Inheritance tax – will I have to pay it twice? A Guide to Double Taxation

Charlotte Macdonald is an associate solicitor in Stone King’s international and cross border team. Over a 12-part series of articles Charlotte will answer legal and practical questions that are often asked by her clients in relation to buying or selling property in France, inheritance law, and how inheritance and capital gains tax are treated between the UK and France.

Inheritance tax is often said to be one of the most disliked taxes. The idea that a person earns money during their lifetime which is taxed, and then following their death it is taxed a second time, is not something that sits well with much of the population.

That said, for many reasons inheritance tax is not likely to be scrapped any time soon on either side of the English Channel.

For many families it is important to be aware of the Anglo/French double taxation agreement. Even though this sounds like a very dry piece of tax law, it is there to ensure that beneficiaries do not unnecessarily pay the same tax twice.

UK Inheritance Tax

As discussed in previous articles, both the UK and France levy a type of inheritance tax. In the UK it is a person’s ‘estate’ which is taxed.

For example Frank, who was domiciled in England, dies owning a home in England and a holiday home in France. He also has some savings in bank accounts in England. In total his assets are worth £1 million. Frank’s only outstanding debt at the time of his death is a mortgage of £100,000 on his English home. His net estate is therefore valued at £900,000 (£1 million – £100,000).

A few years before his death, Frank made a will under which he left all his assets to his two sons equally.

The inheritance tax in the UK is calculated on the net value of his ‘estate’. The inheritance tax rate in the UK is usually 40% and is levied on any amount over Frank’s estate’s available tax-free allowances.

After the tax has been calculated and paid, the remaining amount of Frank’s estate is split equally between his two sons, as per Frank’s will.

French Inheritance Tax

As Frank is domiciled in England, only Frank’s French property will be assessed for inheritance tax in France. In France inheritance tax is known as succession tax.

French succession tax is different to UK inheritance tax because it is the individual beneficiary who pays the tax, at a rate dependent on their relationship to the deceased.

In this scenario, the value of the French holiday home will be divided into two. Each of Frank’s sons will receive a tax-free allowance. Any amount they inherit over their tax-free allowance will be taxed on a sliding scale between 5% and 45%.

Because Frank’s beneficiaries are his children (and therefore fall into the same ‘class’ of beneficiary), they both pay the same rate of tax.

Which asset has been taxed twice?

In this scenario, the initial position is that Frank’s holiday home in France has been taxed twice: once by HMRC in the UK and once by the French tax authorities.

There is a double taxation convention between France and the UK which dates back to 1963. As it pre-dates the EU, no immediate changes in this convention are anticipated following Brexit.

Under the convention, it is confirmed that HMRC will allow a credit or refund of UK inheritance tax up to the amount of UK tax paid on the French property.

The convention helps Frank’s sons from having to pay inheritance/succession tax in both the UK and France on the holiday home.

What to watch out for

It is important that both your probate solicitor in the UK and your notaire in France are aware of the double taxation convention rules.

When administering an estate, the double taxation credit/refund will not happen automatically, it must be claimed and proof of the foreign tax paid must be provided to HMRC.

For more on how your estate will be affected by inheritance tax on your death, please contact Charlotte Macdonald, Dan Harris or Raquel Ugalde at Stone King LLP either by calling +44(0)1225 337599, or via email.