The French legal system has remained unchanged for a very long time but has in recent years been the subject matter of a string of important reforms.  Striking changes include among others, the abolition of death duties between spouses and the trebling of children’s tax allowance, coupled with a yearly increase which currently puts it at 159.325€ per child and per parent. The tax allowance applicable to grandchildren, great-grandchildren, nephews and nieces is currently 31,865€.

In the current difficult economic climate, the trend now seems to be for less generous advantages and it is a widespread view among professionals that now is a good time to prepare one’s succession, where French assets are involved. There is no point in delaying, as this exercise is likely to become more onerous in future.  The latest finance law has seen an increase of the upper two band rates of death duties for children by 5%, although (although it would seem that this change has been put “on ice” for the time being).  There are also clear indications, relayed by many Notaires, according to which the amount of the children’s tax allowance will probably reduce very soon, as the French Senate has voted to reduce it to 50,000€ (although the exemption of death duties between spouses will remain). It has therefore become urgent to make gifts in order to save tax. Making gifts may also alleviate potential exposure to wealth tax.

A common strategy consists in spreading out the transmission of assets over time and it is best to start early if that route is chosen, as the tax period after which the tax allowance is reconstituted has increased from 6 to 10 years.

By way of transition measures, gifts made prior to the reform will benefit of a tax rebate of 40% for gifts made over 9 years earlier, 30% for gifts made over 8 years and less than 9 years earlier, 20% for gifts between 7 and 8 years and 10% for gifts over 6 years and less than 7 years.

Once you have made your mind up on the principle of making a gift, you need to choose the type of gift you wish to make:

Outright gifts:

-    Money or stocks
-    Any asset, chattel or real estate

The common feature of these two simple gifts is that they will be taken into account in assessing the children’s shares and what they are entitled to on your death, based on the value of the asset given at the time of your death, not at the time of the gift.  This can of course lead to a higher tax exposure, if the value of the asset given has gone up since the gift was made.  This type of gift may be used as part of a larger plan with a view to maintain an equality of treatment between children (such equality being a very important principle under French law).

Alternatively, a popular type of gift is the “donation-partage” (‘gift with apportionment”).  This involves, at the same time as making gifts, the sharing in advance of one’s assets among members of the family.

Its key advantage is to freeze the values of the assets given, vis-a-vis the tax administration, at the values at the time the gift was made.  (One must of course not forget to declare the gift to the tax administration on the appropriate form at the time of the gift).

The tax applicable to the split of assets “droit de partage” has increased from 1.1% to 2.5% on the 1st January 2012, but the donation-partage still remains very attractive despite this, for the reason explained above.

One should however not delay undertaking such measures, as not only has the period for a gift to remain tax free gone up from 6 to 10 years, but again, it is most likely that the level of the tax allowance for children will be reduced soon.

As a side point, it should be kept in mind that it is always possible to negotiate additional time with the tax administration to pay gift tax or death duties, sometimes up to ten years; it is an easier process than one may think).  Finally, an avenue not to be forgotten is the possibility of splitting the title to a property between bare title and life interest.  Keeping the latter secures the use of the property for life while reducing the level of tax at the time of the gift. On death, the full title is automatically reconstituted on the head of the holders of the bare title tax free.

Professional advice should of course always be sought before organising the transfer of one’s hard earned assets.

Hervé Blatry
Avocat
TEE FRANCE
Direct dial: 01279 715 596
e-mail: heb@teeslaw.co.uk