CHFS – ANGLO-FRENCH FINANCIAL PLANNING BULLETIN NO. 2 MARCH 2012

In our January 2012 Bulletin we briefly introduced you to the new disclosure obligations imposed on trustees whenever the settlor or any of the Trust beneficiaries are resident in France or whenever French assets are held by the Trust.

This bulletin explores the second main French development impacting on Trusts, introduced by the French revised Finance Act of 29/07/11 – the assessment to French Inheritance Tax of the settlor or beneficiary of a Trust whenever it falls within scope.

French Inheritance Tax Treatment of Transfers Made via a Trust

Section II of new article 792-0 bis of the CGI renders all appointments of capital, gifts, or inheritances transferred via a trust, including accumulated revenue, liable to Inheritance Tax with effect from 31/07/2011. The tax rules affect both trusts already existing prior to this date as well as those created since.

I SCOPE

Article 792-0 bis applies whenever the settlor, a beneficiary or Trust assets are resident or located in France.

IHT territoriality, subject to any overriding double tax treaty provisions, is as follows:

I.i When the settlor (or beneficiary) dies tax resident in France:

A deemed transfer occurs and French IHT is assessable on the whole of the assets held in trust, whatever their location, whether or not the assets remain in trust or are distributed as a result of the settlor’s or beneficiary’s death.

I.ii When the settlor is not French tax resident, IHT is assessed:

Either:

On the whole of the trust assets, (or those assets which are identifiable to a relevant beneficiary) whatever their location, when a beneficiary of the trust is tax resident in France at the deemed date of transfer (death of settlor or beneficiary or trustee appointment of capital) and has been for at least 6 of the last 10 years,

Or:

Only those trust assets located in France when no beneficiary is French tax resident.

It is presumed that trust assets from which income has been received by a beneficiary in the past 12 months, forms part of that beneficiary’s estate for IHT purposes.

II METHOD OF TAXATION AND TAX RATES – BASIC RULES.

The basis for assessment and the calculation of IHT payable on transfers realised via a trust differs according to whether or not they can be classed as a donation or inheritance from the perspective of French tax law.

If holdings remain in trust (on death of a settlor or beneficiary), tax is applied according to the same method as between successive beneficiaries of assets owned directly and absolutely.

II.i Transfers qualified as Gifts or Inheritances.

Typically this will cover settlements.

Tax is assessed according to standard tax rules, (the tax rate being determined by the degree of parental or civil relationship between the settlor and the beneficiary), based on the value at the date it is received by the beneficiary and adding this to the value of all other assets received as a direct beneficiary of the settlor in the 10 years running up to and including the dates of the transfer into and from the trust.

II.ii Transfers not qualified as Gifts or Inheritances under Statutory French Law.

In the main this provision encompasses most types of discretionary and flexible power of appointment trusts.

The death of the settlor (or beneficiary) is the triggering event for charges to tax “sui generis” irrespective of whether or not trust capital is appointed to beneficiaries at that time or later.

The method of taxation depends on the role played by living or future beneficiaries of the trust. Three cases are distinguishable:

a. Transfer of an identifiable portion of trust assets to an identifiable beneficiary on death of the settlor (or beneficiary):

IHT is charged as a function of the parental relationship between deceased and the new beneficiary. To the extent that IHT is in this case applied as under standard rules, the beneficiary can profit from favourable tax treatment, all conditions for doing so having been fulfilled. In particular, exemptions for bequests to recognised charities organisations are also able to be applied to transfers realised via a trust.

The tax assessment is made by adding the value of holdings placed in trust and received by the beneficiary on the death of the settlor to other assets they receive directly and included in the settlor’s estate.

b. Indivisible Transfer to Several Descendants of the Settlor

When on death an identifiable share of the holdings is payable as a whole but on an indivisible basis to several descendants of the settlor IHT is due at the top marginal rate of tax applicable to direct line descendants (currently 45%)

This scenario only covers the case where the beneficiaries are the descendants of the settlor. It therefore excludes cases where one or more of the beneficiaries are the spouse, an ascendant or any other beneficiary

We are still waiting for tax office clarification as to the notion of “as a whole”

In this case the IHT is payable by the trustees within the timescale allowed under standard rules (6 months for a death on the French mainland, 1 year otherwise), otherwise by the trust beneficiaries, who are jointly and severally liable.

c. Other Cases.

The residual value of the trust assets, net of any items covered by a. and b. above is charged to the highest marginal rate of tax applicable to unrelated parties, i.e. currently 60%

Scenarios which are notably caught by this provision are those where the holdings remain within the trust or when there is a wholesale, indivisible, transfer to beneficiaries, one or more of whom are not descendants of the settlor.

Again, in principle, the IHT is payable by the trustees although trust beneficiaries are also jointly and severally liable.

III EXCEPTIONS TO THE BASIC TAX RULES.

IHT (lifetime and on death) remains payable at 60% whenever:

a. The Trust has been created since 11/05/2011 by a settlor tax resident in France at the time the trust was constituted.

b. The Trust is resident in a State which does not have an agreement with France for exchange of information.

Table 1: Summary of Tax Rules as Apply to Transfers & on Death of Settlor:

Operation Nature of Transfer Nature of Asset/Beneficiary Tax Regime
Asset(s) transferred out of Trust Treated as a Donation or succession Standard IHT regime
Neither a Donation nor Succession (Discretionary & Flexible Power of Appointment Trusts) IHT rates according to nature of asset(s) and beneficiaries
- Asset share & beneficiaries identifiable IHT rates according to parental line
- Asset share identifiable & indivisible to several descendants 45%
All Other cases 60%
Assets Remaining in Trust 60%
Trustee in non co-operating state All cases 60%
Trust established by French resident post 11/05/11 All Cases 60%

IV CONCLUSION.

Bearing in mind that direct transfers on death to surviving spouses and civil partners are French IHT exempt, as are the transfers of certain assets, (such as life policy proceeds), these new tax rules are particularly draconian.

When combined with the disclosure requirements discussed in our January 2012 bulletin, it is clear that the French administration wishes to strongly discourage the use of anything other than the simplest form of trusts in any sort of planning which involve a French resident settlor or beneficiary and/or French located assets.

If any of your clients fit this description then it would be advisable to review the present arrangements.

Great care will need to be taken in drawing up a plan for allocation of trust assets when the settlor or a beneficiary becomes French tax resident, if the penalising French IHT rates applicable to trusts are to be avoided. UK IHT planning tools such as Bypass Trusts will tend not to be suitable when the scenario falls within the French tax scope.

If any of your clients are thinking about moving or intend to move to France than the best time for any planning is of course before they move since this usually allows for adjustments to be made outside the scope of French tax. Once they have moved any such modifications need to make prior consideration of the French tax consequences of the transaction itself.

For further information and details of how Charles Hamer Financial Services can help you and your clients adjust their planning around these French tax changes please contact me, Jon Pawsey, on 01844 218956 or by email: jon@charleshamer.co.uk Visit our website: www.charleshamer.co.uk for full details of our Anglo-French financial services.

As FSA authorised and regulated Independent Financial Advisers specialising in Anglo-French planning since 1988, Charles Hamer are always up-to-date with the external developments affecting clients with differing French interests and realise that the same information will not always find itself across the channel to professionals such as you.

Click here to see related articles French Taxation of Trusts 2012 Disclosure Deadline Announced http://www.charleshamer.co.uk/downloads/French-Taxation-of-Trusts-2012-Disclosure-Deadline-Announced.pdf

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