Charlotte Macdonald is an associate solicitor in Stone King’s international and cross-border team.
Over a new 12-part series of articles, Charlotte will answer legal and practical questions that are often asked by her clients in relation to buying or selling property in France, French inheritance law, and how inheritance and capital gains tax are treated between the UK and France.
Should I Set Up a Trust In My Will To Cover My UK and French property?
William is British and UK tax resident. He lives in Oxford and has a holiday home in Nice. He generally spends at least two months each summer in Nice. He has recently divorced and has two adult children in their 30s. In total, his worldwide assets are worth approximately £1.7 million.
William is thinking about updating his Wills and has heard that if he puts all his assets into a trust for his children and grandchildren when he dies, this will reduce the inheritance tax payable. William wants to know whether this is true.
Inheritance Tax for UK Residents
Setting up a trust for UK Assets
As William is domiciled within the UK, HMRC will assess his worldwide assets for inheritance tax
on his death. William is considering leaving his assets to his children and grandchildren in his Will, meaning that the trust will be taxed as a ‘relevant property regime’ trust by HMRC.
Broadly speaking, this means that the first £325,000 will pass to the trust tax free. The balance of the assets passing to the trust will be taxed at 40%. Going forward, each 10 years there will be an ‘anniversary tax charge’ of approximately 6% of the trust assets. There can also be charges on the assets when they leave the trust.
In addition to the inheritance tax, there is also an administrative burden for the trustees to fulfil. They must make sure that the assets in trust are appropriately invested. They must also register the trust with HMRC and make sure that annual tax returns are filed and the right amount of income tax and capital gains tax is paid where necessary.
In short – in William’s situation, simply leaving his assets in trust for his children and grandchildren is not going to save them inheritance tax.
The Benefits of Setting Up a Trust in Your Will
However, there can be very good reasons for setting up a trust in your Will. For example, if you have a young child, the trust assets are treated less harshly than above, as long as the assets are distributed to the child before they turn 25. The trust assets can also be used to look after the child whilst they develop the ability to manage their own money.
You may also have a child who cannot manage their own money due to ill health*, gambling, addictions, bankruptcies, etc. Or you may wish for a child to avoid inheriting because they are going through a divorce and you don’t want your child’s inheritance to go to their ex-spouse. A trust in these situations can be a very sensible way to protect the child’s inheritance for their own benefit.
Each person’s situation will be different, so it is not possible to say whether a trust will be suitable or not without knowing all the relevant details but in general, setting up a simple trust in your Will for your children will not create large inheritance tax savings.
*There are special trusts for people with disabilities which are treated more favourably for tax purposes than regular trusts.
Setting up a trust for French Assets
Under French law, it is not possible to establish a trust. However, as William is a British national (most closely associated with England), he could choose for the laws of England to apply in his French Will under the European Succession Regulation
This means he could have a Will in which he leaves all his worldwide assets into a trust for his children and grandchildren.
Unfortunately, this would cause William’s children and grandchildren problems in France:
• Firstly, it would be very difficult from a legal point of view to get William’s property registered in the name of the trustees. This is because, under French law, no distinction is made between the legal owner (the trustees) and the equitable owner (the children).
• Secondly it would cause taxation difficulties, as detailed below.
If William left his French property directly to his children they would benefit from a tax-free allowance each of €100,000 and would pay French inheritance tax on any amount over €100,000 on a sliding scale between 5%-45% (the more that they inherit they higher the rate of tax payable).
If William left his French property to a trust, the tax rate could be as high as 60%. In addition to this, the trustees would have to comply with a very strict French trust register, which would involve registering the trust in France, and submitting an annual report and an event report if the trustees distribute any of the trust assets. Non-compliance can be met with a €20,000 fine.
Our Advice: Setting Up a Trust for UK and French Property
William should not make a Will putting his French assets into a trust. He can however explore the idea of leaving his UK assets into a trust. This may be a sensible way of protecting the assets if he is worried that one of his children may squander their inheritance, for example. However, it is unlikely that by doing this he will create any immediate inheritance tax savings for his children and grandchildren.
Do You Have Other Questions Regarding French Wills and Inheritance Laws?
For more information please contact the international and cross-border team at Stone King: Charlotte Macdonald, Dan Harris, Raquel Ugalde and Emma Seaton either by calling +44(0)1225 337599, or by emailing: [email protected]
Article written by Charlotte Macdonald and trainee solicitor, Bryony Anning.