Inheritance Tax Advice (Succession Tax)

[Trailerman]

I wondered if I could beg some help.

Two years ago I was given a small flat in Paris by my Father, subject to a 'usufruit' (right to use) in his favour. French gift tax was paid at the time of the gift. Very recently he was diagnosed with a brain tumour and is now unlikely to survive the requisite 6 years from the date of the gift.

Please can somebody clarify two points on French inheritance tax law for me:

1. I assume the full value of the flat will be subject to normal (French) inheritance tax, irrespective of the usufruit, calculated on the basis of an open maket valuation, at the time of his death. Presumably the gift tax already paid will be deducted (?).

2. Am I right in understanding that the 156,000 euro allowance which children benefit from with succession tax, is a separate (additional) allowance to UK Inheritance Tax allowances on the estate of the deceased?

I have researched these issues as far as I'm able, but can't find definite clarity on these two points.

Many thanks in advance for any help or guidance.

Jules

[parsnips]

[quote user="Trailerman"]I wondered if I could beg some help.

Two years ago I was given a small flat in Paris by my Father, subject to a 'usufruit' (right to use) in his favour. French gift tax was paid at the time of the gift. Very recently he was diagnosed with a brain tumour and is now unlikely to survive the requisite 6 years from the date of the gift.

Please can somebody clarify two points on French inheritance tax law for me:

1. I assume the full value of the flat will be subject to normal (French) inheritance tax, irrespective of the usufruit, calculated on the basis of an open maket valuation, at the time of his death. Presumably the gift tax already paid will be deducted (?).

2. Am I right in understanding that the 156,000 euro allowance which children benefit from with succession tax, is a separate (additional) allowance to UK Inheritance Tax allowances on the estate of the deceased?

I have researched these issues as far as I'm able, but can't find definite clarity on these two points.

Many thanks in advance for any help or guidance.

Jules[/quote]

Hi,

    When the flat was given to you you got the "nue-proprieté" or "bare-title" and your father retained the "usufruit" ie; "life interest".  (I don't understand your reference to "6 years"--do you mean under UK inheritence law?)

   In french tax terms , at the death of the "usufruitier" the "nue-proprieté " is automatically re-united with the "usufruit" and the "nu-proprietaire" becomes the full owner with no french tax to pay. (The amount of gift tax paid took into account the probable life expectancy of the "usufruitier" when calculating the value of the "nue-proprieté" at the time the gift was made) .

   If you are a UK resident , there may be an IHT liability as I believe the UK regards the "life interest holder" as the beneficial owner of the asset so any transfer is the equivalent of the transfer of the full value. The UK will give relief equal to any french IHT paid, but in this case there is none--however, it may be that you can have the original "gift tax"paid set against the UK liability. Ask HMRC.

  The french 152 000€ allowance would not , I think, be transferable .

[Trailerman]

Hi, and thank you so much for your very detailed and helpful response.

With regard to the 6 year query - my understanding was that in France there is a 6 year rule, much like the UK's 7 year rule, and that gifts which are made within 6 years of death often have to be added back into the estate, in order to calculate the inheritance tax due, as they would in the UK if they were given within the 7 years before death. That said, your comment, that the gift tax paid took account of the life expectancy of the 'usufrutier' makes absolute sense. If I understand correctly, there would therefore be no additional French tax to pay.

I'm not sure I entirely follow your comments regarding UK inheritance tax. The reading I have done, seems to imply that French property assets are subject to French inheritance tax, and therefore not subject to UK tax (isn't this the point of a double taxation treaty - the individual pays tax only under one regime, not both?). Clearly if the property falls into the remit of the HMRC, then inheritance tax would be payable on the full value of the flat, given that the usufruit constitutes a 'beneficial use' and the time elapsed since the gift is less than 7 years anyway.

Needless to say, I'm very much hoping this is not the case.

Again, thank you so much for your help.

Kind regards

Jules

[Pickles]

First I must say that I am sorry to read of you father's illness and hope that it resolves itself as best as can be hoped for.

[quote user="Trailerman"]I'm not sure I entirely follow your comments regarding UK inheritance tax. The reading I have done, seems to imply that French property assets are subject to French inheritance tax, and therefore not subject to UK tax (isn't this the point of a double taxation treaty - the individual pays tax only under one regime, not both?). [/quote]

No. The point of a double taxation treaty is that it will set out that certain sorts of income, gain etc are taxed only in one country, but that other sorts of income, gain etc can be taxed in both countries BUT with credit being given in the country of residence for tax paid in the country where the income, gain, etc arose.

When there is no double taxation agreement, the income (gain, etc) can be taxed in both the country where it arose and in the country of residence, but with NO credit being given in the country of residence for tax paid in the country

where the income, gain, etc arose.

[quote user="Trailerman"]Clearly if the property falls into the remit of the HMRC, then inheritance tax would be payable on the full value of the flat, given that the usufruit constitutes a 'beneficial use' and the time elapsed since the gift is less than 7 years anyway.

Needless to say, I'm very much hoping this is not the case. [/quote]

The property will fall into the remit of HMRC's IHT, assuming that your father is UK-resident. However, as stated before, you may be able to gain credit for the French gift tax against any UK IHT payable.

Regards

Pickles

[Trailerman]

(I've had to remove all quotes because of formatting issues - my apologies if this makes the chain of communication a little hard to follow)

Thank you Pickles for your kind help and advice.

That's extremely kind. Unfortunately the prognosis is not good, but he's physically 'well' at the moment, and accepting without resentment, of a situation which the rest of the family finds a little harder to deal with. Thank you for your thoughts.

[double taxation] All clear. In essence all it means is that the 'home' regime takes precedence and simply doesn't charge twice for anything you might have paid elsewhere. Now I understand.

This being the case, it appears my father's 'usufruit' would have the opposite effect in the UK to it's effect in France. ie. In France it reduces the notional value of the property (thereby reducing the tax liability), because a right of occupation and use is retained, whereas in the UK it would breach the rules on gifting because the HMRC would consider it a 'beneficial interest', thereby making it liable to full inheritance tax, even if the 7 years from donation was passed.

Thank you pickles - all clear.

Can I perhaps ask if either yourself or Parsnips operate in a professional capacity as advisors in this area, in case I need to secure the services of somebody to provide a more formal opinion?

Thanks again so much for all the advice.

Kind regards

Jules

[Trailerman]

Sorry - formatting appears to be going awry. It looks fine in preview, but is then shown with html uninterpreted when posted - my apolgoies. I will try and sort out.

Jules

[Trailerman]

Message deleted

[cooperlola]

[quote user="Trailerman"]Sorry - formatting appears to be going awry. It looks fine in preview, but is then shown with html uninterpreted when posted - my apolgoies. I will try and sort out. Jules[/quote]Do you have a little icon like a page torn in half alongside the address bar?  If so this is the compatibility view and if you click it it often makes the website you're on work better.  Might not be that but worth a try!

[Trailerman]

Many thanks cooperlola - that may well be it.

 

I will try and use quotes next time I post.  For some reason it was showing the source code rather than the formatted post after it had been posted.

[parsnips]

Hi,

      No, I am not a professional (but did ,long ago ,in a junior capacity, work in Inland Revenue.)

  To clarify the "Double Taxation Treaty" situation, in addition to the treaty dealing with most types of tax , there is ,unusually, a separate treaty dealing with Inheritance Taxes( but not Gift Tax--thats why I was a little doubtful whether the french gift tax would be allowable).

   While the "normal" tax treaty does specify that certain types of income are taxable ONLY in the country of residence , or in some cases , origin, the IHT treaty has rules which determine where various assets can be taxed, and in the case of real property in one country belonging to a resident in another , the country of residence ( UK) if it imposes duty on an asset sited in the other (France)  must allow credit for IHT paid in the country where the real property is sited (France).

     This would seem to mean that ,as no tax is due in France, the property is subject to UK IHT, without credit , unless HMRC accept the gift tax previously paid as allowable--you would have to ask them about that.        

     Another point which could be made to HMRC is that the value of your inheritance (of the flat) should be based on the proportion of its value on which the french gift tax was imposed ie. if your father's usufruit was valued at 50% of the full value, then your inheritance of his part should only be valued as 50% of the full value at inheritance. Again you would have to take that up with HMRC.

[Trailerman]

[quote user="parsnips"]
      No, I am not a professional (but did ,long ago ,in a junior capacity, work in Inland Revenue.)
  To clarify the "Double Taxation Treaty" situation, in addition to the treaty dealing with most types of tax , there is ,unusually, a separate treaty dealing with Inheritance Taxes( but not Gift Tax--thats why I was a little doubtful whether the french gift tax would be allowable).
   While the "normal" tax treaty does specify that certain types of income are taxable ONLY in the country of residence , or in some cases , origin, the IHT treaty has rules which determine where various assets can be taxed, and in the case of real property in one country belonging to a resident in another , the country of residence ( UK) if it imposes duty on an asset sited in the other (France)  must allow credit for IHT paid in the country where the real property is sited (France). [/quote]

Thank you, I think I finally understand the implications of the double taxation treaty now - sorry for being a little slow on the uptake.   Selective understanding on my part I suspect.

[quote]     This would seem to mean that ,as no tax is due in France, the property is subject to UK IHT, without credit , unless HMRC accept the gift tax previously paid as allowable--you would have to ask them about that.[/quote]

I will query this with HMRC.  Given the current state of our public finances, I fear there will be little leway given if they can argue that French gift tax is not directly allowable against UK IHT, but it's got to be worth a try.

  
[quote]     Another point which could be made to HMRC is that the value of your inheritance (of the flat) should be based on the proportion of its value on which the french gift tax was imposed ie. if your father's usufruit was valued at 50% of the full value, then your inheritance of his part should only be valued as 50% of the full value at inheritance. Again you would have to take that up with HMRC.
[/quote]

I certainly like the idea!  Surely though, HMRC will look at the gift as having taken place outside the 7 year rule, and will therefore argue that full inheritance tax applies.  Further, they will presumably argue that the 'usufruit' represents a 'beneficial interest' and that therefore the notion of 'gift without reservation' was never satisfied when the original transfer took place.  This would mean that even if my father survives long enough for deductions to apply, or even for 7 years from the date of the gift, they will insist that IHT is still due in full.   I suppose the uncertainty here is whether or not they have regard to French law or simply assess the asset as if it were in the UK, when it comes to timescales and tax relief.

Thank you again.  I think I have more than enough to be going on with.  Any outstanding points I will raise with HMRC.

Regards

Jules