by Matthew Cameron, Ashton KCJ
If you are considering buying a holiday or permanent home in France as part of your retirement, it will be important to review the various implications that may arise from this, for inheritance law and tax purposes, as well as for other reasons. In this article we will review some of the issues arising from ownership of French property.
You will no doubt have English Wills in place, and if not, you should see your solicitor for this. However, before you do think about a new English Will, you should understand how the French and English legal and tax regimes work together and how all of this will affect you.
Whether you will be moving to France permanently or buying a holiday home will influence how your Wills should be drafted. This is because French and English law agree on one particular point – that the law of the country where a house is situated governs how it passes on your death, while the law of the country of your final residence governs how all of your other assets, such as your investments. Thus, if you stay living in the UK, your English Wills would govern your English home and your other assets, while if you move to France permanently, your house in France and your personal assets are inevitably governed by French law.
It is possible for one Will to govern your estate both in France and the UK yet, in general, this is inadvisable for several reasons. First the language issues will result in a need for detailed translation and possibly legal opinion as to validity of the Will in each jurisdiction. Secondly, as will be seen below, the laws of the two jurisdictions differ substantially, such that an English Will may prove to be of little benefit in France. Thirdly, English Wills invariably contain trusts that can give rise to complications, as well as obligations to make separate annual declarations, in France.
While in the UK you can generally leave your entire estate to anyone you may choose, the same is not true in France, where certain people have fixed interests that can be difficult to avoid. Since the first group of people who have such fixed interests is the deceased’s children, it will frequently be the case that this does not cause a problem. However, this may not always be the case; you may want to ensure that your surviving spouse inherits everything first. The children may, of course, come from a different relationship, and these points may lead to various potential points of conflict.
In the UK inheritance tax is imposed at a flat rate of 40% irrespective of who the beneficiaries are (with an exoneration for a legacy to spouse or a charity), the rate of inheritance tax payable in France depends on the proximity between deceased and beneficiary.
The same exemption to inheritance law applies in France for legacies to a surviving spouse. Apart from that though, the rates vary up to 60% for beneficiaries not related to the deceased. The inheritance tax calculation can therefore become complex, since we have to establish who all of the beneficiaries are and their relationship to the deceased, as well as the amount they each inherit. Rates of tax on children of the deceased, for example, differ from those for siblings, or cousins, or nieces and nephews.
Perhaps more importantly, though, the tax calculation differs between ones children and step-children. Let us take the example of a married couple, both of whom were married before and who each have a child from their first marriage, and have in their joint estate a house worth £300,000 with no other assets. In the UK, it may be anticipated that the first spouse to die would leave everything to the surviving spouse, who would then divide the whole estate equally between the two children on his or her own death. There would be no inheritance tax at the time of either death.
However if the same scenario arose in France, with a property value of say 300,000 Euros, then while there would be no inheritance tax payable at the time of the first death if the surviving spouse were to inherit the house absolutely, the survivor’s child would pay less than 10,000€ in inheritance tax, but the child of the first to die would bear a tax bill of around 90,000€. Clearly inheritance tax is therefore an important point to bear in mind.
In the above example, I mentioned that we were presuming that the surviving spouse inherited all of the French property. Earlier on, I suggested that it can be difficult to avoid a situation where ones own children would inherit at least a proportion of ones estate, which is what would be necessary in this case if the surviving spouse were to take everything. It can be done, but consideration must be given before the purchase is completed; certainly a clause in a Will – whether English or French – saying that ones whole estate will pass to the surviving spouse on death, would not of itself work to override the fixed rules of inheritance in France.
There are new rules coming into force in August 2015, the intention of which is to ensure that a person with assets in another jurisdiction will be able to apply the inheritance rules of his or her country of nationality to the assets in the other jurisdiction. The UK has not, however, ratified the relevant Treaty, and it would seem that it will not do so. The result of this is that there remains some doubt at the moment as to whether it would be possible for British National to apply English (or Scottish / Northern Irish) rules of inheritance to a property in France. Canvassing opinion among legal professionals results in answers from ‘No, it is definitely not possible’, to ‘Yes, it certainly is possible’. So really we have to wait and see before any realistic guidance is possible.
While you may already have an English Will, this may not be helpful or relevant, and it may even lead to substantial disadvantages, especially for inheritance tax purposes. There is no replacement for a detailed analysis of your current situation and what steps may be taken overall. The potential options depend on your specific circumstances, so there is no guarantee that suggestions set out in guides or books can be applied with enough accuracy to your personal situation.
If you are moving to France permanently, there will be some other areas of law you will need to consider – such as pensions and investments. It is vital that you seek a detailed review of such issues: all such investments are likely to be treated differently in France from the UK, and any preferential tax treatment in the UK could well be lost in France. Different structures may be suitable. Consulting financial and investment advisors with suitable knowledge of both jurisdictions is therefore most important.
You may have heard that there is a wealth tax in France. This applies on the value of a French house for non-French residents, and potentially everything a person owns worldwide for people who are French resident. Where the net value of the estate (there are allowances such as certain debts, certain professional assets) exceeds 1.3 Million Euros, then an annual tax is applied on the total value beyond the first 800,000 Euros.
Clearly this article is only very limited in scope, and should therefore be taken as a guide. Different circumstances can result in substantially different situations, and as such it is important to take detailed advice from solicitors with a detailed knowledge of French and English law and tax matters at the earliest possible opportunity.
•With thanks to Matthew Cameron, Partner, www.ashtonkcj.co.uk
This article is for general information purposes only and does not constitute legal or other professional advice. We would advise you to seek professional advice before acting on this information.