High net worth and ultra-high net worth individuals living in, or with property in France, need to understand the most relevant changes to French tax laws, which are set to be announced in the 2020 budget, writes Joanne Leach, senior client director at Strabens Hall France.
Assess the situation before you act. Remember, French succession rules are very different to UK laws and stepchildren are not treated as equally as your own bloodline.
New tax allowances can benefit new small businesses, or even home improvements, if they have green purposes, and within a fixed-time period.
The unprecedented effects of the pandemic have meant priorities and financial situations for many of our clients have changed.
As a result of lockdown, some families have struggled, lost jobs or finances simply became harder. We have found clients reassessing their succession planning and wishing to gift monies now rather than later.
In France however, it is not that simple and it’s important to assess the situation before acting as the ‘penalties’ can be steep.
France operates under Napoleonic law, which dictates how assets must be left on your death. Children are a protected class; stepchildren however are not.
Even if you are non-resident in France, but have a French property, French succession law will apply on that property.
There are ways that you can circumvent these rules, but it is important to understand the consequences of doing so.
Deviating from the forced heirship rules can lead to 60% succession tax. This is because in France it is the individual that is taxed and the tax increases the greater the distance from the bloodline.
Children can benefit from an allowance plus lower succession tax rates; while, stepchildren and non-related beneficiaries are liable to succession tax on gifts at a much higher rate up to 60%.
Gifting in France
There are several things you can do for your family without incurring an immediate tax charge, including a new gift allowance recently introduced as part of the 2020 budget.
Parents can each gift €100,000 (£89,520, $118,250) of assets and, if under the age of 80, can also gift €31,865 each, every 15 years.
A disabled child can receive an additional €159,325 from each parent. Grandparents, under 80, can also each make a gift to each grandchild of €31,865.
The gift must be formally recorded within a month of the gift being made by filing two copies of the form number 2735. If you do not file before the deadline, you lose entitlement to the exemption.
A further allowance recently introduced as part of the 2020 budget, and France’s crisis package, is a temporary, additional, tax-free allowance for cash gifts of €100,000 for families.
To benefit from this gift there are a number of rules:
- The monies can be for an investment in a new, less than five years old, SME where the recipient of the gift exercises their main activity; and
- It can also be used to carry out building work on the home of the recipient of the gift, but only if this building work is done for ecological purposes.
The gift has time scales; including the investment must happen with three months of receipt of the cash gift, and after June 2021, the allowance will be withdrawn.
Unlike the other gifts, the amount which you are able to donate is per donor not per child.
Other options include gifting assets while keeping the right to use those assets throughout your life.
The gift is often discounted at the time for succession tax, depending upon how old you are at the time of making a gift.
This can be tax advantageous when estate planning. However, it is important to consider future plans, for example, if you plan to move back to the UK, this form of planning may not work and is complicated by the different laws in France and UK.
As always, it’s important to understand the laws and the taxes and take advice from an adviser who understands French and UK law.
And finally, the assurance vie. This investment vehicle doesn’t help with gifting throughout your life, but can provide a tax efficient vehicle with which to leave monies to stepchildren, friend or others who aren’t in your direct blood line providing the potential to protect your monies from 60% taxes.
There are additional methods of gifting monies/passing monies on tax efficiently that your financial adviser can discuss with you, and in each case, before you act, we strongly recommend that you take advice.
Many parents keen to help their children may give away more than they can afford.
Others, I’ve found, hesitate, unsure of how much they can afford to give away.
A financial assessment and health check can help as the first step in understanding affordability.
Reassessing your finances ensuring that you’re in the right plans and using cash flow modelling to provide an analytical view point will enable you to understand how much you need in your life time, while offering the potential to identify surplus cash.
This will give many the freedom to give their children/grandchildren a helping hand in this difficult time.
This article was written for International Adviser by Joanne Leach, senior client director at Strabens Hall France.