If you are planning to buy property in France, or hold investments here you must pay special attention to the French laws on inheritance. Unlike Anglo-Saxon law, French laws more or less determine who will inherit your estate and in what proportions.
These laws often prohibit you from leaving your assets to the beneficiaries of your choice and in the proportions you may wish. These succession laws are especially dis-advantageous to surviving spouses. However, the more closely you are in relation to the prospective beneficiary the less tax he or she will ultimately pay on his or her inheritance, when it finally arrives.
If you want to leave real estate to the person of your choice, the best way is to either buy it in joint names in a manner designed to leave the survivor with the ownership of the whole property (en tontine or communaute universelle). Alternatively you can purchase property in the name of a Societe Civile Immobliere (SCI), which also facilitates the purchase of the property for renting. The cost of setting up an SCI is about °Ë2,500 upwards. It can be beneficial to use a loan to purchase the property as this will have a depressing effect on the value of the SCI for inheritance purposes.
Whatever you do, seek the advice of an English speaking lawyer and thoroughly investigate all the alternatives.
French Inheritance Tax for US Citizens
When you draw up a will it is important to get the help of a real specialist in French law as well as the law of the country you come from.
If you are a U.S. citizen abroad you will probably be subject to federal estate and gift taxes, if you own assets in your host country. U.S. law allows for a number of provisions in the estate and gift tax areas. These include:
* The ability to give an unlimited amount to a spouse without incurring an estate and gift tax liability (the annual exemption from tax on gifts to a non-citizen spouse is limited to $100,000).
* The ability to give up to $10,000 annually to any individual free of gift tax.
* A unified tax credit to offset estate and gift tax liability (effectively exempting taxable estates of up to $600,000 from estate tax).
It is unlikely that US. citizens will be subject to estate and gift tax in the US. and France because of a double taxation treaty between the two countries. If the French authorities impose estate or inheritance taxes on property or assets located in France, a credit may be claimed against US. taxes.
Inheritance Tax for British Expatriates
If you are British, even if you have lived outside of the UK for most of your life, you will still probably be considered a UK domicile. Your domicile of origin is usually that of your father, regardless of where you were born. This has important consequences for UK nationals in respect to inheritance tax (IHT). You will be liable for inheritance tax in the UK on your worldwide estate if you are a domicile in the UK at the time of your death. You will also be liable for succession tax in France on your worldwide estate if you are a resident of France at the time of your death. The double tax treaty agreed between France and the UK would then be applied to ensure that your estate does not pay tax on the same assets twice.
There are several ways to avoid an IHT liability. You can shelter your assets in appropriate offshore trusts, and this may be helpful from a French succession tax perspective too. Another alternative designed to reduce the impact of French succession tax in particular is to hold your investment portfolio within the framework of an assurane vie (life assurance) arrangement.
There are some quite incredible tax-saving opportunities utilising the French concept of assurance vie. The investment and tax benefits which apply to certain investment arrangements are substantial. Assurance vie is the generic term given to a wide range of investment choices where the investment is accommodated, for tax planning purposes, within an insurance bond. Sometimes, due to the personalised range of investments held in such arrangements, they are known as Personal Portfolio Bonds (PPB).
The tax shelter of a PPB is unique. It is technically a single-premium life-insurance policy available from insurance groups based in Luxembourg, Dublin, Isle of Man, Jersey or Guernsey and offering a number of tax shaving opportunities as well as many distinct benefits to both expatriate and UK. resident investors. For UK. expatriates, a PPB issued by a company based in the EU is essential for tax efficiency, security and regulatory reasons. In many cases the PPGB will also benefit from being held in a suitably drafted trust, normally this is provided at low or nil cost.
You can select from the widest range of investment choices exactly what you wish to invest in within the PPB. This includes cash, bonds, equities, unit trusts, investment trusts and almost any other "quoted" investment.
Tax-Free Investment Income and Gains
Under the taxation provisions in which the PPB operate, all interest and capital gains is accumulated within the PPB totally free of all taxes. This means that 100 percent of all interest and gains can be re-invested to provide enhanced returns. If you are, or become a UK resident at the time the bond is fully encashed, you are potentially liable to income tax on some of the profits. If professional advice is taken prior to the date of encashment there are some simple tax planning actions which can be taken to avoid the tax becoming payable.
The bond allows you to make withdrawals each year from your original investment and from the accumulated profits in a tax favoured fashion. For example in the UK, should you return there or be a UK resident, you are allowed to withdraw up to 5% of your original investment every year without payment of tax for up to 20 years. Remember, tax deferred is tax saved: even in the event of a final encashment after 20 years, when tax may theoretically be payable, there are a number of techniques which may be employed to avoid the tax charge completely. This situation may alter with future legislation.
In France there are substantial tax savings on withdrawals during the period you hold your investments in an approved assurance vie. There are some complicated rules for calculating the rate of tax on withdrawals, but in simple terms the tax liability can be as low as 10% and is not normally higher than 17.5%. This compares very favourably with the rate of tax which is applied to investments held outside of this arrangement, often up to 54%.
In addition, the first 1 million francs of assets held in a PPB by a French resident is exempt from succession tax. Any excess over this level is only taxed at a maximum rate of 20% rather than the maximum rate for assets outside of this arrangement which goes up to 60%. Finally, the assets in the PPB can be left, more or less, to whosoever you wish by nominating specific beneficiaries, thereby avoiding the problem of the restrictions on testamentary distributions under French succession law.
Perhaps the most appropriate jurisdiction for issuing an appropriate assurance vie contract is Luxembourg. Luxembourg, in particular, has strong investor protection regulation. For example, in Luxembourg, 100 percent of the investor's assets must be held by an independent custodian bank on behalf of the Luxembourg Government giving effectively, 100% protection against loss in the event of the failure of the institution issuing the PPB.
Once again, Luxembourg has an advantage over the other offshore centres with regard to secrecy. The laws of Luxembourg incorporate a statutory code of banking secrecy which is unmatched anywhere else in the Europe. It is a criminal offence for banks and investment houses to divulge information regarding client details to any person or external tax authority.
The company issuing the PPB normally undertakes the day-to-day administration of the investments held within the Personal Portfolio Bond. The PPB is capable of holding almost all quoted investments including equities, bonds, and cash deposit funds, if required. There is no doubt that the PPB is a seriously beneficial tax planning opportunity for all investors living in France; it offers a unique combination of investment freedom and control combined with long-term tax planning benefits.
Remove the Need for Probate
In several countries, it is necessary to obtain probate before a portfolio of international investments can be distributed to your beneficiaries. However, if the PPB is written in Trust, it will be distributed by the Trustees to your beneficiaries, without the need for probate.
Independent financial advisors who normally provide tax and investment planning advice are often remunerated by a combination of investment management fees and, in some cases, by commission at the outset of this arrangement from the company issuing the PPB. Check out the total fees in advance and you will often discover that this method of holding your investment assets is less costly than holding the same investments direct. This is, in large measure, due to the discounts which most independent financial advisors are able to obtain on your behalf.
Creating a Trust in itself can provide many benefits. However, establishing a Trust in conjunction with a PPB as the underlying tax-shelter holding your investment assets brings important tax-savings opportunities, which should form a consideration for every investor living in France who wishes to produce improved returns with the minimum of taxation.