LAWYER'S OPINION

ESTATE PLANNING FOR UK RESIDENTS WHO HOLD ASSETS IN FRANCE OR INTEND TO MOVE TO FRANCE

November 2011

When dealing with inheritance planning in England one automatically thinks of making a will but in France, we soon realise that drafting a Will is only one of the options available. The statutory rules of succession, which apply to the Will, may indeed not allow clients to bequeath their assets as they wish.

There are, however, ways to override or postpone the civil and tax implications of the Civil Code such as holding assets within a specific ownership structure or varying a marital property regime for married couples.

Various factors will influence the limits of one's freedom under French rules: whether or not there are any children and whether they are from the current or previous relationship; the way the couple hold the French property; whether they are relocating to France from elsewhere; and the value of the estate.

The focus of this article is what a testator can do in a Will.

1. The law applicable to the estate

Under the French rules of Private International Law, a distinction is made between immovable and movable assets. The laws of the country where the immovable asset is situated apply to immovable property such as a house, a flat or a farm. However, bank accounts, investments, shares, etc., are subject to the law of the deceased's domicile.

For those who are not French residents, their French bank accounts and other movables in France will remain subject to their English Wills. Only the French property will obey the French rules.

British nationals relocating to France will see the French rules apply to their worldwide movables and French immovable. If they are deemed to be domiciled both in France and in England, a conflict of laws may arise as regards the movables because of the differing concept of domicile.

French Domicile for the application of the rules of succession

From a French point of view, the domicile is the place of one's habitual residence and is therefore synonymous with residency. However, in English law, an Englishman will not acquire a foreign domicile unless it can be shown that he formed an intention to make his home permanently or, at least, indefinitely in the country where he is currently living. It is therefore possible to be regarded as French resident/domiciled by French Law and English domiciled by English Law.

The conflict may be resolved in the future if the EU institutions adopt the Draft Regulation proposed by the Commission in October 2009 regarding the determination of the laws of succession for international estates. Although the UK has currently opted out, it would become part of French law so is likely to be of use for British nationals with an interest in France.

French Domicile for tax purposes

As far as the tax concept of domicile is concerned, any conflict of laws is resolved by applying the Double Tax Treaty for the avoidance of double taxation in place between the UK and France since 21 June 1963 as far as inheritance tax is concerned, (the Treaty).

An individual will be deemed to be considered domiciled in France for tax purposes if he satisfied any of the following tests:

his main home is in France;
his primary place of residence is in France: i.e. he visited France for more than 183 days per calendar year or if he spent more time in France than in any other country in a calendar year.;
he performs a professional activity in France (unless it can be shown that this is not his main activity); or
he has the centre of his economic interests in France (where his major investments are made or annual income is obtained).

Therefore, British nationals relocating to France will be considered French domiciled for tax purposes. However, if they are also deemed to have retained their English domicile, the test laid out in the Treaty will come into play and would supersede both national laws in the determination of the domicile.

The first test under the Treaty is where the individual has a permanent home available to him. If he has a permanent home available to him in both countries, he will be treated as resident of the country where his personal and economic relations are closest (centre of vital interests). This is probably the most difficult criterion to deal with as it requires him to go through various steps, which would reveal where his personal and/or professional and social links are. If that test is inconclusive, the individual will be considered to be a resident of the country where he maintains an habitual abode. If this is still inconclusive, he will be treated as a resident of the country of his nationality.

If we take the view that a deceased person was French domiciled for tax purposes both internally and according to the test above, France will tax his worldwide assets. However, any UK inheritance tax, for example on assets situated here, would be offset from the French tax in accordance with Article 3 of the Treaty.

The French statutory inheritance rules

Without a Will

Under the French intestacy rules, the deceased's children will inherit 75% of the estate subject to French law and the surviving spouse the remaining 25%. When the deceased's children are all from the marriage, the spouse can instead choose a life interest (Usufruit) on the whole of the estate instead of the above quarter share. When there are no children, 25% will go to each of the surviving parents if any and the balance to the spouse.

A life interest (or “usufruit” in French) is an interest in the estate of the deceased, which grants the right to use the property during the lifetime of the surviving spouse and the right to receive any letting income. However, the surviving spouse would not be entitled to sell the property without the children’s agreement. The children or the surviving spouse could also force a sale if they want to sell their share in the property. Upon the subsequent death of the life tenant, the property will revert to the children.

With a Will

In order to draft a Will however, we would look at the testate rules. The number of children now becomes important. With one child, the "reserved" portion of the testator's estate is 50%, with 2 children: 2/3 and with three children or more: ¾. This portion must go to the children (or the children of a deceased's child). The remaining "free" portion of the estate is 50%, 1/3 or ¼ and this can be bequeathed by Will.

Therefore, under a Will, it is not possible for a couple with children to bequeath their estate to each other on the first death. The spouse will only be entitled to the free portion outright, or the whole of the estate in Usufruitt, or 25% outright + the balance in Usufruit.

It is worth mentioning that the reserved heirs may sign a waiver so they cannot use their right to bring a claim against the surviving spouse / beneficiaries if the deceased went over the free portion of his estate. The waiver must be signed in France in front of two notaires.

The French Will

The most usual Will is the testament olographe. The only requirement is that it must be written out entirely in the hand of the testator, dated, and signed by the testator. The signature does not need to be witnessed. The administration of the estate in France is easier with a separate French Will. It is more straightforward and avoids any problem of misinterpretation on the French side. Care must be taken not to revoke inadvertently the English Will and vice versa.

Under the Hague Convention, dated 5th May 1961 on the form of Wills, it is possible for British nationals to choose an English Will to cover their French property for instance. However, the content of the Will as far as the property is concerned will need to respect the above rules of succession. This is why a separate French Will is likely to be more appropriate.

The French inheritance tax rules (figures applying until 31 December 2011)

Unlike the UK, France does not tax the deceased' estate as such. Instead, the inheritance tax is levied on the beneficiaries on their respective shares. The nil rate bands and the rates vary according to the family relationship with the deceased and the beneficiary.

Married couples or couples under a civil partnership recognised in France have enjoyed a full exemption from inheritance tax (but not on gifts) since August 2007 for assets passing to each other (whether outright or in Usufruit).

Then come the children, who benefit from a personal allowance of €159,325 in each of their parents' estate. The balance would be taxed in accordance with a sliding scale from 5% to 45%. The middle rate is 20% for the share comprised between € 15,932 to € 552,324.

Siblings and nephews and nieces are the last family members to qualify for an allowance of respectively € 15,932 and € 7,967and flat rates will apply on the balance.

All other beneficiaries including stepchildren or non married partners would only qualify for an allowance of € 1,594 after which their share is taxed at 60%.

Further inheritance planning

To conclude, the French statutory rules dictate what a testator can include in his Will. However, there are other ways to set aside the property from those rules, subject to conditions, by buying with a tontine clause (similar to the English joint tenancy), signing a marriage contract or (for non French residents only) purchasing through a company. This is especially relevant when a couple wants to secure each other on the first death without any children being involved.