How to Reduce Tax Liability by Tens of Percent – A Guide to Inheritance Planning in France
If you own assets in France or plan to purchase assets in this country, it’s important to know: France has a high inheritance tax that can reach 60% of the inheritance value. Your heirs could easily lose tens of percent of their inheritance – even if they are not residents of France.
France has complex rules for taxing inheritances with substantial implications for heirs. Early understanding of French law and advance planning of wills, residency, and lifetime gifts can significantly reduce exposure to tax payments when transferring assets between generations. Beyond that, it can prevent legal disputes, delays in the inheritance process, and unexpected demands from various authorities.
Inheritance Tax in France – What You Need to Know?
In France, unlike Israel, there is no comprehensive exemption for inheritances. The French inheritance tax is imposed on the heir after receiving the assets. The tax is progressive and increases according to the family relationship between the deceased and the heir, their place of residence, and the value of the assets.
Who is Required to Pay Inheritance Tax in France?
The answer depends on the place of residence of both the deceased and the heirs.
If the deceased was a resident of France or the heir is a resident of France (at the time of transfer and for more than 6 out of the last 10 years), the assets received by the heir, whether located inside or outside France, are subject to inheritance tax.
If neither the deceased nor their heirs are French tax residents, only the transferred assets located in France are subject to French inheritance tax.
What is the Inheritance Tax Rate in France?
- Parents, children, and descendants – Tax rates range from 5% for inheritance up to €8,072, to 45% for inheritance over €1,805,677.
- Siblings – Tax rates range from 35% for inheritance up to €24,430, to 45% for inheritance over this amount.
- Other relatives up to the fourth degree – Fixed tax rate of 55%.
- Distant relatives or others – Fixed tax rate of 60%.
Inheritance Tax Relief
- Married spouses – Exempt from inheritance tax.
- Children/Parents – Personal exemption of €100,000.
- Siblings – Personal exemption of €15,932. The deceased’s siblings are exempt from inheritance tax if they meet one of three conditions: single/widowed/divorced/separated at the time of death; over 50 years old/disabled at the time of death; lived continuously with the deceased for five years preceding their death.
- Nieces/Nephews – Personal exemption of €7,967.
- Heirs with disabilities – Additional exemption of €159,325 (if certain conditions are met).
These rules highlight the complexity of inheritance taxation in France, especially regarding the residency of the deceased and heir, exemptions, valuation, and more. Understanding French law is important for efficient tax planning.
Gift Tax
Gift tax is an important part of planning for intergenerational asset transfers. Often, when asset owners are exposed to high inheritance tax, the option of transferring assets as gifts during the donor’s lifetime arises, thinking this is preferable to bequeathing in the future. However, it should be taken into account that gifts may be subject to tax at rates identical to or even higher than inheritance tax.
In France, gift tax is calculated at rates similar to inheritance tax. Therefore, if large gifts are transferred, they may be subject to tax. However, there are exemptions and mitigating arrangements for business gifts or gifts from first-degree relatives, subject to certain conditions.
Therefore, early planning for inheritance and gift tax is essential when transferring assets between generations. Proper planning allows you to maximize existing exemptions, significantly reduce tax liability, and ensure that assets are transferred to the next generation in an orderly and efficient manner.
Inheritance Taxation in Israel Compared to France
In Israel, unlike France, there is no estate tax or inheritance tax. However, in certain cases, tax may be imposed on the full value of the inheritance received, such as capital gains tax when selling the asset.
The tax treaty between Israel and France includes provisions that can prevent double taxation, but it is important to plan the reporting and filing accurately to avoid double payment.
To read the treaty in French on the Ministry of Finance website, click here.
Making a Will in France – The Key to Tax Savings and Dispute Prevention
Inheritance does not always transfer smoothly to heirs. Sometimes complex procedural steps are needed to obtain a probate order or permission to realize the assets.
Creating an organized will is not just a matter of personal desire; it is an integral part of estate taxation. A detailed will can ensure that assets are transferred smoothly and efficiently to the heirs. The will should include the wishes of the deceased but must also be adapted to the requirements of the law so that its validity is not compromised.
When drafting a will, it is often possible to choose the law that will apply to it. When dealing with assets in France, this choice can have a substantial impact on inheritance planning and its future realization. For example, a French person who is also Israeli can choose to apply Israeli law to their estate even if they live in France and their assets are in France. A testator might want Israeli law to apply rather than French law due to the limitations of French law. For instance, according to French inheritance laws, children are forced heirs whose share cannot be diminished.
Without advance planning, i.e., inheritance without a will, the law that will apply to the deceased’s assets will be the law of the deceased’s last and principal place of residence. For example, if the last place of residence is in France, French law will apply to the inheritance in Israel. This means that the deceased will not be able to bequeath their assets in Israel as they wish, but part of their estate will be reserved for their forced heirs under French law.
If you own assets in France, our recommendation is to make a will to ensure that the transfer of assets is done as smoothly as possible. A will can prevent misunderstandings or lengthy legal processes and ensure that the process proceeds in an orderly manner even after the death of the deceased.
6 Steps to Inheritance Tax Planning
1. Background Check
First, examine the type of asset to be inherited, its location in France, the identity of the heirs, the value of the asset, and more.
2. Checking the Residency of the Deceased and Heirs for French Inheritance Tax Purposes
Individual Residency in France
According to the law, an individual will be considered a resident of France for tax purposes if at least one of the following criteria is met:
- Their main residence is in France.
- They are physically present in France for more than 183 days a year, either with their spouse and/or children, or independently.
- Their profession, occupation, or main work is in France (in terms of time spent or income derived from such activity); or
- Their center of their economic interests is in France (most of their income and profits come from a French source)
For more information on how an individual is considered an Israeli resident for tax purposes, click here.
3. Calculating Inheritance Tax
After determining residency, the inheritance tax that will apply to each heir can be calculated according to their relationship with the deceased and the amount transferred to them by inheritance. As part of the calculation, various exemptions applicable in France should be considered.
4. Examining the Impact of the Tax Treaty Between Israel and France
In light of the existence of a double taxation prevention treaty, it is recommended to check whether there is a mechanism for crediting tax paid in France against tax liability in Israel. Make sure that the reporting is done correctly and accurately to avoid double payment.
5. Checking the Future Effects on the Asset
It is recommended to examine the future effects on the asset, for example, a future sale of the asset will often be subject to capital gains tax in Israel as well.
6. Building a Strategy for Optimal Inheritance Tax Planning
The goal is to transfer the inheritance to heirs in Israel in the most tax-efficient way, while addressing legal issues in Israel and France and issues related to banking and regulation. For example, whether it is better to realize a certain asset in France or transfer it to Israel, whether it is advisable to give gifts during lifetime, how to transfer inheritance funds from France to a bank account in Israel, and more.
To reduce the value of the estate or exposure to this tax and decide which solution is better to implement, an in-depth examination of the circumstances on an individual basis is necessary.
How Can We Help?
Nimrod Yaron & Co. has extensive experience in inheritance tax planning in France and in accompanying Israelis in international inheritance realization processes. Our team of expert lawyers will be happy to assist you in optimal tax planning and in realizing the inheritance of assets in France.
We collaborate with all relevant professional entities in France and Israel and offer legal solutions both in terms of taxation and banking, tailored to the circumstances of the case.
If you wish to bequeath assets in France in the future, our lawyers specializing in inheritance taxation will be happy to advise you on this matter – contact us.
Q&A
Why is it important to plan the transfer of assets between generations in advance?
The transfer of assets between generations from abroad is not just a family matter but also a tax and economic issue. Early planning, considering legal issues in Israel and abroad, can save a lot of money and prevent legal complications.
Can I bequeath all my assets in France to one child?
If the law that applies to the asset is French law, not always. In France, inheritance law provisions limit the possibility of disinheriting certain heirs (forced heirs).
How can the inheritance tax liability in France be reduced?
Through early planning, which includes drafting a will, utilizing exemptions, giving gifts during your lifetime, and more, you can significantly reduce your tax liability.
What are the implications in case there is no will?
In the absence of a will, the inheritance will be divided among the legal heirs according to French inheritance law.
Is it better to give an asset as a gift during lifetime or to bequeath it?
The choice between giving a gift and bequeathing depends on the circumstances of the case. Sometimes a gift will be taxed similarly to an inheritance. Therefore, the legal and tax aspects should be examined before making a decision.
