In my everyday dealings with prospective clients and ex-pats looking for advice generally, I’m finding myself dealing with increasingly more complex personal and family situations. From re-structuring of UK investments such as general investment accounts and Individual Savings Accounts (ISA) to make them French tax-friendly, analyzing occupational pensions to assess the suitability of transferring way from the UK and into QROPS, through to financial planning for the future, every case is varied and different, requiring bespoke advice.
One area I find particularly common is how best to address the impact French succession laws have on those of us used to the fairly flexible UK Inheritance Tax laws. In the UK, its fairly simple: you can leave everything you own to your spouse free from inheritance tax. On the surviving spouse’s subsequent demise, the first £325,000 of that person’s estate can be passed on without tax liability. Since 2007, the deceased partner’s allowance can also now be used by the surviving spouse, thereby ensuring that £650,000 of the combined estate is free from taxation. In addition, there is an additional property nil rate band that can boost the tax exemption even further. Furthermore, with the exception of the spouse, there is no discrimination in who benefits in terms of tax treatment. The tax rate in UK is 40% on the excess over the £325,000 threshold.
In France, assets passing to the spouse have also been tax free since 2007, but this is where the similarity ends in terms of potential taxation. Taking its lead from Code Napoleon, French succession laws put the children of the deceased at the forefront when determining who inherits, giving them Protected Heirs status. Who inherits, and that person’s relationship to the deceased, also determines what tax free allowance is available and following on from that what tax is payable.
Sons and daughters, both natural and adopted, can receive €100,000 each from the deceased’s estate free from tax, thereafter there is a sliding scale based on the amount inherited. But here’s the rub: step-children are not blood related, so the children’s allowance doesn’t apply to them and they fall into the category of ‘unrelated person’. As such they can only inherit €1,594 free from inheritance tax. The balance is taxed at the eye-watering rate of 60%.
Protected Heirs are entitled to receive the major share of the deceased’s estate, at the expense of the spouse, so structures need to be put in place to protect the spouse, such as wills, marriage regimes, family pacts etc. Generally, these relate to the property, but can also include more liquid assets such as bank deposits and investments.
When addressing the issue of shielding step-children from the severest level of taxation, at the same time ensuring the surviving spouse is properly looked after, one weapon in our armoury is the assurance vie, or life assurance investment bond. On the death of the bond holder, any beneficiary can inherit without discrimination. In the holder of the assurance vie was below age 70 when the policy was taken out, each beneficiary can inherit €152,500 without a tax liability. For amounts above €152,500 the tax rate is 20% or 31.25% if the amount inherited is above €700,000. This is per beneficiary and not per assurance vie. But what if I don’t want my money to pass to my children or step-children on my death, but rather to go to my spouse?
This is where it gets clever! By inserting a Demembrement Clause within the assurance vie policy, your spouse can be granted usufruit or life interest in the assets held in the policy, thereby ensuring protection to him or her.
And there’s more. By drawing capital out of the deceased’s policy, the spouse is creating a debt that will be repaid on the spouse’s subsequent death, paid for out of his or her estate, thereby further reducing the amount of any inheritance tax liability. This is what we call true financial planning, and this forms the bed-rock of what we do here in Spectrum.
If you have personal or financial circumstances that you feel may benefit from a financial planning review, please contact me direct on the number below. You can also contact me by email at derek.winsland@spectrum-ifa.com or call our office in Limoux to make an appointment. Alternatively, I conduct a drop-in clinic most Fridays (holidays excepting), when you can pop in to speak to me. Our office telephone number is 04 68 31 14 10.