Trust and French Inheritance and Wealth Tax
This information has been prepared by Sykes Anderson Perry Limited as a general guide only and does not constitute advice on any specific matter. We strongly recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of any information or advice given or omitted. The information herein does not constitute investment advice. Always consult an IFA if before taking any investment decision.
In France, there is a wealth tax charge known as “Impôt de solidarité sur la fortune”. French residents pay this tax on their net worldwide assets and any non-French residents are taxed on assets physically situated in France (or indirectly held French real estate). Please note that the definition in French law of “tax resident” is different from that of other countries. This tax has changed significantly with effect from 1 January 2018 so it only applies to real estate assets.
There is a partial exemption for individuals moving to France. For their first eight years of residency, only French based assets fall within the charge.
This wealth tax is based on the net value of taxable assets held on 1st January each year. If the net taxable assets exceed €1.3million, then a wealth tax charge will apply. There is particular treatment for assets held within a trust.
Article 885 G ter of the French Tax Code provides that all assets held within a trust are deemed to be within the taxable estate of the “constituant” (roughly equivalent to settlor). If the beneficiaries are deemed to be the “constituant” (which is the case is the original settlor has died), their share of the trust assets is attributed to them and within their estate for the purpose of wealth tax.
On 15 December 2017, a decision of the French Constitutional Court clarified the application of this article 885 G ter of the French Tax Code.
The decision specifies that in order for an individual to be effectively taxed as the owner of the asset, they must have a “contributory capacity”. This capacity is conferred on the taxpayer when the assets or rights in trust provide them with direct benefits (such as the attribution of income from the assets or rights in trust) or indirect benefits (such as the use of the assets). The proof will be based on the facts of a case, rather than the wording of any trust deed or the irrevocable / discretionary nature of the trust.
This is helpful as the law as drafted imposed an absolute tax regardless of the reality i.e. even if an individual was wholly excluded from benefiting from the trust. However, we will have to await confirmation from the tax administration as to what proof is acceptable in terms of demonstrating that you do not benefit from the trust.
In addition because the new article 970 of the French Tax Code relating to the new French Wealth tax is similar to this article 885 G ter the interpretation of the French Constitutional Council should apply for the future to this new article.
In a decision dated 12th January 2018, the Court of Appeal of Versailles held in favour of the tax payer in a French inheritance matter. This is directly analogous to the Wealth Tax position. In this case Ms Ruth H. set up a trust in 1984 in the USA. The trust provided that on her death her children would receive the income from the trust but no capital. On her children’s death their children i.e. her grandchildren would receive the capital from the trust. In other words the trust was a classic life interest trust. Ms Ruth H. died in 1980 and her daughter died in 2009 a resident of France. The French tax authorities charged the grandson Mr Michel B. French inheritance tax. He appealed and the Court of Appeal of Versailles found in his favour and against the French tax authority.
The Court decided that Ms Ruth H. had no power to sell the underlying trust assets and only had a right to income. Accordingly under French law she did not have a nue-propriété (similar to a reversionary right). The nue-propriété belonged to her son who inherited all the assets outright on his mother’s death. The Court decided the mother’s rights were an usufruit (individual with the life interest) which is not taxed in France when it comes to an end.
Article 750 Ter of the French Tax Code states that you apply the inheritance tax rules when ascertaining the value of a taxpayer’s estate for wealth tax. The key points when drafting a trust are to ensure that the individual with the life interest has no power to direct the trustees to sell the assets.
There remain important declaration obligations for trusts with a connection to France that must be observed. Failure to do so can result in substantial penalties.
Any trust with a connection to France ought to be considered closely to determine whether it triggers any French wealth tax or inheritance tax consequences. The inheritance tax rates for trust assets are particularly punitive in France.
Graeme Perry, Solicitor
Sykes Anderson Perry Limited