Gifting French Property

It is perhaps a consequence of the pandemic that we have seen a marked increase in the number of French property owners looking to pass their home to their children: a recognition of own morbidity leading us to realise that we need to plan for the future and think about transferring our estates down the family line.

It is common knowledge that reducing the value of ones estate can work to reduce the overall exposure to inheritance tax. Yet inevitably there are a number of complications that can arise from an intention to gift a property, not least where we have to consider both French and UK tax.

Indeed, giving consideration only to the French tax consequences can result in problems in the UK. A common format for gifting a property in France is for the donor to retain a life interest (an usufruit) in the property. Since the usufruit has a value attributed to it, that value is deducted from the gift to the children, when they receive the remainder interest, the nue-propriété.

Notaires will often suggest that the donors retain the life interest not only because it means that the donor is entitled to retain the use of the property for their lifetime, but also because it reduces the French tax burden overall. Gift tax is applied on the value gifted, and since that value is reduced by the value of the usufruit, the amount of tax is smaller than if no gift had been made and the property had consequently been left to the recipient as a legacy on death.

Where an usufruit is retained by a donor, this simply lapses on that person’s death, such that the children then become absolutely owners. Since any gift tax will have been paid when the original gift was made, there is no French inheritance tax to pay at the time of that death. So that all seems remarkably easy, and perhaps an excellent way of passing property down the family line with a view to reducing inheritance tax. Understandable, then, that notaires will often propose this method.

But – and there is always a ‘but’ – that does not take account of the UK tax perspective; and this is where very careful consideration becomes necessary. What follows may seem horrendously expensive, yet it is important to appreciate that this is not always so.

The first point to note is that if the donor retains the usufruit, and if that donor is in fact UK tax resident at the time of their death, then the entire value of the French property will be included in the deceased’s estate for the calculation of UK inheritance tax.

If the donor is not going to have an estate of sufficient value to attract inheritance tax, this will not be an issue. However, if they do, then an increase in the UK tax bill amounting to 40% of the value of the French property at the time of death could be substantial.

As well as this potential increase on UK inheritance tax, it is also important to bear in mind that actually making the gift can give rise to a charge to UK capital gains tax (CGT). It is clear that this tax would apply both in France and the UK where a French house were sold by a UK tax resident person; but it will also apply in the UK where it is gifted, as the UK definition of CGT relates to a disposal of an asset, not just a sale.

As we have seen, the gift of the French property might give rise to gift tax in France. Gift tax is effectively the same as French inheritance tax. It is payable at the time the gift is made. Once a gift is made, the donor would have to wait 15 years before being able to make a similar gift, if the donor wishes to benefit from the full tax allowances. This is not to be confused with the seven year rule that applies in the UK: under this rule, a gift made more than seven years before the donor’s death is not counted as part of the estate for UK inheritance tax (although that itself is irrelevant where a life interest is retained in a gifted asset…)

We can see from the above that when a gift is made, there are tax consequences both in France and the UK. The form of tax in each jurisdiction is different – gift tax in France, and CGT in the UK. It follows from this that there is no Double Tax Relief available. On a sale, giving rise to CGT in both jurisdictions, the French CGT would be credited against the similar UK bill for a UK tax resident. The same would be so for inheritance tax arising on a death.

Occasionally, clients explain that they would prefer to pass separate properties to their children: It is possible to gift the French property absolutely to one child, although extra care is required here. If one of the children has not received a share of the property, they could have a basis for challenging the parent’s estate following the death. In general, having that person enter into the deed of gift at the time the French property is given to their sibling should ensure that any such risk is avoided.

This brief analysis deliberately avoids any references to the amount of tax that may be due in any specific situation, whether that tax may arise in France or the UK. It is purely intended to outline some of the major points that should be considered when you are looking to make a gift of a property in France.

It will hopefully be apparent, though, that a number of potential tax problems can arise. The various tax consequences illustrated here may suggest that there is no benefit in contemplating a gift of the French property. That is certainly not the case: there is every interest in considering the implications in advance of entering into any such gift arrangement, with the assistance of a solicitor and/or accountant with suitable experience of both French & UK tax rules.

Such an analysis should however be based upon a comparison with ‘doing nothing’ or simply selling the French property: in such circumstances there will inevitably be tax consequences arising, and so making a gift can look much more attractive even if there are taxes to pay, if the overall tax bill would be higher in the future.