UK citizens with property in France should consider tax planning in relation to their French property carefully, particularly in light of recent developments.
On 1 January 2008, the French government disclosed its new inheritance tax allowances for the 2009 tax year. They were slightly increased from the current figures implemented by French President Nicolas Sarkozy's TEPA law (work, employment and purchasing power law) in August 2007. The rates of tax remain the same.
The nil rate band is increased from e150,000 to e151,950 for parents and children (with rates of tax from 5% to 40%), from e15,000 to e15,195 for brothers and sisters (with rates of tax from 35% to 45%), from e7,500 to e7,598 for nieces and nephews (55% tax rate), and from e1,500 to e1,520 for nonrelated beneficiaries (60% tax rate).
The TEPA law also introduced a total exemption from French inheritance tax between spouses and those in a French civil partnership (called Pacte Civil de Solidarité - PACS for short). However, what about British people in a UK civil partnership? Unfortunately, French authorities have refused to recognise it to date and therefore same-sex British partners who own a property in France are considered as nonrelated and will pay a frightening 60% French inheritance tax.
An alternative way to plan your estate in France is to consider an inter vivos gift (called donation). The same tax principles as those on inheritance apply to gifts to descendants (the e151,950 tax allowance can be used every six years), between siblings, to nephews and nieces, and to non-related beneficiaries. However, gifts between spouses and those in PACS still fall into the scope of the pre-TEPA legislation. The applicable tax rates go from 5% to 40%, subject to a e75,000 nil band rate applicable for spouses and e57,000 for those in a PACS.
It appears from our level of new enquiries and instructions that British owners of French property seem keen to look into French gifts more closely, in particular gifts to certain children, as a potential way to disinherit estranged children. Is that possible in France?
Gifts are a difficult area of French law precisely because of the restrictive rules resulting from the children's forced heirship rights. The French formalities are also greater than those for gifts in the UK.
A deed of gift of property in France would have to be by way of two types of notarial acte de donation.
The donation simple permits a gift of French property to one or more of the children. However, this donation could be challenged on death by the French notaire and/or the other disentitled children on the basis that they have been deprived of their right to inherit up to their reserved share (réserve), unless they renounce in advance their right to make this claim. The renunciation, introduced by relatively recent French provisions (23 June 2006) and called the renonciation anticipée `a l'action en réduction (RAAR), must be expressed in a legal deed executed in person in France and in front of two notaires. The problem is that no RAARs have yet been made in France and notaires are extremely reluctant to draw up these documents to avoid handling any subsequent dispute.
The donation-partage allows French property to be gifted equally between all the children, satisfying the requirements of the réserve. As a result, this French deed of gift, if signed by all the children, is definite and cannot be challenged, making it more advantageous than the donation simple. It is possible for British citizens to make a donation-partage of their French property to one or more children if they gift UK based assets of identical value to their other children beforehand.
French law allows donors the opportunity to add a clause ofdroit de retour to both types of deed of gift, whereby the property would be restored to their ownership if they survive the beneficiaries and their descendants. Depending on personal circumstances, this tool could be inheritance tax efficient.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
