Inheritance rules if you're UK national emigrating to, or living, in France

If you have an estate worth more than the £325,000 nil-rate band you should give some serious thought to mitigating inheritance tax, writes Paul Davies.

The issues become much more complex when a UK national becomes a foreign resident or owns property abroad: the laws of two different jurisdictions are potentially applicable to issues involving succession and inheritance taxes.

The starting point in working out how your estate is going to be dealt with is to work out which country’s laws apply. The rules for determining this are not the same from country to country though.

Which country’s rules apply?

So far as real estate is concerned, the rules of succession are thankfully simple:
Real estate in France is determined by French law; British property by UK law.

Let’s look at other assets such as bank accounts. If you are resident in France, French law applies to assets situated in that country. If you are domiciled in the UK, UK law applies to assets situated in the UK; the same inference follows if you are domiciled in France.

Note though that domicile and residence are not the same thing. Unfortunately, ‘domicile’ is not easily defined. Suffice to say that a person who is resident in France might be domiciled in the UK if he was born and raised in the UK and ultimately intends to return to the UK at some point in the future.

If a person owns assets in a third country e.g. Belgium, then the domestic rules of Belgium would need to be applied to see what rules of succession apply. This might be the rules of Belgium, or the UK or France, depending on what the asset is and other circumstances.

In short, the situation can quickly become very complex.

Why does it matter?

The UK is a ‘common law’ country and the laws and traditions are very different to those on the Continent.

Broadly speaking, UK succession rules give ‘freedom of testamentary disposition’ - an individual is free to make a will benefiting whomever he or she pleases.

(This testamentary freedom is not absolute. Certain dependents and close family members have the right to apply to the court for reasonable financial provision if the will does not provide this).

The position in France is very different. Children are protected heirs and entitled as of right to a specific proportion of the estate. Only a small part is freely disposable.

The spouse is also normally entitled to a specific proportion of the estate. For example, if a person dies leaving a surviving spouse and two children, the spouse will receive one quarter of the estate and the children one third each, leaving just one twelfth freely disposable. This can have significant inheritance tax implications since only gifts to spouses are free of inheritance tax.

Inheritance tax – which tax rules apply?

Inheritance tax cannot be avoided by moving to France!

There are two reasons for this. First, France has its own version of inheritance tax; second, UK inheritance tax may be payable on certain assets.

UK inheritance tax will be levied on all assets (both real estate and other assets) of the deceased person that are situated in the UK. Likewise, French inheritance tax will be levied in France on all assets situated in France.

If a person is French resident when they die, French inheritance tax will apply to their worldwide estate. If they have had to pay UK inheritance tax on assets situated in the UK, the French tax authorities will give an allowance for this in determining the French tax. French inheritance tax is also applicable if the recipient of the estate (rather than the deceased) is resident in France.

If a person is UK domiciled when they die, UK inheritance tax will be levied on their worldwide estate. For this purpose, a person remains UK domiciled for three years after they have departed from the UK.

If the estate has had to pay French inheritance tax on assets situated in France, the UK tax authorities will give an allowance for this when determining the UK inheritance tax due.

But what if a person is resident in France he or she dies and is also a UK domicile?

This possibility is catered for by a double tax treaty between the two countries that contains a ‘tie-breaker’ provision: the individual will only be treated as resident/domiciled in the country in which he had a permanent home; and if he had a permanent home in both countries, then he shall be treated as resident/domiciled in the country with which his personal and economic relations were closest.

Which tax regime is better?

Which tax regime is better will depend on the circumstances and the value of the estate. Broadly however, if the estate is worth a great deal, the UK regime is preferable if the estate is shared out between very few beneficiaries, or if the beneficiaries are not closely related to the deceased person.

Inheritance tax in the UK is levied at a flat rate of 40% on the value of the estate in excess of the ‘nil-rate’ band (currently £325,000). Assets that pass to a surviving spouse or civil partner are exempt from inheritance tax.

Lifetime gifts are generally exempt from tax but can be taken into account if made less than seven years before death.

In France inheritance tax is not levied on the estate, but is paid instead by the recipient. The allowance and rate of tax depends on the relationship to the deceased. Inheritances between spouses are exempt from inheritance taxes. Lifetime gifts including lifetime gifts to spouses are taxable on a sliding scale on the amount in excess of a specified threshold are not. The top rate of inheritance tax is 60%.

Wealth planning considerations - a scenario

Very careful consideration should be given where a person is likely to be subject to inheritance tax both in the UK and in France.

Suppose, for example, a person moves to France intending to live there permanently, but they do not sell their property in the UK. When they die, their estate is worth £2m, half of which is situated in the UK and half in France. It passes to the person’s four children.

Inheritance tax is due in the UK on the UK property. The tax due at 40% (after deducting the £325,000 nil-rate band) is £270,000, which represents an effective tax rate of 27%.

Under the system of allowances and sliding scales applicable in France, each of the children is liable for €125,000 on their individual €750,000 inheritances i.e. a tax rate of 16.67%.

Unfortunately the ‘extra’ tax suffered in the UK cannot be reclaimed. It might have been avoided however if, prior to death, the UK property had been sold or mortgaged and the proceeds deposited in a French bank.

Conclusion

It almost goes without saying that it is imperative that UK nationals resident in France consider succession and tax issues, with specialist help if necessary, so that their estates can be disposed as favourably as possible.

Paul Davies is a specialist estate planning solicitor and partner at Lane-Smith & Shindler can be contacted on 0845 658 48 48 or by e-mail.