Please note that tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
UK Civil partners with French assets or those considering moving to France have not been receiving the same tax benefits as French couples in the same position. This has been due to the non-recognition of UK civil partnerships within French law. The French parliament, on 12 May 2009 passed a change in the French law so that if a partnership is validly carried out abroad its effect is to be recognised in France. We look at what benefits this might confer upon UK civil partners who are planning on moving to France.
UK tax treatment of Civil Partners
Partners entering into a UK civil partnership will obtain similar treatment and benefits to married couples. These include the exemption from inheritance tax for assets passing between two UK domiciled partners. They are also able to take advantage of the transferable nil rate bands introduced in the 2008 budget.
In the UK, inheritance tax is charged on the estate of the deceased at a fixed rate of 40% on all assets above the nil rate band, which for the 2009/10 tax year is £325,000. Assets passing to a spouse or civil partner or to a charity will not be subject to IHT. Certain classes of assets may also be exempt.
The position in France up to now
The estates of UK domiciled individuals will be charged UK IHT on the value of all assets in the estate no matter where they are located. The spousal/civil partner exemption applies to UK IHT so if you remain UK domiciled there will be no liability in the UK. However any properties located abroad may also be subject to inheritance tax in that country. For example, a particularly popular place for UK residents to purchase property is France. French inheritance tax will be charged on any French assets owned by UK domiciled individuals at death. Under the terms of the UK-France double tax treaty on Inheritance Tax a credit will then be given in the UK for any French IHT paid. Civil partners have, up to 2009, needed to be aware that the IHT treatment in France of any French property they own would be different to that in the UK.
Since August 2007 married couples benefit from a total exemption from IHT in France for assets passing between them (article 796-0 bis French tax Code). This exemption also applies to partners who have a Pacte Civil de Solidarité (PACS), which is the French equivalent of a civil partnership (although this can also be entered into by opposite-sex couples). However, a UK civil partnership has not been recognised for these purposes so the partners have not benefited from the exemption.
French inheritance tax rates vary depending on the deceased’s relationship with the beneficiary. For these purposes, civil partners have previously been considered as ‘un-related’, the consequences of which can be devastating on the surviving partner. They would have had to pay inheritance tax at the rate of 60% on all assets, which pass to them over the paltry tax-free allowance of around €1,500. This is likely to result in the French property having to be sold (with capital gains tax potentially having to be paid) just so that the surviving partner can afford their IHT bill.
Although not previously recognised for IHT purposes, in certain circumstances the civil partnership was acknowledged by the French authorities. For example civil partners who became resident in France would be charged to tax on their household income as opposed to being taxed individually. This is essentially akin to the taxation of married couples. The partnership has also been recognised for civil reasons so that it could have an effect when forced heirship became an issue. This is the French law whereby assets must pass to certain relatives (primarily children but it also applies to siblings and to parents) on death. Due to the recognition of civil partnerships for this reason, so long as neither partner has children from an earlier relationship, a will can be made so that all French property passes to the partner upon death. This made the reasons for non-recognition for IHT purposes and its discriminatory effect even more difficult to justify.
The discriminatory effect
There has been a contradiction as a French PACS is recognised in the UK as legislation provides for the applicability of foreign partnerships in the UK. Certain partnerships in other countries, of which the French PACS is one, are automatically considered as equivalent to a civil partnership in the eyes of the UK authorities so long as they are between same-sex partners.
The only solution seemingly available to UK civil partners up to now has been to obtain a PACS. These are available only to those with a joint residence in France or to French citizens with foreign partners. UK civil partners moving to France might therefore have sought to enter into a PACS so that they can benefit from the inheritance tax exemption. Although this was a way to rectify the discriminatory nature of the French position it is hugely problematic to achieve in practice. This is because partners seeking to register a PACS must obtain a certificate from the British authorities showing that they are single. This will not be provided if the individuals in question are in a civil partnership. The only way to register a PACS has been to dissolve the UK civil partnership first. This is a measure equivalent to a divorce.
The French Parliament has now recognised that this is an unacceptable hurdle for non-French individuals to face.
The changes in French Law
On the face of it the French law, dated 12 May 2009, does not fully explain how it will operate and does not appear to guarantee an equal treatment for civil partners. It simply states that the conditions for a partnership to be formed or dissolved will depend on the laws of the State in which it was registered.
However, the French Revenue has clarified that the effect of this legislation will be to put UK civil partners on an equal footing with French PACS partners with regard to inheritance tax. This means that those partners who purchase a property in, or move to, France, should not have to worry about the impact of inheritance tax on a first death when the assets pass between them. They will now fall within the exemption in Article 796-0 bis of the French Tax Code. It is always sensible to take advice on your individual circumstances, and there are numerous other taxes which must be taken into consideration when purchasing in France.
Having highlighted this issue last year, Sykes Anderson are pleased to see this development in the French law giving equal rights to UK civil partners. With the increases in UK tax rates a number of high earning individuals will be seeking to move from the UK to France. Same sex couples in a civil partnership will be relieved to see that the barrier created by the French tax discrimination has now been knocked down making moves to France even more attractive.
David Anderson
Solicitor and Chartered Tax Adviser
Graeme Perry
Solicitor
9 Devonshire Square, London EC2M 4YF Tel 020 3178 3770 Fax 020 3178 3771 DX 729 London/City E-mail: |
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