Wealth transfer in France: little-known options
French inheritance taxation
French inheritance taxes are a big deal. The larger the estate and the fewer the children, the higher the inheritance tax.
If you haven't taken any precautionary measure, a child inheriting 2m will leave a 30% of it to the taxman, even if the assets inherited are illiquid, thus forcing your child to sell in a rush. This quickly can turn into a poisoned chalice.
For higher amounts, the bill can rise up to 45%. Please find the scale here and a simulator here.
Which assets are subject to French inheritance tax?
for French residents or non-residents with a French-resident heir, all assets are taxable, whether they are located in France or abroad.
for non-residents with a non-resident heir, only French real estate is taxable, whether held directly or through companies.
note that the rules determining French residency are quite broad and depend on the source of economic interests, not just on the person's physical residence (rules and detailed cases).
Little-known options
For those who already know the classics and the not-so-classics inside out!
For those who need to refresh their memory, continue to the next section, "The Classics".
Option A: Taking advantage of expatriation
After a family expatriation of 7 years, donations on non-French assets are exempt of French gift tax (source).
Even if the donation is exempt of gift tax, it is not entirely free, as there are notary fees for the deeds of gift.
So in case you and your child plan to remain expatriates forever, you should avoid it. In all other cases it is advantageous, so you should definitely consider it: who can control where their child will choose to live?
You may want to gift the full ownership or the bare ownership only. This depends on the age of your child and the assets to be transferred.
I recommend that you rely on a good notary / notaries. It's important on the French side, to ensure that the transaction is properly validated by the French tax authorities. It's also important to find out whether any gift tax is due to your country of residence.
Option B: The "donation trans-générationnelle avec réincorporation"
When you know it, this option feels like magic.
If your parents made you a gift more than 15 years ago, they can reincorporate this gift to pass it on to your children. This reincorporation is subject only to a sharing fee of 2.5% of the asset's current value (plus around 2% of notary's fees).
The most common case is a gift of bare ownership. If you agree to it, your bare ownership can be passed on to your children.
Depending on your needs, you can choose to reincorporate only some of the assets originally donated, not all, and you can choose to keep a right of successive usufruct on all or some of the reincorporated assets.
I recommend you consult a good notary or tax lawyer, as retaining successive usufruct and donating to minors involve some subtleties.
Sources: BOI-ENR-DMTG-20-20-10 / a notary's article
Option C: Renouncing your inheritance
Another option may be to simply renounce your inheritance.
It's all or nothing, excluding what has already been donated, plus "assurance-vie". With a complete renunciation, your children will be able to share your 100k allowance. So passing on to an only child involves no additional cost.
It is also possible, if your parent's will mentions it, to have a ring-fencing option on certain assets, so that you can renounce only those assets. For the time being, this option remains subject to grandparent/grandchild rights, which is less advantageous because there is no 100k allowance.
I recommend you consult a good tax lawyer, so that you can prepare for this option upfront, together with your parents.
The classics
#1: Gifting bare ownership
Every 15 years, a parent benefits from an allowance of 100k to pass on to each child. As long as the parent is still alive, he can choose to pass on only the bare ownership (BO), which is worth less than the full ownership (FO) of the asset, especially when giving at a young age (see the scale).
Thus, the most far-sighted parent will be able to give 100k at age 35, then at age 50, then at age 65, then at age 80. Over the course of his or her lifetime, each parent can pass on a cumulated 890k without inheritance tax, which corresponds to 2.6m at the time of death (assuming death at 85 and a 3% asset return).
So, in theory, a couple of parents could pass on 5m of assets free of inheritance tax! (but with around 1% in notary fees).
If you didn't start young enough, all is not lost. The other classic option for passing on is...
#2: The French "assurance-vie"
The French "assurance-vie" is an attractive way of passing on up to 850k of financial assets per donor/recipient couple invested before the age of 70: the first 152k is exempt of inheritance tax, the following 700k is only subject to 20% tax. "Assurance-vie" is independent from the rest of your inheritance and therefore doesn't raise inheritance tax on other assets.
A parent will be able to pass on 2m to a child with 18.5% tax instead of 30%.
Also, after the age of 70, gains (only) are exempt from inheritance tax. It may make sense to pay in a limited amount (e.g. 400k, which will be subject to inheritance tax of 58k). With an aggressive risk profile and a long lifespan, it's not impossible to turn this 400k into 2m, leading to an effective tax rate of 3%.
Unlike inheritance and gifts, no notary fees apply, but you will have to pay higher annual account fees - they are at 0.6% for the best "assurances-vie" instead of 0.2% for the best investment accounts or PEAs.
The not-so-classics
#1: Assurance-vie with a dismemberment clause
A dismemberment clause in an "assurance-vie" can enable wealth transfer over several generations.
The usufructuaries are generally the middle generation, and the bare owners the grandchildren.
On the death of the donor, the usufructuary has two choices:
invest the money into a dismembered investment, which the bare owner will recover at death without inheritance tax
spend the money, and owe a debt to the bare owner - thus reducing other inheritance taxes upon his own death
Suppose you have an only child (C), who also has an only child (GC). He and his spouse (S) are between 51 and 60 years old when you die, so their usufruct is worth 50%. Here's an example of how to distribute the beneficiaries of a $2m life insurance policy:
Benefits
Give everyone (C, S, GC) enough cash to pay the 16.5% tax on the 2m
Give a reasonable reward to the middle generation: 150k and 120k can be spent freely by child C and spouse S.
Maximize the amount ultimately passed on to your grandchild (GC), 1.4m, via the 20% bracket
#2: Business transfer
If you contribute an asset to a company and then pass on shares of the company, you can pass on the asset in several instalments instead of one, and somewhat lighten the tax burden. For example:
passing on the bare ownership of a 2m property in one go at the age of 55 will generate 213k in tax, i.e. 11%.
adding this asset to a company enables a 2-instalment donation: 1m at age 55, with 78k in tax, then 1m at age 70, with 98k in tax, thus reducing taxation to 9%.
Your situation may fit one of two more powerful schemes:
1) Tu veux transmettre la nu-propriété une société opérationnelle, non immobilière, et peux t’engager à conserver les parts quelques années. Alors le pacte Dutreil permet de la transmettre avec un abattement de 75%. Tu peux donc transmettre la nu-propriété en une fois avec 28k de droits, soient moins de 2%.
2) You want to transfer bare ownership of a fairly profitable property (let's assume 6%) that you own directly.
You can set up a company that buys the property from you with debt and repays it with rental income (1.6m at 2% over 20 years).
The value of the company net of debt will be low, 400k, which reduces the gift tax to 18k, i.e. less than 1%.
If you don't have to pay capital gains tax, you'll get back 75% of the value of the property in cash, after paying 5% tax in property transfer and contributing 400k to your company.
This operation is known as an OBO (Owner Buy-Out) and must not be carried out with a primarily tax-related purpose, otherwise you can be considered guilty of tax abuse. It is therefore advisable to seek the advice of a tax lawyer.
About the author
Hello, you can call me Margot.
I'm a French expatriate living in Switzerland. I've been investing for 15 years.
With assets in the low millions, I'll probably never have a family office, so I have to stay in the driving seat. How can I grow my assets further and pass them on to my children?
AskMargot is my testimonial, that of a peer, to go further in wealth management.
You'll find unique content, more advanced than what you'll find on beginner investment blogs or in the wealth reports of French or Swiss asset managers.
Don't hesitate to contact me if you'd like to discuss your wealth strategy with a peer.
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