Route out of inheritance tax nightmare for same-sex couples

THE inequality that the French inheritance tax system has towards same-sex couples from outside France could see many people face bills totalling 60 per cent of the value of their assets.

At present the French system does not recognise couples who have registered under civil partnership arrangements in their own countries, so on the death of one the surviving partner is treated as an individual and will be charged inheritance tax.

Campaigns have been started in both the French parliament and Europe to change the current set up, but surviving partners have already faced tax demands at a time when they are still grieving.

Here regular contributor to This French Life, lawyer Guillaume Barlet, has looked into possible ways around the current situation and offers readers a route out of this nightmare.

Here he describes an arrangement he has offered two of his clients:

Anna and Megara, both around their 60s, live in the UK and wished to purchase a holiday home in France worth around €65,000. The compromis had not yet been signed.

They have both been married in the past, Anna is a widow and Megara is now divorced. Anna has three adult children. Anna and Megara have lived together for over 20 years and will soon be entering a civil partnership.

They have made wills in England leaving everything to one another and would like to find a way to leave the property in France to one another without incurring too much inheritance tax, and on the deaths of them both pass the property on to Anna's children.

They decided that they did not wish to set up a company to deal with the property.

The principles of English and French private international law provide that the inheritance to property, as an immovable asset, immeubles, is governed by the law of the place where they are situated.

So under French law, children must be entitled to a share of the parent estate (réserve légale). This means that if Anna dies then a share of her French estate will automatically pass to her children.

Alternatively, if Megara dies she would still be free to dispose of the remaining share pursuant to her will.

In the absence of any estate planning measures and assuming that in any case the property would be transferred to the surviving partner then to the children, this would be the outcome:

- If Megara dies first, her share of the property would be taxed at 60 per cent on transfer to Anna. Then on Anna'€™s death however, the children should receive the property free of tax.

- If Anna dies first, her share of the property would be taxed at 60 per cent on transfer to Megara. On Megara's death, the children would also be taxed at 60 per cent on transfer of the property to them.

Inheritance tax is usually paid by the beneficiaries of the estate and is charged in a series of bands. However, various allowances exist and each of Anna's children can be granted an allowance free of tax, which is similar to the UK inheritance threshold.

Since August 22, 2007, a surviving spouse or a surviving person conjoined by a French civil partnership (PACS) is not liable for inheritance tax.

However, a civil partnership made in the UK is not recognised by French law and a surviving partner in this case will be considered as a third person and liable to pay 60 per cent of inheritance tax on the value of the legacy after an allowance of €1,596 free of tax.

In addition, a lifetime gift or a legacy of the French asset from Megara to Anna'€™s children would also incur a 60 per cent gift/inheritance tax after an allowance of €1,596 free of tax.

Usufruit and nue-propriété

In France there are two separate rights in ownership:

- The usufruit is the right to use the asset owned by someone else and the right to receive its income

- The remaining share is the nue-propriété

The combination of these two rights is the full ownership of the asset.

The nue-propriété can be transferred to Anna's children upon her death and inheritance tax would probably not be paid since the allowance would cover the value of the share of the property.

Upon the usufruit holder's death (usufruitier), the usufruit is automatically rejoining free of tax the nue-propriété to form the full ownership again.

Therefore, in order to eventually divide the French assets between Anna's children, Anna would need to hold the nue-propriété of the property and Megara would need to hold the usufruit so the nue-propriété can be received by each child free of tax.

Depending upon which partner died first different routes of transfer would take place.

- If Megara dies first, her usufruit would automatically rejoin free of tax Anna's nue-propriété to form the full ownership again. Anna could then decide to transfer the property to her children during her lifetime or upon death.

- If Anna dies first, her nue-propriété could be transferred to her children with very little or no inheritance tax to be paid. On Megara's death, her usufruit would automatically rejoin free of tax the children's nue-propriété.

Clearly if Anna dies first, this solution would involve a shared ownership between Megara and Anna's children and important decisions would have to be taken with their agreement (e.g. major building work on the property or a decision to sell).

Thanks to this estate planning, the surviving partner or the children have little chance of paying inheritance tax.

Guillaume Barlet is a French lawyer specialising in French assets and wealth management issues for Bank House Investment Management Limited. Guillaume can be contacted by e-mail or by telephone on 01242 520074.

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Inheritance tax black hole for same-sex couples