Are UK Inheritances taxed in France? Individuals may have received a UK inheritance whilst resident in France, and are wondering what the French tax implications are.
What is a UK inheritance?
A UK inheritance is assets received on the death of an individual who was domiciled in the UK.
Each UK individual receives a nil rate band (NRB) of £325,000, as well as a residence nil rate band (RNRB) of £175,000. This may be reduced if gifts have been made within the 7 years prior to death.
This means £500,000 of an individuals assets are not subject to IHT. For married couples, that’s £1 million (this may change if an estate exceeds £2 million in value).
The estate then pays tax on the excess at 40% before the assets are distributed to the beneficiaries. Therefore, UK IHT will have been paid before the assets are distributed.
This differs from how French inheritance tax is paid, where the succession tax is paid by the beneficiaries and not the estate. The tax due is dependent on your relation to the deceased. You may therefore be wondering whether UK Inheritances are taxed in France.
Do I pay French tax on the UK inheritance received?
As a French resident for tax purposes, you will be assessed on your worldwide income. This includes employment, rental, and investment income. If you have received an inheritance, you would assume it will be subject to French tax.
This would generally be the case if you received an inheritance and had been a French resident for 6 of the last 10 years.
However, due to the 1963 Estate Double Taxation Treaty between France and the UK, any inheritances from the UK are only taxable in the UK. Once the estate has paid UK IHT and the distributions are made to the beneficiaries, no further tax is due irrespective of whether you are a UK or French resident.
The above may change in instances where the deceased individual had some French assets. The French element of their estate would potentially be subject to French succession tax. It is therefore important to understand what the assets and their origin are to determine if any further tax is due.
What are my options with a lump sum inheritance?
As a French resident, there are a couple of options available for tax-efficient investing a lump sum UK inheritance. These options depend on how long you intend to remain a resident in France.
Investing can help mitigate the risk of inflation, and can be used alongside your risk profile to help achieve your financial goals.
What if I am a long-term resident?
If your plan is to remain a long term French resident, a potential option would be to open an assurance vie. An assurance vie is a tax-efficient investment wrapper that can contain underlying investments such as unit trusts, shares, and bonds etc.
If an assurance vie contract was taken out prior to 27 September 2017, the tax charges are more substantial. In the first 4 years income tax is due at 35%, between 4 and 8 years income tax is due at 15%, and for a contract held more than 8 years, income tax reduces to 7.5%.
In contrast, if the contract was taken out after 27 September 2017, the income tax due is reduced favourably. In the first 8 years, any gains on the policy are subject to an income tax charge at 12.8%. Once the policy has been held for 8 years, gains of €4,600 can be taken annually with no tax charges. Moreover, tax on gains exceeding the annual allowance drops from 12.8% to 7.5% up to €150,000.
Social security charges are due on any gains subject to income tax at 17.2%. However, if you applied for your S1 form prior to 1 January 2021 (the date the UK officially left the European Union), you can avoid the substantial social security charges. This will not apply to applications made after this date.
There are also substantial French IHT benefits from holding an assurance vie, such as beneficiaries of the deceased policyholder being able to receive up to €152,500 without paying inheritance tax.
What if I am a short-term resident?
If you are unsure of your longer term plans and intend on living a more transient lifestyle, it may not be in your best interest to take out an assurance vie.
One option is to open a global investment platform. This would allow you to monitor and hold listed investments on one platform. It avoids you committing to a locally compliant solution which may not be tax efficient in your new country of residence. You can then still implement an investment strategy for your goals whilst you are moving around.
Who can help?
If you have recently received a UK inheritance and are wondering what the best solution is, please get in touch with us here at Harrison Brook. We can take a look at your individual situation, and prepare advice that best suits your needs.
The information contained herein is for informational purposes only which is subject to change and should not be relied upon. You should seek advice from a professional adviser before embarking on any financial planning activity.