Service France

by David Anderson, French tax and property solicitor at Sykes Anderson LLP solicitors

Please note that taxation and property are complex subjects and you should not take or refrain from taking any step without full independent advice on the particular facts of your case. The content of this article is of a general nature and no liability is accepted in connection with it.

Alongside wealth tax, French gift tax (FGT) is often widely misunderstood. This is probably because the UK has no gift tax as such and inheritance tax (in most cases) is only payable on lifetime gifts if the donor dies within seven years of making such a gift.

A fundamental difference between the UK and the French tax systems is that in the UK, a gift for no consideration is deemed, in principle, a disposal for capital gains tax (CGT) purposes. In France, such a gift attracts gift tax but not CGT. Importantly, French gift tax is not deductible against UK CGT should both be payable on the occasion of the same gift.

Gift tax and capital gains tax liability are set out in the following table, which assumes a gift from individual to individual and is simplified:

Donor  →		UK resident		French resident
Donee  ↓	Gift from ↓	FGT	CGT	FGT	CGT**
UK resident	UK assets	No	Yes	Yes	No
	French assets	Yes	Yes	Yes	No
French resident	UK assets	Yes*	Yes	Yes	No
	French assets	Yes	Yes	Yes	No

FGT= French gift tax payable
CGT= UK capital gains tax payable

* if the donee has been tax resident in France for at least 6 tax years in the previous 10.
** the donor must not return to the UK, if previously a UK tax resident, within 5 tax years of leaving, otherwise he will face UK CGT as if he were a UK resident at the time the gift was made.

So, we can see that the French gift tax net is far wider than the UK capital gains tax net. A French resident does not pay UK CGT whereas a UK resident often pays gift tax if the gift is to a French tax resident or out of French assets. The worst scenario is that of a gift which attracts UK CGT and French gift tax, neither of which can be set off against the other.

Strictly speaking, the donee is liable for French gift tax. However, if the donee failed to pay – for example, because he was living outside France – the donor could be made liable.

It may look like whichever way you turn, you’ll be taxed. However, there are some interesting gift tax deductions and exemptions, available whether or not you are French resident.

French inheritance tax (FIHT) largely mirrors gift tax, the only difference being that a legacy is after death while a gift is before it. However, many of these deductions and exemptions are only available against gift tax and not inheritance tax. On the other hand, gift tax is sometimes more onerous.

Where French gift tax is more onerous than FIHT:

1. In an inheritance, movable goods can be given a default value of 5% of the total estate. This is not available for gifts.
2. No debts can be deducted for gift tax where they can for IHT.
3. Gift tax must be paid in one go and cannot be staggered like IHT.

Where French gift tax is usually often less onerous than FIHT:

1. Every donee / heir has a nil-rate band. This is renewed every 10 years, effectively (somewhat similar to the UK 7-year rule). Gifts can take advantage of this but a single legacy obviously cannot. Additionally, each donee has a nil-rate band per donor, so parents can give their children double without incurring any gift tax.
2. Manual gifts are not in principle taxable – this refers literally to a gift from one hand to another – unless they, or a future donation, are certified by a formal document, or the donee declares them to the tax authority. If the donor dies however and the donee is a reserved heir, they become taxable (even if given more than 10 years previously). Also, if the gift is particularly large and the tax authority notices the donee’s raised expenditure, it can require him to reveal the provenance of his money.
3. Where a marital community is liquidated, on the death of the first spouse, in favour of the other, no gift tax or IHT is payable.
4. Grandparents may give their grandchildren (or great-grandchildren, if the grandchild has died) up to €30,000 tax free.
5. A general deduction of gift tax is applied to all gifts of full property of 50% if the donor is under 65 and 35% if he is over 65 and under 75. If only the reversionary interest is given away, the aforementioned deductions are, respectively, 35% and 10%.
6. Irrespective of point 5. above, any donation made until 30 June 2005 benefits from a 50% deduction in tax, whatever the age of the donor.
7. If the donor agrees to pay the gift tax, this is not regarded as a gift in and of itself, even though the legal obligation strictly falls upon the donee. (In other words there is no concept of “grossing up” as in UK IHT.) This should be mentioned in the deed of gift if there is one.
8. A specific exemption open for one year exempts certain cash gifts – please read our article.

A donor can give away the reversionary interest in property but keep a usufruct in it (the right to continue to benefit from the asset – typically to use it and/or to receive its income during his lifetime). This is known as a donation-partage. Gift tax is then only payable on a certain percentage of the property value, according to the age of the donor. Combined with the general deductions available at the moment, this can be an interesting prospect.

For example, a widowed father of 72 wishes to give away the reversionary interest in his house to his only child. The house is worth €100,000 so tax would be payable at 20% (assuming the nil-rate band was already exhausted). The reversionary interest (according to the statutory scale) is worth 60% of the property value. Therefore gift tax payable is 100,000 x 60% x 20% = €12,000. A further deduction of 10% against the tax payable is then available (see 5 above) so the total tax payable is €10,800. Upon the father’s death the usufruct is extinguished and no IHT is payable.

If the father had kept the property and died the next day, with his child as his only heir, the child would have paid IHT at 20% of the total property value, namely €20,000; almost double the gift tax.

Sykes Anderson LLP can advise on the impact of gift tax, inheritance tax and capital gains tax both in the UK and France.
Please contact David Anderson by email or on 020 7398 4700.