The case study, posted on a blog by European IFA firm Blevins Franks, involves Mrs A, whose husband died at the age of 67.
He left her a private pension in the UK that had been paying him an income. Their UK-based adviser gave the widow the option of taking the fund as a lump sum or to carry on receiving an income.
Mrs A chose to take the income, which although free of UK tax, is taxed as income in France. As a result, she was subject to 14% tax on this income.
“If she had elected to take the lump sum, this would have been free of both inheritance tax and income tax in the UK. In France it would have been treated as a payment from husband to wife, so no French succession tax or income tax would have been due.
“Her adviser was not familiar with the rules in France and so did not advise Mrs A of this,” wrote the blog post.
Another issue involved succession planning, where when she dies Mrs A’s pension fund will go to her children. In the UK, it was not an issue but the UK-based adviser failed to tell the client that in France the fund will be liable to succession tax – 20% in this instance, but could be up to 60% if she chose to leave the money to step-children.
“When we reviewed her situation, it was immediately clear that Mrs A had not been given the best advice for her circumstances,” said Blevins Franks.
Mrs A already had an assurance-vie and was still under the age of 70.
Assurance vie is a life insurance product which holds financial investments, offers tax advantages and is subject to a different set of rules than your normal estate.
If she had elected to take the lump sum rather than the income, she would have had the following benefits in France:
- The whole amount could have been invested in the assurance-vie with no tax immediately payable in France.
- When taking income from the assurance-vie, she would only pay income tax and social charges on the growth element of the funds she had invested.
- Since she has held the policy for more than eight years, she will have no income tax liability as the gain element of the withdrawals will be less than the €4,600 (£3,933, $4,881) tax free allowance.
- As the value of her assurance-vie is less than the €152,500 per beneficiary, no succession tax will be due when the money passes to the children.
According to the firm, which has offices in Spain, Portugal and France, it was able to “assist Mrs A in challenging her UK financial adviser, who agreed to fully recompense her”.
“However, it highlights how important it is that the advice that you receive is designed for your circumstances in France. Although some UK advisers may be ‘passported’ to offer advice to expatriates living abroad, they do not always have a comprehensive understanding of the French tax regime,” it added.