About Inheritance Tax
The term Inheritance Tax is used to describe tax charged on the value of assets inherited by beneficiaries under the terms of a Will or applicable intestacy law in the absence of a Will.
In France the tax is known as Droit de Succession. Inheritance Tax or Succession Tax is in essence a tax charged on the transfer of wealth from the deceased to the beneficiaries.
This transfer of wealth can either be inter vivos or at death.
The rate of Inheritance Tax is determined by the relationship between the deceased and the beneficiary such that assets are charged at a higher rate by virtue of the beneficiary being a direct descendent.
In general terms the Inheritance Tax regime in France is as follows:
Prior to 2007 Inheritance Tax in France was levied on the estate of a deceased regardless of nationality . In other words all estates passing on death were subject to the central French state and the beneficiaries were not liable for any additional tax out of the proceeds of the estate.
In 2007, Inheritance Tax in France was decentralised and it became the responsibility of individual communes to assess the value of the estate and to charge Inheritance Tax accordingly. As such the amount of Inheritance Tax payable on the estate depends on the commune in which the deceased was domiciled. The Tax rates are similar although there are small differences. It is worthwhile noting latest changes in the French inheritance tax laws have now bought the Parisian commune into line with other communes for the purposes of Inheritance Tax.
How Inheritance Tax is Calculated
The inheritance tax in France is calculated on a sliding tax bracket basis according to the relationship between the deceased and the beneficiary of the estate. Tax exemptions may apply under certain articles of the French Tax Code depending on the relationship and circumstances.
The calculation is divided into four brackets; the amount available to offset against these brackets varies according to the relationship of the heirs.
The thresholds for each tax bracket for 2015 are as follows:
From 0 to €7,967 then taxed at: 5%
€7,967 to €11,689 taxed at: 10%
€11,689 to €15,529 taxed at 15%
€15,529 to €552,324 taxed at 20%
Above €552,324 taxed at 30% (the first tranche was previously taxed at 40% but was lowered by the 2015 Finance Act).
An additional 25% is added to the rate of tax for estates above € 902,838 and 35% for estates above €1,805,677 (as of 2015). The maximum estate tax rate payable was 60% but it is now 50%, this reduction applying to any estate on which the decedent was subject to nil or low tax.
These tax rates result in the following 2015 brackets for the most common heirs:
Widow/widower/adopted child: €159,325
Children: €159,325
Siblings: €15,932
Uncles/aunts/cousins: €7,318
Brothers/sisters: €47,280, tax reduced to €45,119, if net inheritance value exceeds €52,785
Parents and Grandparents: €31,125
Deductible from these amounts, the cotisations familiales (insurance benefits) equal to 34% of the amount of the tax calculated.
Exemptions and Reductions
There are a number of exemptions and reductions available under French inheritance tax law. Firstly, it is important to know that gifts between spouses (husband and wife or civil partners) are exempt from inheritance tax. Except in some circumstances, children inherit tax-free up to 100,000 euros, as does the surviving partner of a civil partnership, the parents (50,000 euros), grandchildren, step-children and siblings (15,000 euros). Each direct descendant of the departed is exempt up to 5,000 euros. Other exemptions exist such as life insurance policies. For all other cash gifts, the first 5,000 euros is tax-free. There are also some specific exemptions where the inheritance arises from the exploitation of an individual’s goodwill. Businesses may be taxed at a lower rate and in some cases the taxes may be spread over the years. Exemption limits apply, generally, to each heir and not the family as a whole. Gifts to some associations, charities and other individuals range from 50,000 euros to 150,000 euros. Other gifts may be taxed at rates of between 5% and 60%, depending on the value of the gift. The lower rates apply to members of the family and more distant relatives.
Ways of Reducing Inheritance Tax
A method of minimising inheritance tax is giving gifts during one’s lifetime. It is possible to make gifts to individuals and entities without facing any tax liability, subject to certain limits. There is an annual allowance of €80,724 per child. For gifts to grandchildren, a different allowance applies (€32,210). For gifts to others (e.g. children’s partners) the limit is €16,154. Other limits apply if you are related to the donor (e.g., parents, grandparents €5,310; uncles, aunts, and great-grand children €1,604; a nephew, niece, cousin, etc. €1,594). Gifts between spouses, civil partners and inheritance from your spouse or civil partner are exempt. It is possible to combine allowances with spouses, thereby reducing the potential tax by gifting up to €161,508. An important caveat is that, except if the donor dies with less than 3 years of the gift (in which case the exemption does not apply) , the donor must live a further 10 years for the gift to take effect.
With careful estate planning, in some cases, it may be preferable to set a trust in order to avoid the high rate of inheritance tax (for French real estate, it is 60%). Other family members, relatives and friends can be invited over several years to make gifts to the beneficiaries, thus benefiting from the respective allowances. The donors must pass away 3 months after the gift for it to be effective.
If the beneficiary is not a tax resident, similar allowances for payments from one of the parents or a grandparent can be used with the donor meeting certain requirements. It is also worth mentioning that a spouse or relative can use his/her yearly allowance to pay school fees and college tuition as well as medical expenses, purchase a property or place funds on an escrow account.
Filing process
Inheritance tax must be paid to the French taxing authorities and even if you set foot in France only occasionally, you will be required to submit a tax return for all assets situated in France.
The tax return is to inform the French tax authorities of the succession not by the heirs but by the notary acting on their behalf. When a person dies, the notary is required to communicate to the tax authorities information on the names and surnames of the heirs, their ages and their birthplaces plus the age of the deceased when he died using a form 2705 with supporting documents. The notary is required to complete a global declaration of the estate assets (form 2705-SD), listing all the estate assets including insurance and annuity contracts, and a list of all the assets with their corresponding value, bank accounts, business accounts etc., as well as a detailed list of gifts made within the last ten years by the deceased to each beneficiary who must then pay the appropriate inheritance tax. Inheritance tax returns must be filed within six months from the date of death. The return must be filed to the tax office of the place of residence of the deceased or the office of the place where most of the assets are located or the notary’s office. At present it is not possible to file a French inheritance tax return online (but do check in advance as creation of a new internet website of the French tax authorities is planned for 2018). Time limits for filing a return are normally six months from the date of the deceased’s death. A tax authority can extend time limits for filing a return but this has to be requested by the notary within six months and justified by a valid reason. For example if the deceased owned assets in more than one jurisdiction, the tax authority is quite likely to extend the time limit. In the case of a UK resident who has been born in France but remained a UK resident after moving to the UK, the time limit is 12 months for each return to be submitted. The French tax authorities may impose penalties for late submission of an inheritance tax return with a fixed penalty of €10 for each month of delay but cannot impose penalties for the first month of delay. Interest is charged at the rate of 0.20%. In addition to this fixed monthly penalty, it is common for tax authorities to apply a supplementary penalty at the end of the year of 0.2% on the amount of tax due where the return has not been filed before 31 December in the year following death.
Common issues and solutions
One of the most significant challenges faced by heirs is the liquidity issue. The inheritance tax owed may be substantial enough to exhaust or exceed the amount of available cash. Without sufficient cash on hand, the heirs would typically need to consider selling some of the inherited assets to pay taxes. Further, such a sale may be difficult due to time restrictions. Indeed, Article 784 of the CGI provides for a 6-month time limit to make the payment of the inheritance tax and if there was no consideration of a property sale, the heirs will need to seek an extension for the payment. It is also worth noting that under French law the heirs must have full capacity to receive an inheritance. Full capacity may entail the finding of actual and legal incapacity, in addition to the age and foreign nationality of those heirs. This could result in the possible disqualification of one or more heirs under French law and thus the necessity of appointing a representative. The recognition of a possible incapacity in the heirs has often been overlooked by foreign notaries , possibly resulting in a loss of some rights to the heirs. It is therefore essential that French succession be analyzed at the earliest stages of the estate planning process. Another common challenge is the issue of valuation of the real estate assets. French rules impose strict rules for the valuation of real estate properties. First, Article 665 of the CGI sets forth an exhaustive list of the methods permissible for valuing real estate. Second, the applicable valuation method is determined according to the type of property. Third, depending on the method used, a different form of calculation is applicable – either a valuation per square meter, a size or surface ratio. In addition, because of the nature and specificity of their activity, real estate properties entered on the ISF (tax on the real estate) bases are subject to higher taxation. For example, according to Article 669 of the CGI, built or built-over properties used for a purpose other than the occupancy of a natural person, that is to say the occupancy by a legal entity, are subjected to a coefficient that corresponds to the market value reported in the fiscal assessment.