Time to review succession planning for French assets?
A controversial new law came into force in France on 1 November 2021 to apply, under certain conditions, French forced heirship rules even where a will specifies a foreign legal system should apply. This could have significant consequences for some UK residents with French assets, and we recommend that such individuals review their estate planning arrangements.
The principle of testamentary freedom is paramount under the law of England and Wales: a testator has free choice as to the recipient(s) of their estate, subject only to limited powers of the court to make provision for a defined class of people in certain circumstances. By contrast, domestic French law puts in place rigid rules as to who may inherit from someone’s estate and in what proportion. Where an individual has children, the children are entitled to a “reserved portion” of the estate.
A particular issue for individuals with estates subject to UK inheritance tax (IHT) is that French forced heirship can prevent assets passing directly to a surviving spouse, thereby triggering an immediate IHT charge on the first death.
Since 2015, the French regime has been subject to EU law, which, depending on residence and nationality, has allowed testators some choice. The new law purports to override this in some circumstances.
International Individuals: Brussels IV and Succession in the UK
Since 2015, the EU Succession Regulations (known as Brussels IV) have applied to assets in most EU member states, including France.
Brussels IV determines which country’s law would govern a testator’s estate on death, the default being the law of the country where the testator was habitually resident. This default position can be overridden if there is a closer connection to another country or the testator chooses to apply their law of nationality instead.
For example, an international individual with French and English connections and British nationality could elect for English law to apply to their worldwide estate, wherever they were habitually resident. Making such an election allows the testator to take advantage of English testamentary freedom. This reduces uncertainty as well as preserving specific choices as to estate administration, tax planning and any potential disputes which may arise.
Reinforcing the Rights
It seems that the French law-making bodies now consider that the EU rules requiring French authorities to apply another state’s succession laws are at odds with their objectives. Allowing an international individual with French connections to circumvent the rules guaranteeing inheritance for their children appears to be contrary to French public policy.
The new law applies to the French estates of EU nationals, someone habitually resident in an EU member state, or individuals whose child is a citizen or resident of an EU member state. If the foreign succession law which applies to the estate does not reserve a portion of the estate for the testator’s children, the children (or their heirs or beneficiaries) can obtain compensation enforceable against any property located in France at the time of death. French authorities would be allowed to re-allocate French assets for the deceased’s children to receive as much as of the reserved portion they would have been entitled to as can be obtained.
Whilst it is not yet clear on how these rules will be applied in practice, it is likely that the small amount of protection for children potentially afforded by English law will be insufficient to satisfy the requirements of the new law.
French notaires will have to inform any beneficiaries affected by this, who can then seek to enforce their inheritance or not.
A British Benefit?
Following the UK’s exit from the EU, if a testator (and their children) is not a national of, or habitually resident in, an EU member state, this new law will not touch them.
However, there will be many international and UK residents with EU connections who will be affected by this law. For example:
- Mrs A is a German-British national, habitually residing in the UK and deemed domiciled in the UK for IHT purposes. She has two children. She owns a property in St Tropez worth Eur 6 million. Mrs A makes an election in her will to apply English law to her worldwide estate, leaving the French property to her husband. Under Brussels IV, the property would pass to Mrs A’s husband under her will and no UK inheritance tax will be due because of the spouse exemption. The new French legislation provides that Mrs A’s heirs would be notified of their rights under French succession law. The children are entitled to two thirds of the property and, if they make the claim, there will be an IHT tax liability of Eur 2.4 million because the full spouse exemption will be unavailable (French tax will also be due, but there will be a credit between the French and UK tax).
- Mr and Mrs B are US nationals, resident in London, whose daughter is a French national. Mr B owns an apartment in Paris worth Eur 3 million. Mr B executes a will in accordance with the law of New York, intending to leave his estate to his wife. However, his daughter, being a French national, is able to enforce her right against his estate. The daughter is entitled to a one half share of the apartment and there is an immediate US estate tax charge of Eur 600,000 because the US marital deduction is unavailable (again, French tax will also be due, with a credit available).
In many cases, clients will trust their children not to override their wishes by claiming the reserved portion, particularly if doing so could give rise to a hefty tax bill. However, the position is not quite so simple. An omission to exercise a right may be chargeable to IHT for UK tax purposes, and so a child’s failure to claim their forced heirship right could have tax consequences for their own estate. Further, if the child is in the course of a divorce or other financial claim, there could be external pressure to claim the reserved portion. Add into the mix the very real possibility of family relationships changing, and it is clear that simply hoping for the best is inadvisable.
Que sera, sera
This law is significant and controversial because it clashes with and undermines Brussels IV (and the dominance of EU Law). It is therefore very likely that cases will come before the French courts and it remains to be seen how both these courts and the EU courts deal with these cases. There is general surprise that such a law has apparently been allowed to bypass EU law and some believe that the law will not stand up to scrutiny at the highest level.
From a French domestic law point of view, a similar mechanism, concerning French heirs only, was judged unconstitutional as being contrary to the principle of equality. We highly doubt that the extension to EU nationals and residents would be sufficient to overcome this infringement of the principle of equality.
In the meantime, succession planning arrangements should be reviewed in light of the new rules. Owners of French property who are affected by this change might wish to consider other means of avoiding French forced heirship, such as changes to one’s marriage regime or the options for joint ownership of property.