Retain as Much Control as Possible
For most UK residents, making a move across the Channel for a life in France does not usually mean a change in estate planning objectives. These normally remain:-
- to exercise control over the eventual distribution of assets acquired throughout life
- to ensure that these assets are distributed to chosen beneficiaries as tax-efficiently as possibleHowever, given a number of key differences in the legal and tax systems between the UK and France, what is likely to require a change is the financial planning approach and the tools and techniques used to achieve these objectives.In the UK the key tool for controlling the distribution of assets on death is a legally constituted Will. Moreover in the UK, an individual’s Will allows total control over the choice of beneficiaries and the apportionment of assets between them.For married couples in the UK the most common approach is the use of ‘mirror Wills’ by which each spouse leaves 100% of his or her assets to a surviving spouse on the death of the first spouse. The surviving spouse can then revise their Will to direct combined assets to children, or other beneficiaries on their own death. For those on second, or subsequent, marriages, with children or step-children, the position is somewhat more complex and trust arrangements may be used to provide financial security for a surviving spouse, while protecting eventual legacies to children or stepchildren.On a change to French residency there are a number of key differences in the estate planning environment as the worldwide assets of French residents are subject to French inheritance tax treatment and the unfamiliar concept of ‘succession law’.In France, a French Will is still a key tool for estate planning. However, the operation of French succession law means that, unlike in the UK, a French resident is not necessarily able to exercise full control over the distribution of their assets on death. The most important aspect of French succession law is that it gives children, (both natural and legally adopted) the legal right to inherit a certain ‘reserved’ portion of a parent’s estate. A French Will can only control the distribution of the ‘un-reserved’ portion.
For a couple with one child then the ‘reserved portion’ is a half of each parent’s estate. For a couple with two children the reserved portion is a third of each parent’s estate. With three or more children it is three-quarters of each estate divided equally between them. This applies irrespective of where the children are resident themselves.
The operation of French succession law effectively means that the familiar ‘mirror will’ planning approach used in the UK cannot easily be reproduced in France. Furthermore, the use of trusts is not available as part of an estate planning strategy as trusts are not a fully recognised legal concept in France, and, following recent changes in French tax law, offer no real planning or tax mitigation advantages.
The back-drop of French succession law means that careful attention needs to be given to the form of ownership of assets, particularly in relation to the ownership of real estate property. Before buying property in France it is vital to seek informed legal advice on the most appropriate form of ownership for one’s specific family circumstances. The French notaire used to arrange your property purchase can assist but it needs to be recognised that notaires, as French nationals, may not always be particularly sympathetic to the UK standard approach to estate planning which typically favours the inheritance rights of spouses and partners before the inheritance rights of children.
As such it can often be more helpful to consult a UK lawyer fully conversant with both the UK and French legal systems. This will ensure that the most appropriate form of property ownership is adopted, and French Wills put in place which are fully compatible with the ownership arrangement and wider estate planning objectives. In addition the legal advisor will ensure that French Wills do not conflict with UK Wills, which may be recommended where UK real estate property is being retained.
There are a number of legal and financial planning tools which can be used to mitigate the impact of French succession law and allow UK expatriate residents in France to retain as much control as possible over the eventual distribution of their assets. These tools include the use of the ‘tontine’ form of joint property ownership or possibly a change in a couples’ ‘marriage regime’. In the UK, there is effectively only one form of ‘marriage regime’ whereby all matrimonial assets are deemed to be jointly owned assets. In France there is, by contrast, a range of ‘marriage regime’ options which govern the ownership of assets between spouses. Here again, a specialist UK/French legal expert can advise on whether a change of ‘marriage regime’ on moving to France could be appropriate and beneficial.
The second key objective of estate planning is the tax-efficient transfer of assets to chosen beneficiaries. Achieving this requires a sound appreciation of French inheritance tax rules, and how they differ from inheritance tax rules applying in the UK.
There are two key differences between the French and UK inheritance tax systems. Firstly, in France it is the beneficiaries who are subject to French inheritance tax on their shares of a deceased person’s estate, and not the estate itself as applies in the UK. Secondly, the rate of tax payable by a beneficiary is directly related to the relationship of the beneficiary to the deceased. The principle is that the closer the relationship the less onerous is the tax burden.
Helpfully, as in the UK, there is no inheritance tax applying between spouses, or those with a PACS agreement, Pacte Civil de Solidarité, which is a form of civil partnership available to both opposite and same sex couples. (However, it should be noted that if assets are given away during an individual’s lifetime as part of an estate planning strategy then French gift tax may apply, even between married couples or PACS partners).
Under current tax bands and rates, a child as an estate beneficiary has a 0% tax band allowance of €100,000 from each parent, with sums received in excess of this charged on a sliding scale from 5% to 45%. Brothers or sisters normally enjoy a 0% tax band allowance of €15,932 with rates above this of 35% or 45%. However, for beneficiaries unrelated to the deceased the 0% tax band is a mere €1,594 with all sums received over this amount taxed at a penal 60%. This has significant implications for couples with children from previous marriages as stepchildren are categorised as ‘unrelated’ to a deceased step-parent. So, for example, a child eventually inheriting the combined estate of a deceased natural parent and a deceased step-parent faces a massive difference in French inheritance tax depending on who dies first!
With second marriages being an increasingly common scenario in today’s world there is fortunately a range of planning techniques and forms of investment holding for non-property assets which can be used to by-pass both French succession law and inheritance tax rules.
The key, as ever, is to take specialist independent legal, tax and financial planning advice well before your move and particularly before purchase of French property. Taking such an approach means the common perils and pitfalls of estate planning for French residents can usually be readily and legitimately avoided.
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