France is a country notorious for its high rates of inheritance and gift tax and small tax-free allowances, especially for estates passing outside of the standard ‘nuclear’ family. However, offering some relief but under specific criteria, article 779 II the French tax Code provides a special, additional, tax-free allowance of €159,325 for disabled beneficiaries (or recipients of a lifetime gift).
When you consider that if, for example, you leave assets which are taxed under the French inheritance or gift tax regime to your nephew who would then only benefit from a tax free allowance of €7,947, before being liable for French inheritance or gift tax at a fixed rate of 55%, one can see how the special tax free allowance can provide relief so that your disabled beneficiary, rather than the French state, benefits from your estate.
However, in a recent string of cases, this special tax-free allowance has unfortunately come under the spotlight in a Court de Cassation (French Supreme Court) decision in June 2021, and more recently (June and October 2022) in decisions made by two major French Courts of Appeal. This appears to show that not only are the French tax authorities now prone to dispute the application of the special tax free allowance, but the French Courts themselves will interpret the application criteria restrictively, making it very difficult to obtain the benefit it offers.
The main argument being used to dispute the application of the special tax free allowance is that the French tax code applies to beneficiaries suffering from mental or physical disabilities, but only in so far as they are or were prevented by said disability from working in a normal, profitable way. It is easy to see how such a subjective (dare we say vague) criterion can be used to circumvent granting a beneficiary this additional relief and the cases mentioned below highlight how restrictive the French tax authorities and Courts have become in applying article 779 II of the French tax Code.
In France, disabilities are graded by severity using a percentage rating of how much the disability prevents the person from working. The tax guidance sets out that there is no minimum percentage disability threshold that must be met to benefit from the special allowance, and also that it does not matter how recent the disability is, its nature or what caused it, as long as it existed on the date of death.
However, due to the criteria of “loss of profitability”, the disability must not have appeared later on in life if the beneficiary had been able to enjoy a normal, profitable working life before. Further, granting the special tax free allowance can only be considered if the disability appeared during the youth, or during the period considered to be the “active life” period (i.e. when a person would usually be working). Therefore, a retired beneficiary who becomes disabled after retirement where the disability does not affect any retirement income cannot benefit from the special allowance. Very often it is not the disability itself that is disputed but the “loss of normal profitability” itself, and the causal link with the disability.
In recent case law, it was decided for example that someone whose degree of disability was considered as 100% was not able to benefit from the special allowance, as he was still the director of a successful company. And a retired veteran whose disability caused by war wounds which only appeared once he was retired and did not prevent him from having a successful career or from making the relevant French National Insurance contribution to obtain a full pension was not able to benefit from it either.
In the most recent Court of Appeal case, the disabled beneficiary only received a p/a average income of €8,500 after an accident caused their disability. But the Court noted that this was still more than before their accident, and that during their 25 years career, “only” ten years were affected by the disability and therefore the application of the additional tax-free allowance was rejected.
Whilst it is disappointing news to report, especially during the current financial turmoil affecting the world, it is still important for families who were hoping to be able to rely on this additional tax free allowance in France. This particularly so when it appears to be a reversal of the previous position of leniency from the French tax authorities, and that it may no longer be granted to families who may now need to consider other arrangements to ensure that disabled beneficiaries receive as much as possible of their estate.
