This column is by Rob Kay, a senior partner at Blevins Franks financial advice group (blevinsfranks.com). Rob has decades of experience advising UK nationals in France and features regularly in the media discussing the issues affecting expatriates here.
Recent months have been interesting for Britons in France, with elections on both sides of the Channel.
A common question since then has been: ‘What does this mean for tax?’
Given the difficult years we have just been through (a pandemic, war in Ukraine, high inflation) and the toll they took on government finances, many countries need to find ways to increase tax revenue and improve their balance sheets, preferably without increasing taxes on income and spending.
Read more: Should you reinvest your pension fund in France?
Uncertain times
It is possible, therefore, that governments will try to leave income taxes and VAT alone and focus on levies affecting wealthier individuals – inheritance and wealth taxes, large pension pots, maybe capital gains tax on investment assets.
In the lead-up to the French election, the Nouveau Front Populaire talked about reinstating the old wealth tax and strengthening exit tax, while pledging not to raise income taxes on lower earners.
The UK’s Labour Party manifesto, meanwhile, promised not to increase income tax, national insurance contributions or VAT.
Capital gains tax (CGT) was missing from the list, though party leaders said there were no plans to raise rates.
Many observers still expect CGT to rise in future, however, or for capital gains to be classed as income. Pensions also look vulnerable, since the plans were to review the pension landscape.
Labour also pledged to abolish the non-domicile status and end the use of offshore trusts to avoid UK inheritance tax. It is possible it will review the inheritance tax system and consider other reforms – for example, removing some reliefs.
Until we have official announcements, we can only speculate. Nevertheless, this seems a good time to review the inheritance taxes that UK nationals living in France face.
Read more: Capital gains tax – what expats in France need to know
UK inheritance tax
Many British expatriates do not pay much attention to UK inheritance tax (IHT), since they live and pay taxes in France.
France does have a specific tax treaty with the UK on inheritances. Both countries tax worldwide assets, but UK nationals who are long-term residents of France are deemed domiciled in France for inheritance tax purposes.
However, if you have assets in the UK, they are always liable to UK inheritance tax. This includes all property, bank accounts, investments, insurance policies not in trust, household contents, vehicles etc.
The UK currently offers the individual nil rate band of £325,000 and residential nil-rate band of £175,000. The latter only applies to your primary residence. Your UK property will not qualify if you die as a habitual resident of France.
Frozen allowances
The Conservative’s last budget kept these allowances frozen until 2028 – the main threshold has not changed since 2009.
We wait to see what the new government will do with these frozen allowances, but since they generate a nice income for the Treasury, it would be no surprise if they are maintained.
HM Revenue & Customs collected a record £7.5billion in IHT receipts over the 2023/24 tax year, and another £1.4billion in just the first two months of this tax year, 16% more than last year.
The Office for Budget Responsibility projected IHT receipts to hit £9.7billion in 2028/29. As the fiscal drag from frozen allowances pulls more families into the net, it forecasts the number of deaths resulting in IHT will reach 6.3% – the highest since the 1970s. In 2009/10, it was just 2.7%.
This tax take could dramatically increase under the new government. Its pledge to restrict non-domiciles from moving money overseas is expected to raise a further £430million a year. If combined with frozen thresholds, this unpopular tax will keep growing.
If you live in France with no plans to return to the UK, and wish to reduce or eliminate UK IHT liability on your UK assets, the simple answer is to move them out of the country. You do not need to move them into France, just out of the UK.
Take cross-border tax advice to establish how to reinvest the capital to keep taxes as low as possible for you today, throughout your retirement, and for your heirs in future.
Read more: How does income tax season in France differ to other countries?
French succession tax
While there is no UK or French inheritance tax between spouses/civil partners on death, beyond that your heirs could potentially pay a lot of tax.
The UK imposes a flat 40% tax when an estate exceeds £325,000. In France, the rates and allowances vary dramatically based on level of kinship and amount received. At one end of the scale, a child gets a €100,000 allowance and starts paying tax at 5%. At the other end, unrelated heirs suffer a set 60% hit with a €1,594 allowance.
We are often asked where it is best to die – will heirs pay less tax if you die as a UK or France resident?
The answer often gets complicated with all the variables. But where there is little or no planning in place, and matters are simply left to take their natural course, the answer is usually France since assets must flow down the bloodline and the French system is designed to minimise the tax those recipients pay.
Estate planning
This does not necessarily mean no tax is paid – even children face a top French succession tax rate of 45%. It is worth reviewing your estate planning to see what steps you can take to reduce tax for your heirs.
If you and your partner are not married or in a civil partnership, the survivor will pay 60% tax – cohabitation can prove expensive in France. Stepchildren, too pay, 60%.
If you are concerned about how your wealth will pass to your heirs, and with new governments in France and UK, now is the time to review your testamentary wishes and what taxes your nearest and dearest will pay.
Do not wait until it is too late – take specialist cross-border advice. The ‘cross-border’ element is important, as your estate plan must take account of both UK and French succession regimes, how they interact, and what planning opportunities are available.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
