France imposes both gift and inheritance taxes on its inhabitants, as detailed below. Note, however, that tax rates and rules change regularly, so you should check the latest figures with a French tax expert.
Inheritance Tax
Inheritance tax (droits de succession), called estate tax or death duty in some countries, is levied on the estate of a deceased person. Both residents and non-residents are subject to inheritance tax if they own property in France. The country where you pay inheritance tax is decided by your domicile. If you’re living permanently in France at the time of your death, you will be deemed to be domiciled there by the French tax authorities. If you’re domiciled in France, inheritance tax applies to your worldwide estate (excluding property); otherwise it applies only to assets located in France.
Tip: It‘s important to make your domicile clear, so that there’s no misunderstanding on your death.
When a person dies in France, an estate tax return (déclaration de succession) must be filed within six months of the date of death (within 12 months if the death occurred outside France). The return is generally prepared in France by a notary.
The rate of tax and allowances varies according to the relationship between the beneficiary and the deceased. French succession laws have traditionally been restrictive compared with those in many other countries, but they’re gradually being relaxed. If a married couple have shared ownership of a property (see Avoiding Inheritance Tax below), no inheritance tax is payable on the death of the first spouse. If they don’t, inheritance tax is payable on the ‘inheritance’ of the deceased spouse’s share of the property to the surviving spouse and children.
However, the surviving spouse has an allowance (abattement) of €76,000 and the children each have an allowance of €50,000 – in addition to which there’s a ‘global’ allowance of €50,000 to be shared between the surviving spouse and children. After the relevant allowance has been deducted, inheritance tax is payable at the rates shown in the table below.
Note that it’s the individual beneficiaries who are taxed on their share of the inheritance and not the estate which is taxed (as in the UK, for example). Note also that from January 2007, a child will be able to renounce his share in favour of a sibling or his own children, who will thus inherit tax-free from their grandparents. Childless couples may nominate brothers, sisters, nephews or nieces as heirs and any person may now make a tax-free legacy of up to €5,000 to brothers and sisters.
Unmarried couples with a French PACS agreement qualify for an allowance of €57,000 (the limitation that the agreement had to be in place for at least two years no longer applies). Inheritances from a deceased PACS partner above that amount are taxed at 40 per cent up to €15,000 and at 50 per cent above €15,000. It’s expected that these allowances will be extended to cover those who enter into a similar relationship outside France.
If you’ve been resident in France for more than six years and receive an inheritance from abroad, you’re subject to French inheritance tax.
Tax may be paid in instalments over five or, in certain cases, ten years.
Gift tax in France
You may make tax-free gifts every ten years to a spouse (up to €76,000), child (up to €46,000) or grandchild (up to €30,000). Each of these figures is increased by €46,000 if the recipient is handicapped. To brothers, sisters, nephews, nieces and grandchildren you may make a single tax-free gift of up to €5,000.
Gift tax (droits de donation) is calculated in the same way as inheritance tax (see above), according to the relationship between the donor and the recipient and the size of the gift, although there’s a reduction of 50 per cent if the donor is aged over 70 and 35 per cent if over 80. Any gifts made within six years of the death of the donor (en avancement d’horie) must be included in the inheritance tax return and are valued at the time of death rather than at the time of donation.
Note that gift tax is payable on gifts made between spouses in France, so assets should be equally shared before you’re domiciled there.
Payment of gift tax can be spread over a number of years, except in the case of the donation of a business.
Avoiding Inheritance tax in France
It’s important to understand French inheritance laws, which apply to both residents and non-residents with property in France.
First, property is divided into ‘movable’ and ‘immovable’ property: meubles, including not only furniture but all belongings except land and buildings, and immeubles, including land and buildings. Immovable property must be disposed of in accordance with French law, irrespective of whether you’re resident or non-resident in France, whereas movable property is subject to French law only if you’re resident (or spend the majority of your time) in France.
Second, all property subject to French law is divided into a ‘disposable part’ (quotité disponible) and a ‘heritary part’ (réserve héréditaire). Irrespective of your will(s), the hereditary part must be disposed of according to French law. The size of the hereditary part depends on how many children you have. If you have one child, half of your affected property must be left to him; if you have two children, they must inherit two-thirds; three or more children three-quarters. If you have no children, surviving parents or grandparents no longer (from January 2007) automatically inherit, although they can be made beneficiaries in a will.
TIP: It’s essential that couples considering buying property in France should decide in advance how they wish to dispose of it.
Marital Status
A couple’s marital status is also of relevance to inheritance. French couples normally enter into a marriage contract, whereby their assets are either shared (communauté universelle) or owned separately (séparation de biens). Foreign couples who don’t have a marriage contract will normally be regarded as having separate ownership unless they state otherwise in the property purchase contract. It’s important to do so because otherwise, if one spouse dies, the other retains ownership only of his half of the property and the deceased’s part is disposed of as explained above, subject to inheritance tax.
If, on the other hand, you’ve specified that your marital ‘arrangement’ is similar to the French communauté universelle, ownership of all property will pass to the surviving spouse on the death of the other and the surviving spouse will be exempt from inheritance tax, although there may be a small fee (e.g. 1 or 2 per cent of the property’s value) for the re-registration of the property in the surviving spouse’s name. Note that from January 2007 married couples with stepchildren or ‘illegitimate’ children can adopt shared ownership, which was not previously possible.
If you don’t have shared ownership, you can limit or delay the impact of French inheritance by inserting a clause tontine into the purchase contract. The clause tontine (or pacte tontinier) – an obscure law relating to an archaic finding system set up by an Italian banker in the 17th century and hardly used by French people – allows a property to be left entirely to a surviving spouse and not shared among the children. Because it places the entire inheritance tax burden on the surviving spouse, rather than sharing it among the spouse and children, it’s particularly advantageous for inexpensive properties; with more expensive property, it may be advantageous only for married couples, who are entitled to higher inheritance tax allowances (see above).
Surviving Spouse
Bear in mind also that recent changes to French inheritance laws allow a surviving spouse to inherit at least 25 per cent of a property. In any case, a clause tontine is likely to be valid only if both spouses have a similar life expectancy (otherwise, it could be argued that it was used expressly as a way of disinheriting children). Another consideration to be made before using a clause tontine is that, if you want to sell the property but your spouse objects, there’s nothing you can do to force a sale.
A surviving spouse can also be given a life interest (usufruit) in an estate in priority to children or parents through a gift between spouses (donation entre époux). This is also known as a ‘cross-purchase’ (achat croisé). This means that the spouse may occupy the property for life and take any income generated by it but may not sell or otherwise dispose of it; on the other hand, the property cannot be sold of disposed of without the spouse’s consent. A gift between spouses therefore delays the inheritance of an estate by any surviving children, who will have a ‘reversionary interest’ (nue-propriété) in it, i.e. ownership reverts to them on the death of the spouse. A donation must be prepared by a notaire and signed in the presence of the donor and the beneficiary. You must take along your passports, marriage certificate, birth certificates, titres de séjour (if applicable) and evidence of your address and occupations; a donation entre époux costs around e160. It may not apply to non-residents, who will be governed by the law of their home country.
Note that French law doesn’t recognise the rights to inheritance of an unmarried partner, unless a PACS agreement has been signed, although there are a number of solutions to this problem, e.g. a life insurance policy.
Donation Partage
Another way to reduce your inheritance liability is to make a donation partage to your children or (from January 2007) stepchildren or grandchildren or (if you have none of these) to brothers, sisters, nephews or nieces, although gift tax will be payable (see above). It’s even possible to make a gift or legacy to a child with the instruction that the asset concerned be passed to his child or children on his death – an arrangement similar to a British trust. You can also register your home in your child(ren)’s name(s). In the latter case, however, if a child dies before you or divorces, part of your home will count among the child’s assets, which could make matters very complicated. Seek expert advice before registering a property in children’s names.
Finally, you might consider buying property through a company.
Whatever your marital situation, it’s important to make a French will (even if you already have a foreign will that’s valid in France), which can help to reduce your French inheritance tax liability or delay its payment.
French inheritance law is an extremely complicated subject, and professional advice should be sought from an experienced lawyer who understands both French law and that of any other country involved.
This article is an extract from Buying a home in France. Click here to get a copy now.