Service France

David Anderson solicitor and chartered tax adviser with Graeme Perry solicitor, Nicole Gallop Mildon and Katie Mear, trainee solicitors at Sykes Anderson LLP London Solicitors and Chartered Tax Advisers.

Please note that French and English inheritance and tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.

People looking to mitigate their inheritance tax liabilities may choose to make lifetime gifts or settle a trust. When there are cross-border considerations, either at the time of the gift or at a later date (say on retiring to another country), particular care needs to be taken. The complexity of the legal position and the possible high tax charge which could be visited on totally unsuspecting individuals shows the need for more harmonisation of personal taxation within the European Union.

UK Tax Position

Outright lifetime gifts to individuals in the UK are PETs1 (potentially exempt transfers) and as the name suggests they are not immediately taxable. If the donor survives for 7 years, the gift will be entirely outside the scope of UK inheritance tax. If the donor dies within 7 years, the value of the transfer forms part of the death estate. In these circumstances, the PET is taxed to inheritance tax on death rates (40% above the nil-rate band, currently £312,000, increasing to £350,000 by 2011), but taper relief2 is available if the donor survived a minimum of 3 years after the gift. Although there should be no Capital Gains Tax implications when you simply gift cash, there may be CGT implications for gifts of other assets.

Transfers into certain trusts3 are chargeable lifetime transfers. These transfers are immediately chargeable to inheritance tax and the transfer forms part of the cumulative total of chargeable lifetime transfers made by the donor. The lifetime rate of inheritance tax is 20% over the nil-rate band. If you die within 7 years of making a lifetime chargeable transfer inheritance tax is due at the death rates (40% over the nil-rate band); a credit is given for the inheritance tax already paid at the lifetime rates. Again taper relief applies as above.

French Tax Position

In comparison in France, gift tax is, in principle, payable when a gift is made. There is no concept of a potentially exempt transfer. French gift tax is due if a French resident makes a gift, if the recipient has been resident in France for 6 of the last 10 years, or if anybody (regardless of residence) makes a gift of real estate situated in France 4.

In France inheritance and gift tax is levied on the beneficiary. The rates are the same for lifetime and death. The tax free allowance and the inheritance tax rates will depend on the relationship between the donor and the recipient (and for lifetime gifts the tax payable may be reduced depending on the donor’s age5). There are some tax free allowances some of which are only available for lifetime gifts6 and others only available on death7. In addition any tax free allowances used up by lifetime gifts will “regenerate” after 6 years.

Often in France, gifts are recorded by deed in front of a notaire. This is particularly necessary for French real estate. Some gifts are given “hand to hand” and known as “don manuel”. Whilst the notion of hand to hand still persists in the title, a gift of cash can take place by bank transfer etc.8. Although these can be recorded by deed, often they are registered directly at the tax offices. Where a gift is recorded, any applicable tax is payable at the time it is recorded.

However, in practice, gifts of cash are not always declared to the French tax authorities and therefore tax is not always paid when the gift is made. The French tax code9 provides that if any applicable tax on a gift has not been paid at the time it was made, the tax will have to be paid when the gift is revealed. Once a don manuel has been revealed, the donee must register it (and therefore pay any applicable tax) with the French Tax authorities within one month10.

Typically a don manuel is revealed in one of the following manners:

• When they are declared in a deed which needs to be registered;

• When they are recognised through court proceedings;

• When the recipient declares them to the tax authorities either:

  • spontaneously;

  • at the request of the tax authorities;

  • during the course of a tax enquiry; or

  • during court proceedings

• When a subsequent gift is made by deed between the same parties;

• When the donor dies if the donee is amongst his/her heirs.

The reasons that a donor’s death has an effect on a don manuel can be found in the fundamental principles of French Inheritance Law. These principles seek to protect reserved heirs (generally children) and to treat them equally. This is a result of an antipathy towards primogeniture. In practice, this means that when an estate is being “valued” prior to being divided, the value of any gifts made to the reserved heirs is re-incorporated11. There are nuances to this system which allow a donor to stipulate that a gift may be treated differently. When such a gift is re-incorporated, the value taken into account is the value at the date of death. To avoid this problem gifts are sometimes re-incorporated not into the estate, but into a “donation-partage”12.

Whilst this appears to be an issue only concerning French residents, with high numbers of UK residents retiring and dying in France, estate planning carried out in the UK may have unforeseen effects.

The tax trap for a UK person moving to France

For example, a UK individual, shortly before retiring to France, makes a gift of UK based cash to one of his children, who is also UK resident. The donor does not report this gift to any authorities. The gift would at this stage have nothing to do with French tax but when the donor dies, after moving to France, the gift must be revealed to the French authorities and forms part of the deceased’s estate. If the death occurs more than 7 years after the gift there would be no UK IHT. However, in France it is the date of revelation of a don manuel which counts, therefore IHT may be due on the gift of cash or it will reduce the tax free allowance available on death.

Ways round the problem

If however, an international approach is taken, thought should be given at the time of the gift in the UK to the fact that the individual intends to retire to France. If the individual notifies HMRC when they make a gift, could this be taken as the date of revelation? It is possible to notify HMRC using form IHT100a and this does not change the tax status of the potentially exempt transfer in the UK.

From the point of view of the French tax authorities, it would seem that registration does have to take place in France. Notifying the PET to HMRC may nonetheless be useful as it would give a certain date to the PET. What is less clear is how one can “reveal” the gift to the French tax authorities without triggering a charge to French gift tax. One obvious route is to, by some means, render the PET a “donation” and not a “don manuel”. It is unclear how that might be achieved but a deed drawn up in front of a solicitor may work. In the case of settling cash into trust, the existence of a trust deed may render the gift a “donation” and not a “don manuel”. If the settlement of cash into a trust was classed as a “don manuel”, the inheritance tax at the time of revelation would probably be very high as it is likely that the trustees are unrelated to the settlor and therefore, any transfer from the settlor to the trustees would be charged to French inheritance tax at 60%.

Alternatively, and more in keeping with what is usual in France, it may be possible to reveal the PET as a “don manuel” to the French tax authorities. It would appear that there are three different times when such a revelation could take place:

1. At the time the PET is made;

2. When moving to France; or

3. At the date of death.

If a declaration to the French tax authorities is made at the same time as the PET is made, the only difficulty will be persuading the French tax authorities that they can accept such a revelation and that it is effective. The difficulty is that, at this point, the PET has nothing to do with France. When the donor moves to France, they could declare the PET to the French tax authorities but they may then be liable to French gift tax on the amount given. However, this would at least allow the clock to start running so that six years after the revelation, the nil rate band will again be available13.

If nobody says anything it is possible that, even at the donor’s death, the PET will not be revealed. However, if the death occurs within 7 years of the PET being made, there will be IHT due in the UK, which may cause the PET to be revealed to the French tax authorities. Equally, the beneficiaries of the donor’s estate may have cause to bring the PET voluntarily within the estate, in particular to ensure an equitable division of the estate. This is all the more likely as French has a system of enforced heirship14. The donor’s Will may also refer to the PET or it could be disclosed accidentally. If for any reason the PET is disclosed at this point and has not been previously revealed to the French tax authorities, it will be re-incorporated into the estate and taxed.

Whilst there is a Double Tax Treaty between France and the UK covering estates, it specifically does not cover lifetime gifts. Given the uncertainty, it is unclear how best to proceed although there seems to be no harm in at least declaring the PET to HMRC. It is understood that French legislation on what constitutes a revelation of a “don manuel” is under review and may be amended in the future.

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