Naturally, when another generation occurs, it brings to mind inheritance planning (not to mention school fees planning, wedding planning, etc., etc.) especially when the generations are separated by country borders.
Many people believe that if their financial assets are in the UK and their beneficiaries are also in the UK, then there will be no French inheritance tax payable. This is a myth. If you are French resident, these assets would be subject to French inheritance rules and tax.
In France, there are strict rules on succession. Children are protected heirs and so are entitled to inherit a proportion of their parents’ estate. If there is one child, the proportion is 50%, two children, one-third each and three or more children, three-quarters of the estate must be split equally between them.
The inheritance tax rates and allowances are also dependent upon the relationship to beneficiaries. Whilst these are quite generous between parents and children, at the other end of the scale, for ‘non-related persons’ (which includes step-children), the tax rate is 60% on anything inherited above a very small allowance of just under €1,600. Even grandchildren are taxed at 55% on amounts exceeding €7,967! Fortunately, there is no inheritance tax between spouses and partners with a PACS (or a recognised civil partnership from another country).
Inheritance planning becomes more complicated if there are children from a former marriage. For example, how does one protect the survivor and mitigate the succession taxes for the children, especially if they are all to be treated equally?
Let’s take a case where a husband has three children and his wife has two. The husband’s children are entitled to inherit 75% of their father’s estate, in equal shares, while his wife’s two children are each entitled to receive one-third of her estate. By simply making French wills, they can provide for the survivor to have life use (usufruit) of their estates.
However, a downside of the survivor only having usufruit of any property, for example, is that if he/she were to subsequently sell the property, his/her step-children would be entitled to receive their share of their parent’s part of the property, at the time of the sale. Although it would be possible for the step-children to revoke their inheritance at that time, but the surviving step-parent would be depending upon their future goodwill to do this.
One option would be for each spouse to enter into a ‘family agreement’ with their own children. This is known as a ‘Pacte de Succession’ and basically, the children agree to give up their French inheritance rights, leaving each spouse free to leave their total estate to each other through their French wills. The survivor is then free to sell the property without having to distribute the step-children’s share of the proceeds at that time.
Having achieved the protection of each other, the issue then concerns how the five children can be treated equally without the step-children being liable to 60% succession tax. This is addressed in two steps.
First, by creating a ‘Legs Résiduel’. Subsequently, when the survivor dies, whatever is remaining of the estate of the first person to die, passes to that person’s natural children, as if inherited directly from that person, without the possibility of the 60% tax.
Second, by investing financial assets into an ‘Assurance Vie’. This type of investment is considered to be outside of the estate for inheritance purposes and there is freedom to nominate beneficiaries and in whatever proportion desired. Depending on the value of the financial assets, it could be possible to address the imbalance between children, which arises because of the division of property. Quite simply, the husband’s three children could receive a greater proportion of the financial assets, since the wife’s two children will each inherit a greater share of the property.
When this type of investment is set up before one’s 70th birthday, each beneficiary is entitled to a tax-free allowance of €152,500 in respect of monies invested before age 70, with succession taxes limited to 20% on amounts exceeding the allowance (although a higher tax rate of 25% applies for amounts exceeding €902,838 per beneficiary). Hence, there is no possibility of any step-children suffering the 60% succession tax.
The Assurance Vie is one of the best types of investments in France for regular savings and/or capital, because, not only does it provide a valuable source of inheritance protection, but it also provides a tax-efficient source of income for the investor.
Thanks to Brian Furzer & Daphne Foulkes of Spectrum IFA for writing this article
The Spectrum IFA Group specialise in assisting English speaking expatriates across France and Europe in maximising their wealth opportunities with regard to investment planning, retained UK pensions, mortgages and family protection and tax planning.and can be viewed on www.spectrum-ifa.com. Brian Furzer can be contacted directly on email@example.com and Daphne Foulkes on firstname.lastname@example.org.
The Spectrum IFA Group is registered as TSG Insurance Services S.A.R.L.Siège Social: 34 Bd des Italiens, 75009 Paris « Société de Courtage d'assurances » R.C.S. Paris B 447 609 108 (2003B04384) Numéro d'immatriculation 07 025 332 - www.orias.fr