs of purchase – (£2,000)
Legal costs in relation to the gift – (£1,000)
UK Annual Exempt Amount 2022/2023 – (£12,300)
Taxable Amount: £34,700
You are a higher rate tax payer, so your tax rate is 28% therefore your tax bill will be: £9,716.00
Although you do not need to pay CGT in France (because in France giving a property away does not give rise to French CGT), it is very important that if you are UK resident you consider UK CGT before making a gift.
Inheritance Tax (IHT)
If you are domiciled in the UK then you must consider IHT before you make a gift of your French home. This is because all your worldwide assets are assessed by HMRC when they calculate your IHT on your death.
It is important to note that in the UK we do not have a gift tax as such, so you could give your French property to your child and, at the time of the gift, you would not need to pay any IHT.
However, you would be making a Potentially Exempt Transfer. This is because if you die within 7 years of making the gift, the value of property will be included in your estate’s IHT calculations. If the value of your estate is below the UK threshold for inheritance tax, even when you add back in the value of your French home then your estate will pay no IHT. However, if your estate is over the IHT threshold when you add back in the value of the French property then IHT will be payable at 40%.
So, in short giving away your property shortly before you die may not help you avoid IHT.
To give an example:
At the date of your death you are widowed. On your husband’s death, he left all his assets to you. This means that you can use his IHT allowances and your own. You have one child and you decide to leave all your assets to your child. Two years before you died, you gave away your French holiday home to your child.
Value of your estate at the date of your death: £1,000,000
Value of your French property (even though legally your child now owns it): £200,000
Your tax-free allowance (nil rate band) (£325,000)
Your husband’s unused tax-free allowance (nil rate band) (£325,000)
Your residence tax-free allowance (residence nil rate band) (£175,000)
Your husband’s residence tax-free allowance (residence nil rate band) (£175,000)
Taxable estate: £200,000
Tax @ 40%: £80,000
Gifts with Reservation of Benefit (GWR)
If you are in good health and expect to live for over 7 years, it may seem a good idea to give away your French holiday home to your children even if you have to pay UK CGT as this tax is payable at either 18% or 28% of the gain only, rather than the inheritance tax rate of 40% on the value of the whole property on your death (if your estate is taxable).
It is important to note that if you want to keep using the holiday home as before you must now pay the new owner rent for the time that you use the property. If you do not pay rent for the time that you use the property HMRC may consider that you have ‘reserved’ a benefit in the property.
These types of gifts are known as GWR. If you have made a GWR, after 7 years instead of the value of the property no longer counting for your IHT calculations on death, the value of the property will be included within your estate indefinitely. So, although there may be practical advantages to giving away your property there will be no IHT advantages.
Take Tax Advice in Both the UK and France
If you are UK resident with a French holiday home it is important that you take both UK and French tax advice before giving it away. The taxes in France and the UK are not identical, and what may be sensible for taxation reasons on one jurisdiction may not be favourable in the other.
For more information about the cross border treatment of your civil partnership, wills or inheritance tax please contact the international and cross-border team at Stone King LLP – Charlotte Macdonald, Dan Harris, Raquel Ugalde, Emma Seaton, Bryony Anning or Graeme Beattie, either by calling +44(0)1225 337599 or by emailing [email protected].
Article written by Charlotte Macdonald.
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