It is a tax on lifetime gifts as wells as on inheritances.
The tax is payable by the recipient depending on the value received and the degree of kinship with the deceased or donor.
If the donor or deceased is resident in France, French succession tax will be payable on their worldwide assets.
French assets are always liable to French succession tax regardless of where the deceased or recipient is resident.
In addition, succession tax is payable by a French resident who receives a gift or inheritance and who has been resident in France for at least six out of the 10 previous tax years.
However, under the special Britain/France Inheritance Tax Treaty, inheritances (not gifts) from a British domicile to a French resident recipient are not liable to succession tax in France, even where the recipient has been resident in France for more than six years.
The treaty also stipulates that if you die a resident of France and have any assets based in Britain, they will be subject to British inheritance tax, as well as French inheritance tax. However, any inheritance tax paid in Britain will be credited against the French tax due.
Inheritances between spouses are no longer liable to French succession tax. This exemption also extends to registered PACS partners (a civil partnership registered before a French court) in France. However, gifts between spouses and PACS partners remain taxable after an allowance of €76,988.
Children are entitled to an allowance of €151,950 (for 2008) each, and the tax rates on the excess range from 5 per cent to 40 per cent. The top rate of 40 per cent is only payable where the amount taxable exceeds €1.7m, therefore most beneficiaries will pay tax at a much lower rate. As each beneficiary has their own separate allowance and rate bands, succession tax can be substantially reduced if there are several beneficiaries.
Where the recipient is a more remote relative, the tax rates are higher and the allowances are lower. For example, the allowance between brothers and sisters is €15,195 and the tax rates are 35 per cent and 45 per cent.
The allowance for nieces and nephews is €7,598, with a flat tax rate of 55 per cent. Unrelated beneficiaries, including unmarried couples not registered under a PACS agreement, are liable to succession tax at a flat rate of 60 per cent with an allowance of only €1,520. This rate and allowance also applies to stepchildren.
For lifetime gifts, the allowances renew every six years. A child can therefore receive up to €303,900 (€151,950 from each parent) tax free every six years. A gift made more than six years before death falls out of account if it was declared at the time. However, a gift made less than six years before death must be cumulated with any inheritance from the deceased parent.
There is an additional specific exemption for cash gifts where the gift is made to a child, grandchild or, if there are no direct line descendants, to nieces or nephews, of €30,390. This is provided the donor is less than 65 years old and the donee more than 18 years old. In addition, the gift should be declared and registered by the donee at his/her local tax office within one month of the gift.
This exemption can be cumulated with other allowances, however, it does not renew after six years and can only be used once.
There are various ways of minimising liabilities to succession tax in France. An Assurance Vie is an extremely effective way of reducing or even eliminating succession tax liabilities. Where the policy is set up before you become resident in France, and provided the life assured is under the age of 70 at the time, the entire proceeds will be free of succession tax in France, regardless of the residence status of the recipient and deceased at the date of death.
Where the policy is set up once you are already resident in France, and again provided the life assured is under the age of 70, the succession tax position is still favourable as there is an exemption of €152,500 per beneficiary, with any excess being taxed at a special rate of 20 per cent.
Any benefit paid from an Assurance Vie policy to a spouse or PACS partner is free of succession tax regardless of when the policy was created and the age of the life assured at the date of creation.
Other ways of minimising liabilities on death include splitting the ownership structure of a property into the usufruct (life interest) and nue-propriété (bare ownership or freehold interest). It is usually preferable to do this via your Will rather than during your lifetime.
Trusts can also be a useful tool in succession tax planning, although advice specific to your circumstances should be sought, as this is a complex area.
When carrying out succession tax planning, you must take account of the French succession laws which reserve the right of children to inherit a certain portion of the parent's estate on death. There are various ways of circumventing these laws. For example if you adopt a Community Marriage Regime, all assets will pass immediately to the surviving spouse. You could also rearrange the ownership structure of your property, preferably before you buy, or use an Assurance Vie, since the succession laws do not apply to such policies.
Some information contained within this article may have changed since it was first published. HomesOverseas strongly advises you to seek current legal and financial advise from a qualified professional.