French Inheritance Tax Explained
When a person passes away and leaves behind assets or property in France, his or her estate may be subject to inheritance tax. Inheritance tax in France is levied on the free gift or transfer of property between living persons (donations) or the transfer of property in event of death (inheritance). French inheritance depends on the relationship between the deceased and the beneficiary of the estate, and how closely related they are to the deceased.
French inheritance works in a way that it will pass from the deceased to the beneficiaries of their Will or the French Law of Succession – which comes into play if no Will exists. The French inheritance is taxed in part from the 1st Euro , with a maximum rate of 60% being paid by the beneficiaries. French inheritance tax consists of a sliding scale of tax-free allowances and tax rates that vary depending on the beneficiary’s relationship to the deceased. For example, a surviving spouse will half of his / her inheritance tax, while a cousin will pay up to 55% of his inheritance. The sliding scale allowances are:
It is important to note that the exemption limits specified above apply on a per person basis. Thus, about 83% of the deceased estate is exempt from French inheritance tax.
The assets of the deceased’s estate will be divided according to the rules of succession so that each beneficiary of the estate receives his/her portion. However, if the deceased has requested that their wishes be adhered to, they may be allocated less than his / her lawful portion.
Giving Away Assets During Life
An alternative is to make lifetime gifts to relevant parties which can reduce the potential liability to French tax on death.
Lifetime gifts to a child qualify for annual allowances of €100,000 per child. In addition to the annual allowances, lifetime gifts to a marriage partner or PACS partner qualify for allowances of up to €80,000 each year. Gifts to grandchildren qualify for allowances of €31,865. Gifts to other supported family members or family and friends can benefit from allowances of up to €5,310 each.
The allowances apply per person so a couple can effectively make double the gifts above.
Gift rules are complicated and not as generous as those which apply for UK inheritance tax purposes. However, with planning they can reduce the potential exposure to French inheritance tax on death by making tax exempt gifts before death equal to annual allowance amounts or shortly before the individual dies in circumstances in which the death is unexpected or close in time.
It can be difficult and costly to take tax planning steps to manage exposure to the potential 60% flat rate and 35% flat rate inheritance tax rates. However, simple lifetime gifts by French or foreign domiciled persons to relevant family members or others can prove valuable in planning to reduce exposure to French inheritance tax on death.
Taking Out Life Insurance Policies
Within the framework of a good wealth strategy, one may use life insurance policies. Indeed, under French tax law provisions, there may be significant advantages in using life insurance as a wealth transfer tool, as an alternative or additional means to give assets to listed beneficiaries, or to indirectly give assets to other beneficiaries/wider circle of family members.
In order to be effective from a French tax law perspective, such insurance policy has to be taken out (or be designated if an existing one) before the date when the life insured holds the status of French tax resident.
A gift under such life insurance policy can benefit from a generous estate duty allowance of €152,500 per beneficiary. The allowance doubles in case of gifts between spouses or PACS partners. For children and grandchildren, a specific hierarchy applies.
In addition, insurance policies taken out (or designated) by the life insured before his/her 70th birthday are exempt from inheritance tax over a certain amount. The amount that is exempt is determined as follows: In practice, the funds will be paid to the designated beneficiary for full ownership, free of any right for the heirs of the life insured to claim their share of the succession. However, it may be necessary to inform beneficiaries of the (undisclosed) existence of other inheritance reserve rights.
Establishing a French SCI
An effective way of managing and passing on French real estate while reducing inheritance tax exposure is to form a société civile immobilière (SCI). An SCI is a French company whose ownership is structured around the ownership of one or more properties. The shareholders of an SCI will not therefore own directly a property, but indirectly by virtue of their status as shareholders in the SCI which itself owns the property. An SCI can own and be the registered owner of a property, instead of any individual.
The key benefit to forming an SCI is that this creates a vehicle to make a gift of shares, rather than a gift of a specific property. Shares in an SCI can be transferred without the need to transfer the underlying property interest itself.
The advantage to this is that in France, if an individual inherits a property from someone who is related to them, the real property is re-valued and the inheritance tax due on the new value. This means that if the property market has increased between dates of death the liability can be much greater than if the deceased had held shares in an SCI, even where the value of the shares remains the same since date of death. Historically the French tax authorities have taken the view that the tax authorities can assume the property was passed as a gift on the date of the death of the original owner and therefore the value of the property should be at the date of death of the original owner, rather than the date that the property was actually passed on as a gift . So whilst a gift of property between individuals who were related to each other may be taxable at a lower rate, an inheritance will always be taxed at the rate applicable at the date of the death.
If the property is owned by an SCI then the tax authorities can only tax any change in value of the property between the time the deceased died and the time it was passed to the person inheriting it. For someone inheriting shares in an SCI, the value remains exactly the same on the date of death of the original owner; it is the shares themselves which must be valued at the date that the gift is passed.
The distribution of shareholdings amongst several shareholders, for example by allocating some of the shares to descendants, can also help to simultaneously make lifetime gifts exempt from inheritance tax. We would recommend that a professional valuation is obtained for the shares at the time of gifting so that there is certainty to the tax authorities if a dispute does arise as to how much inheritance tax is payable by the estate of the deceased.
As is the case when spouses inherit from each other and then make a gift to their children passing on the savings from the tax, an SCI can also work well to allow parents to make a gift of shares to their children once the property has been transferred to them upon the death of a spouse. This would allow the children to take advantage of the reduced rate inheriting from a parent rather than from a grandparent.
Utilizing Double Tax Treaties
Establishing a network of comprehensive succession plans is essential to successfully navigate the complexities of tax treaties which are in place between different countries. These treaties, which are created as part of negotiations between countries, are intended to avoid situations where individuals would be forced to pay taxes twice on the same assets. One example of this is the double taxation treaty France has entered into with the UK. It allows UK residents not domiciled in the country to avoid having UK Inheritance Tax applied to their French property, provided that French inheritance tax has been paid. The rules around avoiding double taxation are complicated and it is essential that you get expert legal advice to determine which tax treaty may apply to your specific situation.
Working with a Tax Advisor
Consulting a tax professional is crucial when attempting to decrease those taxes and, more often than not, that should be done in country if the goal is to save on taxes through local laws. You must look to the future or risk facing complications down the line. There are many unanticipated scenarios that come from transfer matters. A knowledgeable and licensed advisor will help you to avoid these circumstances and ensure a more accurate outcome.
Heirs in France have less than six months to file an inheritance tax return. That is a short window for developing a plan to determine how to minimize the taxes owed on an estate. Having a professional help you make the right moves for your specific situation can maximize your success and savings.
Estate planning isn’t just about saving on taxes. It’s about creating an estate that will provide security and future stability for you and your heirs. The ultimate goal is passing your assets on in a way that makes solid financial sense and respects your individual needs and goals. Only professional advisors in France are able to interpret the law and identify the best ways to handle personal matters regarding successions and transfers.
Don’t waste time after a succession with trying to figure out what the best approach should be to minimize your inheritance tax bill. When you consult with a tax advisor , you can be rest assured that your situation will be legal as well as ethical. You have to keep in mind that a professional in succession planning will know when it isn’t a good time to write off all wealth. The accountant and tax attorney will also discuss with you things that might be more beneficial on a financial level.