Don’t let your family trust be undermined by French trust rules
Many English trusts will have a connection with France. This could either be because the trust owns French assets such as a holiday home, or because one or more person who funds the trust - such as a beneficiary, potential beneficiary, trustee or settlor - is resident in France.
A person will generally be French resident for any calendar year in which they spend 183 days in France even if they don’t have a permanent home there. A person can also be French resident in other circumstances, for example, where their main home is in France. So, it is actually very easy for an English trust to acquire a French connection – particularly where there are a lot of potential beneficiaries.
Working with a lawyer who has specialist experience in Anglo-French legal matters is a huge advantage when dealing with complex trust matters involving a French connection. Sarah Walker [add link to profile] regularly assists clients with preparing French Wills, advising on French estate and inheritance tax planning, and dealing with trusts that involve French assets.
A trust is a legal vehicle widely used in England and many other jurisdictions as a way of allowing one or more persons to hold legal title to assets such as money, investments or property, for the benefit of one or more other people.
In France, trusts do not exist, and it was only in 2011 that legislation was brought in to recognise for tax purposes trusts set up abroad. If an English trust has a connection with France, it must comply with French laws – and the French definition of a ‘trust’ for these purposes is very wide.
Trusts that are set up under someone’s Will when they die, or under the intestacy rules (the rules which apply where someone dies without a valid Will), could fall within the scope of French law even where the executors or administrators have no control over who should benefit from the trust or when. Even when the situation is clear cut, a trust could still be subject to French inheritance rules, which is why it’s always advisable to make a separate French Will when dealing with French assets.
The below case studies demonstrate some of the ways in which English trusts can acquire a connection with France. As you can see, these are everyday situations which could affect many families.
Isobel Turner established the Turner Family Trust in 1989. It is a discretionary trust, which allows the trustees to make certain decisions about how to use the trust income and/or capital. The potential beneficiaries are Isobel, her siblings, and their children and grandchildren. The intention is that Isobel’s children and grandchildren will benefit; her siblings and their families were only included as potential beneficiaries in case the intended beneficiaries don’t live long enough to benefit.
In 2019, Isobel’s great nephew Zak spent eight months working as an au pair in France. Although Zak is unlikely to ever benefit from the trust, he is a potential beneficiary and is likely to be regarded as French resident for 2019. Therefore, the trust may well be subject to the French regulations in 2019.
Joseph, a UK resident, makes an English Will leaving his worldwide assets to a flexible Will trust (. The potential beneficiaries of the Will Trust are his wife and children, who are all UK resident. All his assets are located in the UK apart from a French holiday home.
When Joseph dies, the trust will be subject to French regulations because it includes a French asset. This may have been the case even if he had left the French holiday home to his wife and children outright, because English Wills are often drafted in a way that falls within the very wide definition of a trust under the French rules. However, he could have sidestepped the issue completely if he’d made a separate French Will dealing with the French holiday home.
Foreign trusts that are subject to the French trust regime must make an annual declaration to the French tax authorities. Additional declarations must be made if the trust has been “modified” for example, through the distribution of income or capital, or brought to an end.
Severe penalties apply if the declarations are not made. There is a fine of the higher of 20,000 euros or 12.5% of the total trust assets for non-declaration - and the authorities can go back up to 10 years. In cases of deliberate failure to file, criminal sanctions of up to 5 years in prison and a 500,000 euro fine can also apply!
The trust may also have to pay an annual French wealth tax charge. This is charged at a rate of 1.5% of the worldwide trust assets if either the settlor or any of the beneficiaries are French residents. If this isn’t the case, then the annual charge is 1.5% of any French assets held within the trust. The wealth tax can be avoided in certain cases where the assets have been correctly declared, but the rules governing this are extremely complicated.
The trust may also be liable to French Inheritance Tax rules when the settlor dies, or when assets leave the trust during the settlor’s lifetime. The rate of tax will vary depending on the circumstances but can be as high as 60% of the worldwide trust assets.
Any income distributed from the trust to a French resident will be subject to French income tax. There may also be other French tax consequences in certain circumstances, such as stamp duty and capital gains tax.
The UK has double tax treaty agreements with France. In some circumstances these may provide some relief from French tax charges, however, once again, this is a very complex area and you should always seek specialist legal advice.
With careful planning and by consulting a solicitor with cross-border expertise Sarah Walker it is often possible to avoid the French rules. Some planning steps include:
- Putting in place a separate French Will to deal with assets situated in France
It’s important that the terms of your English and French Wills don’t conflict, for example, that the French Will doesn’t override your English Will in relation to non-French assets.
You’ll also need to consider the UK tax consequences of the French Will. For these reasons, it’s best if your English and French lawyers work together.
- Avoid putting French assets into a trust in the first place unless it’s absolutely necessary
The French tax and regulatory ramifications should always be considered and will often outweigh the benefits of using a trust.
- Avoid including people who are, or may become, French resident as potential trust beneficiaries unless absolutely necessary
If you think the French resident won’t need to benefit from the trust for the time being, you can give the trustees - or someone else - the power to add beneficiaries in the future. This means that the French resident can be kept out of the list of beneficiaries for now (avoiding French trust rules) but could be added as a beneficiary in the future if necessary.
- Avoid appointing French resident trustees unless absolutely necessary
If your chosen trustee is about to become a French resident, it might be a good idea to replace them as trustee. Changing your trustee may change the tax residence of the trust, however, which can have tax consequences in the UK.
It’s important to seek expert legal advice if you’re planning to change trustees.
- If a potential beneficiary is due to spend time in France, seek professional advice
Depending on the terms of the trust and your specific circumstances, it may be possible to take action to avoid the French rules, so consult a legal professional who will be able to assess your specific case.
Potentially! While French trust rules have been widely reported, there are some other countries which also impose onerous reporting and/or tax obligations on foreign trusts with a connection with that country.
You should always take legal advice whenever a trust has a potential overseas connection, or when conducting estate planning in relation to assets held overseas.