I’ve been thinking about transferring ownership of my modest French house to a UK Trust (yet to be established), with my two non-French resident daughters as Trustees, and last Autumn my grumpy Notaire said that this would not be problematic.
Now back in Yorkshire I realise that I forgot to explicitly ask whether there are any different taxation rules that apply to a Trust, and that I will need some specialist advice on the French side.
I’ve just come across an annual 3% Real Estate Tax that might apply, and thought I should mention it:
As the intended Trustees will be confined to family members, the Trust may well be exempt, so before I contact the Specialists, I am wondering if anyone has first hand experience of this?
I would suggest looking into a company structure UK co, rather than a trust, for a few reasons.
For example, France legally “looks through” trusts ie treats them as though they were not there.
Whoever or whatever it’s owned by though, I would expect full France taxes to be due if it’s real estate physically in France. Eg on inheritance or transfer/sale.
It depends what you’re hoping to achieve. But if a transfer would be tax free now, for example if you’ve owned it for 30 years, guessing it might possibly save some tax to tranafer it now rather than let it be inherited? You’d have to take advice.
Transferring my French Hovel now is completely free of additional French Inheritance taxes, and I’ve cheekily had that verified by the Notaire - perhaps that’s one of the reasons that she was so grumpy! However on transfer, it is not free of UK CGT as I am a UK Resident, so it has the status of a Second Home as far as HMRC are concerned, even though it is located abroad.
My major objectives:
(a) to reduce the liability for UK IHT on my personal Estate
(b) to avoid post-Transfer, for either of my two daughters from being liable for UK Stamp Duty when they purchase their first UK houses
(c) to avoid the Hovel from being included in any future Divorce settlement calculations - both are currently single, sort-of! I’d like to see the place staying in the Family - we all regard it as being a bit “special”.
Transferring the Hovel to a Company would of course require annual returns to HMRC as well as Audit Costs, and possibly the French 3% Real Estate Tax on top. My guess is that it might not avoid any inclusion in a divorce settlement either? I’ll got lots to check out, but I currently believe that a Bespoke Trust might be a better fit. I also recognise that the more I go through this topic myself, the better use I’ll be able to make of my time when I eventually talk with a professional adviser. So thanks Karen.
Meanwhile I’m saving up so that I can afford to pay the UK CGT amount - it’s currently 24% at the margin, (for the size of the capital gain invariably places you in the Upper Band for that tax year!).
With respect, you are all over the place in what you say and want.
To have house here protected against droits de succession, it needs to be in an assurance vie, an SCI or you have opted for IHT laws of another acceptable country by Brussels to apply. I do not see how any of these legal methods would make a Notaire grumpy or, why you see the need to additionally and unnecessarily put the house into a trust!
Trusts in France are regarded as suspicious and open up all sorts of unwanted attention. And tax as you have noted. If you wish it just so your girls can be trust-fund-babes, then you need a UK international tax lawyer.
I am not a lawyer, but I think trusts aimed at reducing inheritance tax are frowned on in the Uk too these days.
20 years ago they were all the rage - my parents had wills made in 2005 that set up Discretionary Will Trusts to shelter some of the value of their house.
My father’s trust kicked in when he died in 2007 and a) was made redundant by changes in IHT rules and b) has cost us money to unravel so that my mother could do an equity release.
We are in the process of getting the Trust removed from my mother’s will, on the advice of a UK lawyer who specialises in wills and probate.
So clearly you need specialist legal / taxation advice, but I suspect a Trust may not be the magic bullet you are seeking.
Anecdotally, a friend was thinking about setting a trust to avoid care fees and his solicitor advised that councils are challenging very hard and quite successfully unless a genuine need for a trust can be demonstrated, e.g. a vulnerable child who will need support. He decided not to go ahead.
It’s nothing to do with French IHT - having owned the Hovel for 37 years, it so happens that it is free of any transfer-related taxes on the French side, whether it is simply Gifted to the Girls, or moved into a Trust (apart from possibly the 3% RET mentioned earlier kicking-in).
What might grate a little is that I’ll likely be paying UK CGT without being to be able to take full advantage of the deductible allowances for the costs of“improvements” (but not “maintenance”). I spend most of my time in France wall building and roofing etc, (at a leisurely pace mind), and all with minimal outside help, and such was the state of the place, 75% of my work there probably qualifies as “improvements”. Fortunately I’ve got lots of photo’s. However I assume that it will be a challenge to get my labour time taken into account, so that’s an additional question for the International Tax Adviser.
Your assumption is correct. In order to be CGT deductible, HMRC requires that capital expenditure is actually incurred, ie you must have paid something to somebody else eg for materials, or their labour etc. The costs of your personal labour - however skilled (!) - are never deductible in a UK capital gain calculation.