Gifting Property in France
Sensible wealth protection planning, for those who can afford it, will often include an intention by people to gift a property down to their children.
In accordance with UK tax law and subject to some other points, we shall discuss below, provided a property owner survives for seven years after having made a gift, the value of that asset will not be included in their estate for the purposes of inheritance tax calculation. One of the most obvious assets to pass on to one’s children would be a second home. This can even be the case where the holiday home they own is in France. Inevitably, though, where a person lives in the UK and wants to gift a property in France to their children, there are potential legal and tax consequences that can arise in both France and the UK. In addition, methods of completing a gift that may be very commonplace in France – and highly beneficial for French tax saving purposes – can be equally disadvantageous for UK tax purposes.
Let us presume that a person living in the UK wishes to leave their house in France to their children; they understand that this could be good for tax planning, but are not fully sure why. Let us consider some of the points that they will need to bear in mind when deciding whether to proceed with the gift.
The property is based in France and is therefore inevitably subject to French taxation rules. French tax rules impose a potential gift tax charge at the point the gift is made. Gift tax is calculated on the same basis as French inheritance tax – with each beneficiary entitled to inherit a certain amount before any tax is paid, and then with the tax being applied at varying rates. One of the early steps in considering whether to proceed with a gift is to calculate the overall tax liability that would arise. Gifting in France can be carried out on a fifteen-year cycle. For example, if a person makes a gift now to the maximum level of the tax-free allowance, they would be able to make repeat that gift in fifteen years and the beneficiaries would be entitled to their allowance again. This may sound like an unreasonably long period of time; however, as we shall hopefully see, it may well not be a problem overall. If the whole of the property is transferred, then it will not be necessary to anticipate a further gift in any event.
It is important to bear in mind that as the donor is living in the UK then their worldwide estate is going to be subject to UK inheritance tax as well (there are some exemptions to this, but space does not allow them to be considered here – again this is a point upon which specialist advice should be sought). Therefore the gift in France will result in the donor’s estate having been reduced for the purposes of UK inheritance tax. One proviso for this reduction in UK inheritance tax is that the donor needs to have survived the gift by a specific period. However, unlike the 15-year requirement in France, the period in the UK is seven years. And even if the donor dies before that seven years has expired, there is some tapering to reduce the UK tax burden.
Another proviso to be observed before the property is to be treated as outside of the donor’s estate on death is that they must not have given the property to the children while retaining any ability to occupy or control it. If the donor can exercise control, then HMRC would treat the French property as continuing to be included in the donor’s estate for the purposes of calculation of UK inheritance tax. Quite simply, that would entirely defeat the object of the gift. This means that if the donor has any intention of using the property for anything more than a week or two each year, then extra care must be taken, and specific advice sought on how to avoid problems.
One way that control can be retained by the donor can actually be achieved inadvertently through one method of completing the gift that could well be the default option that a French Notaire may choose. A Notaire might suggest that a donor should retain a right of use over the property, as this is a way of reducing the likely exposure to French gift tax, and Notaire’s fees. It is highly advantageous for French tax planning, yet similarly disadvantageous for UK tax. Again, a point upon which detailed advice should be sought in advance.
So far we have looked at the implications of French gift and inheritance tax, as well as UK inheritance tax. While we have seen that problems can clearly arise in the absence of careful planning, it is nevertheless the case that substantial savings can indeed be made. Yet we should also bear in mind that the gift of the French property by the donor can give rise to a liability to capital gains tax in the UK. UK CGT applies when a person disposes of an asset (excluding their main residence). The key point here is that the tax applies on disposal, not just on a sale: it does not matter that the asset is given away rather than sold at a profit. So if the French house is gifted to the donor’s children, UK CGT is applied by taking the original purchase price from the value at the time of the gift. Expenses incurred during the ownership of the property – such as the cost of works, and professional fees – are also deducted from the value at the time of the gift. The result constitutes the profit made, and this is then subjected to tax in the UK.
It is evident that this application of capital gains tax can result in a further reduction in the benefits that would otherwise arise from the gift. Nevertheless, the tax may not itself be particularly onerous, and so the overall benefits should be compared against the initial costs. One does also need to bear in mind the Notaire’s fees for completing a deed of gift. These are calculated by reference to fixed scales imposed by law, taking into account the value of the property. They can typically amount to around 2% – 3% of the value of the property.
In order to decide whether this outlay is worthwhile, the family should understand fully the implications of, and consequences arising from, a gift of French property, since structuring the gift in an unsuitable format can expose the donor and their family to substantial costs, both in France and the UK. It can even result in the whole value of the property being included in the donor’s estate on death: effectively defeating the object of the gift in the first place.
Having to pay those fees in France for a gift that may be of negligible benefit may not be ideal. Far better to seek analysis from specialist solicitors with knowledge of both legal and taxation procedures as a first step in the process.
For individual legal advice, please contact the Ashtons Legal French Property Team
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