The recent High Court judgment in Euro Accessories Limited  EWHC 47 (Ch) has shed some light on the interpretation of “fair value” for a compulsory transfer initiated by a...
French Inheritance Tax – towards major reforms of the system?
The Conseil des prélèvements obligatoires, an advisory body to the governmental authority that oversees French public finances, published a report in 2017 which looks into the state of the French Inheritance Tax regime.
It identifies current trends and their implications, suggesting reforms as possible solutions to these issues. In particular, the report highlights that the ageing population means the passing on of estates is often delayed, causing the wealth gap between generations to grow. Furthermore, it identifies an erosion of the traditional family unit in recent decades and the emergence of new structures, such as those involving step-parents and step-children.
Some of the proposals are ambitious (some may say unrealistic) long-term reforms that will be difficult to implement without extended research on their potential impact and the resources required to achieve them. For instance, the report suggests that French Inheritance Tax should take into account the lifetime amount received by a beneficiary, rather than the amount received for one instance of inheritance included under the current system. However, others appear to be more immediate and are likely to be addressed in the next French presidential campaign, leading to their possible implementation within the next decade.
- Making lifetime gifts more attractive to boost assets transmission before the estate administration stage
- Making “assurance-vie” contracts less attractive from an Inheritance tax point of view
- Implementing a better tax regime for gifts (lifetime or on death) to step-children
The first of these proposals is designed to remedy the wealth-gap issue by encouraging individuals to transfer their assets to the younger generations before their death. However, the report suggests that the most efficient way to make lifetime gifts more attractive is not to implement a lower rate and higher tax-free allowances for such gifts, but rather to make the French Inheritance Tax less attractive by increasing the rates. It even suggests going as far as removing the tax-free allowances altogether (the highest allowance being currently €100,000 per descendant in direct line). This could encourage individuals to start their estate planning process earlier to prevent their beneficiaries from being penalised by the proposed new deterrent rates on their death. In terms of public finances, this would be a preferred option as taxes on lifetime gifts would be levied more often at their current rate, and the French tax authorities would receive higher amounts on death as a result of the deterrent rates.
The report also suggests that, in the event French IHT rates are increased and tax-free allowances are removed entirely from the picture, beneficiaries will be entitled to pay their French IHT bill in instalments over a longer period than currently allowed.
The second viable short-term proposal has a similar objective. Currently, individuals use “assurance-vie” contracts as an estate planning tool because the pay-outs on death are taxed separately from the rest of the estate. They are also subject to different and, in most cases, more attractive rates, depending on when payments towards the assurance-vie were made. The report argues that reform is needed to prevent this effective loss of income from the public finances purse. Coupled with the fact that some aspects of the taxation of assurance-vie contracts have already been recently reformed, this indicates that the beneficial rates and separate taxation for those contracts might be short-lived, and that “assurance-vie” contracts will resume their primary role as investment tools.
Implementing a better tax regime for gifts (lifetime or on death) to step-children would help modernise the French IHT system by recognising the emergence of “step-families”. Under the current system, French IHT is paid by each beneficiary based on their relationship to the deceased. Although they may have been raised by their deceased step-parent from a young age, step-children are considered “third parties” and, consequentially, taxed at the most punitive rates (60% of the value of the assets received, minus a negligible tax allowance circa €1,000). Moreover, due to French forced heirship rules, the deceased cannot leave by Will as much of their estate to their step-children as they would like, as it could infringe their biological/adoptive children’s reserved rights, even if they are estranged. Under French forced heirship rules, an individual could be prevented from dividing their estates equally between their children and step-children should they so wish. In the event that no Will is left, the step-child is not entitled to any part of the estate.
As a result, individuals are forced to find convoluted solutions. Some leave a sum of money to their step-children through “assurance-vie” contracts so that they can pay the hefty French IHT. The other main option is to adopt step-children (in France, the adoption of an adult is possible). However, this is a lengthy and costly process with implications that go beyond the initial objective of increased tax efficiency.
The report recognises that the process of completely matching the French inheritance law and tax regimes applicable to children for step-children would be delicate. This is partly because of the unknown impact on public finances. However, it welcomes the possibility reform in this regard.
The proposed reforms are not mandatory in any way, but it is hoped that some will occur. However, it should be highlighted that President Macron has made it clear that no reform of French IHT will happen during his current term.
That is not to say that the current French government is not looking into the current state of its Inheritance law regime and the ease of transmission of assets in general. Indeed, a recent study was commissioned by Secretary of State Gabriel Attal to consider reforming the infamous French forced heirship, with a view of making it easier for a deceased to leave assets to charities. This is a topic that the French Finance Ministry was already looking into and the report is planned for May 2019. During a recent interview, the Minister for Action and Public Accounts, Gérald Darmanin, has also hinted at potentially looking into gift tax
We will continue to monitor the situation and will keep you updated of any future developments.