Understanding Inheritance Tax Rules for British Nationals in France

Affluent individuals often navigate the complexities of managing assets across multiple jurisdictions. Effective legacy planning is crucial to ensure the efficient transfer of wealth to future generations. This article explores strategic considerations for high-net-worth (HNW) individuals, focusing on optimising property management and pension schemes for legacy planning. We use the example of a UK national living in France with multiple jurisdiction pensions, including assets held in the U.S. and property in France and the U.S.

Case Study: Strategic Legacy Planning for a High-Net-Worth Client with International Assets

This case study outlines a comprehensive legacy planning strategy for a high-net-worth client based in France, with substantial property assets in France, the UK, and the USA, and multi-jurisdictional pension schemes. The client has a family consisting of three children and five grandchildren. Our strategy is designed to ensure the efficient management and transfer of the client’s wealth to the next generations while minimising tax liabilities and respecting the client’s wishes for their legacy.

Client Profile

• Residency: France
• Nationality: British
• Assets:
  • Property in France, UK, and USA
  • Multi-jurisdiction pensions
• Family: 3 children, 5 grandchildren

Objectives

• Efficient Estate Planning: Ensure the client’s assets are distributed according to their wishes in a tax-efficient manner.
• Tax Optimisation: Minimise inheritance and estate taxes across jurisdictions.
• Wealth Preservation: Protect the client’s wealth from erosion due to taxes and legal complexities.
• Family Governance: Establish a family governance structure to manage and preserve the family wealth across generations.

Strategy

Property Management

• France: Given the implications of the French wealth tax (IFI), we may consider restructuring ownership of the French property through a ‘Société Civile Immobilière’ (SCI). This allows for easier management and transfer of shares to descendants, potentially reducing inheritance tax liabilities under French law.
• UK: For the UK property, consider holding it in a trust to benefit from the UK’s inheritance tax regime, which may offer opportunities for tax planning, especially concerning non-domiciled UK residents.
• USA: U.S. property requires careful consideration of Federal and state estate taxes. Establishing a Limited Liability Company (LLC) to hold U.S. property can provide flexibility, privacy, and potential tax benefits regarding estate planning.

Multi-Jurisdictional Pensions

Pensions in multiple jurisdictions present both challenges and opportunities for tax planning. It may be prudent to consider consolidating pensions where possible, and where not, leveraging the tax treaties between France, the UK, and the USA to optimise tax treatment. Specific strategies may include:

• QROPS (Qualifying Recognised Overseas Pension Schemes) for UK Pensions: Transfer UK pensions to a QROPS to potentially benefit from more favorable tax treatment in France, considering the double taxation agreement between France and the UK.
• French Pensions: Utilise available French pension wrappers that offer tax-efficient growth and withdrawals, aligning with the client’s residency status.
• U.S. Pensions: For U.S. pensions, including IRAs and 401(k)s, careful planning is needed to manage Required Minimum Distributions (RMDs) and the potential for double taxation. Utilizing tax treaties and considering the France-U.S. Estate Tax Treaty is crucial for minimising tax exposure.

Legacy Planning

To address the client’s desire to leave a legacy for their children and grandchildren, we may consider the following:

• Family Trusts: Establish family trusts in jurisdictions with favourable trust laws, such as the Isle of Man or Jersey, to hold assets and ensure controlled distribution to future generations.
• Life Insurance Policies: Use international life insurance policies to provide liquidity for estate taxes and other expenses, ensuring the preservation of asset value for the beneficiaries.
• Family Governance Structure: Create a family office or similar governance structure to manage the family wealth, including investments, education funding, and philanthropic endeavours. This ensures alignment with the family’s values and legacy objectives.

Conclusion

Through strategic planning and utilisation of international legal and tax optimisation structures, we can ensure the efficient transfer and preservation of the client’s wealth across jurisdictions, in line with their wishes for their family’s future. By addressing the complexities of international property ownership and pension schemes, we can minimise the tax impact and provide a solid foundation for the client’s legacy planning. This approach not only secures the client’s assets for their immediate family but also establishes a governance framework for wealth management that will benefit future generations.

Strategic Estate Planning: The Importance of a Holistic Approach

For high-net-worth individuals with assets spread across different countries, estate planning goes beyond basic will drafting. It involves a holistic approach that considers the tax implications, legal frameworks, and family governance structures of each jurisdiction. Effective planning aims to ensure the preservation of wealth and its transfer in a way that aligns with the individual’s wishes, minimising tax liabilities and legal complexities.

Property Planning Across Jurisdictions

• France: Owning property in France requires careful consideration of the French wealth tax (IFI) implications. A strategic approach involves restructuring ownership through a ‘Société Civile Immobilière’ (SCI), facilitating the management and transfer of property shares to descendants in a tax-efficient manner. This structure can significantly reduce inheritance tax liabilities under French law, offering a streamlined way to pass on wealth.
• UK: In the UK, holding property in a trust can offer substantial inheritance tax benefits, especially for non-domiciled residents. Trusts provide a flexible framework for property management, allowing for the controlled distribution of assets according to the settlor’s wishes, potentially shielding the estate from higher tax rates.
• USA: The complexity of U.S. estate taxes, both at the federal and state levels, necessitates a tailored approach. Establishing a Limited Liability Company (LLC) to hold U.S. properties can offer privacy, flexibility, and tax advantages. This structure allows for efficient estate planning and asset protection, catering to the specific needs of international property owners.

Managing Multi-Jurisdictional Pension Assets

High-net-worth individuals with pensions in multiple countries face unique challenges in optimising their retirement savings for tax efficiency. The goal is to leverage tax treaties and understand the nuances of each jurisdiction to minimize tax liabilities.

• UK Pensions: Transferring UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) can offer tax benefits for residents in France, taking advantage of the double taxation agreement between France and the UK.
• French Pensions: Utilising French pension wrappers can provide tax-efficient growth and withdrawal options, aligning with the individual’s residency status and financial goals.
• U.S. Pensions: Careful planning is required to navigate the tax implications of U.S. pensions, including IRAs and 401(k)s. The France-U.S. Estate Tax Treaty plays a crucial role in minimising the potential for double taxation.

Legacy Planning: Beyond Asset Transfer

Legacy planning extends beyond mere asset transfer; it’s about ensuring that wealth serves the family’s long-term goals and values. Establishing family trusts and utilizing international life insurance policies can provide liquidity for estate taxes and other expenses, preserving the value of the estate for beneficiaries. Moreover, creating a family governance structure, such as a family office, can manage wealth across generations, ensuring its alignment with the family’s legacy objectives.

In Summary

By optimising for tax efficiency, international properties, and pensions, and establishing robust legacy planning structures, it is possible to preserve wealth and ensure its efficient transfer. This approach not only secures the individual’s assets but also sets a foundation for future generations, aligning with the family’s values and long-term objectives. In the realm of international estate planning, foresight and strategic action pave the way for a lasting legacy.

Contributed by David Vacani Principal, Beacon Global Wealth Management

Disclaimer: This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations, or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. While every effort has been made to ensure the information contained in this communication is correct, it is subject to change, and we are not responsible for any errors or omissions.

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