Legal: Changes to inheritance tax in France

Gift (donation-partage) between generations

Any child (the donee) who is the beneficiary of a gift can stipulate that his or her own children (i.e. the donor’s grandchildren) an be nominated as beneficiaries, and can therefore take their place for part or all of the gift.

Should the original beneficiary not wish to receive any part of the gift, it won’t be considered by the French Revenue as a gift by the original beneficiary if they then pass it to their child(ren). In this way you can bypass the middle generation, allowing them to accumulate the tax- free threshold for each beneficiary.

The beneficiary can receive €50,000 free of tax (above which he would be taxed). In accordance with these new rules, he may then prefer to allocate anything above the tax-free threshold to his own children. For example, a father can gift €80,000 by dividing the amount between his child, who will receive €50,000 tax free, and a grandchild, who will receive €30,000 tax free.

Gift to a child from a previous relationship

Any transfer of assets subject to French tax (by death or gift) between non-related individuals is normally subject to 60% tax. However, in the new budget a gift made by a spouse to a stepchild can now cover assets held jointly in both spouses’ names (subject to conditions), without attracting a 60% tax rate on half of the assets.

Tax treatment of waiving inheritance rights

The inheritance act introduced the right for children to waive their claim under the statutory inheritance rules. This will need to apply to one particular beneficiary and can represent part or the whole of their parent’s estate. The waiver is only valid if it is signed in the presence of two notaires and incorporates the legal consequences. From a tax point of view, the Revenue will not be able to claim that the waiver is a gift by the child.

Gradual and residual gifts/wills

The inheritance act also introduced new methods giving a donor or a testator some control over the destination of his assets.

He could make the following:

• A gradual gift or will (libéralité graduelle), whereby the recipient has an obligation to keep the property, and upon his death, to transfer it to a further named beneficiary. The second beneficiary will be deemed to have received the assets directly from the initial donor.

(b) Residual gift or will (libéralité résiduelle), whereby the recipient is not obliged to keep the property or asset, but must transfer whatever remains upon his or her own death to a further named beneficiary. The budget confirms that on the first death the assets will have to be valued at their market value, or if it is a gift, any allowance in accordance with the donor’s age at the time of the gift.

On the second death (i.e. the first beneficiary’s death), the second beneficiary will be seen as having received the assets from the initial donor and not from the first beneficiary. However, the assets will be valued on the first beneficiary’s death and there will be a tax credit for whatever has already been paid by the first beneficiary. This could be particularly attractive to someone wanting to leave the property to a spouse from a second marriage, but ensuring that the property reverts to their own children. In the past any transfer from a second spouse to the step-chil dren attracted 60% tax. In this example, the first named beneficiary can be the surviving spouse and the second beneficiary the step-children, who will be considered as having received the assets directly from their own parent (as long as the waiver by the children has been organised).

Skipping a generation

The new budget finalises the rule introduced in the inheritance act which authorises a child or sibling to pass his rights to their own children and therefore retain the tax allowance they normally would have received (€50,000 for a child, €5,000 for a sibling). In the past a child or sibling who waived their right to be a beneficiary, also disinherited his own children (the share was divided among the remaining beneficiaries). Now the grandchildren will step into their parent’s shoes.

Clearly the inheritance act and budget will benefit many families, including:

(a) Siblings waiving their rights for the benefit of a nephew.

(b) Someone who already has substantial wealth and wishes his parent’s assets to skip a generation and pass directly to their grandchildren in order to reduce inheritance tax.

(c) A waiver from children from a previous relationship which enables the current spouse (step-parent) to receive the assets on their partner’s death. The surviving step-parent must transfer the assets on death back to her step-children. For example, Mr and Mrs Smith are married. Mr Smith has a child from a previous relationship. On Mr Smith’s death his estate passes to Mrs Smith. The child has waived his claim to an immediate benefit from his father’s estate, but Mrs Smith has to transfer the assets to the child on her death.

Legal matters from the French team at Blake Lapthorn Tarlo Lyons
Written by Philippe Piedon-Lavaux Tel: 020 7421 1632

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