EXPLAINED: The French '5-year-rule' for inheritance tax
If you're researching French inheritance law or tax rules you might come across mention of the '5-year rule' - here's what this frequently misunderstood term refers to.
Estate planning is a generally complex topic, especially for foreign tax residents of France.
French inheritance law has its own quirks - for example you cannot disinherit your children - and inheritance can be taxed at up to 60 percent.
Death and taxes: What you need to know about estate planning in France
And if you're a foreigner either living in France or with assets (such as property) in France, you're likely to come across discussion of the '5-year rule' or sometime the '6 years in 10 rule'. These are often misunderstood, so here's a look at what they actually say and who they refer to.
What doesn't the 5-year rule affect?
First let's be clear on what we're talking about - this is to do with inheritance tax, not inheritance law.
French inheritance law enforces the principle for forced heirship, which means that you cannot disinherit your children and must leave them a fixed portion of your estate.
For foreigners living in France, however, it is possible to have your will administered under the terms of your home country - which means that French inheritance rules would not apply. Find out more here.
What does the 5-year rule affect?
What the length of your residency in France can affect is inheritance tax, and also the wealth tax - if applicable.
It's a common misconception, but even if you have stipulated that your will is to be administered under the terms of your home country, that doesn't mean that you will avoid French inheritance tax.
Inheritance tax is paid by the recipient of the inheritance and can apply if the recipient lives in France, or if the deceased lived in France or had French assets. The rate it is paid at varies depending on the relationship between the deceased and the heir, but it rises to 60 percent at the highest level.
Reader question: Why pays French inheritance tax?
Before reading on, you will need to determine if you are a tax resident of France. To do so, you can consult The Local's guide for tax residency.
French residency
When you become a French resident, several tax obligations will automatically apply to you, such as having to fill out a yearly tax declaration (and if you're American you will also need to report to the taxman any trusts that you are listed in, whether you are the beneficiary, grantor or trustee. You will not be taxed until distribution, but failing to report a trust can lead to steep financial penalties of up to €20,000).
READ MORE: What Americans in France need to know about trusts
If you die as a French tax resident, then the general rule is that the French taxman can consider your global assets for taxation purposes - so that would include assets in France as well as other assets eg property or shares in the UK or the US.
This happens even if you noted in your will that you wanted it to be treated under the laws of your home country.
Practically speaking, this means that your heirs would be required to pay French taxes - you can learn more about what to expect from our estate planning guide.
If your country has a tax treaty with France, it is possible that tax credits to avoid dual taxation might be available. In order to find out more, you should consult assistance from a cross-border tax specialist.
In the majority of cases, if you are a French tax resident, then France will consider your global assets for inheritance tax upon your death.
READ MORE: Reader question: Who is responsible for paying French inheritance tax?
Five years residency in France
There is however, one small exception to this - the 5-year rule.
The first thing to note is that it specifically applies to Americans - this is because of the France-US tax treaty which takes into account the fact that the US practices citizen-based taxation (rather than residency-based taxation as is more common).
If the 5-year rule applies, it means that only your French assets would be subject to French inheritance taxes, while cash, property, shares or other assets held in the US would be taxed there.
Be aware, however, that the 5-year rule does not apply to all Americans.
According to tax attorney Jérôme Assouline, who is admitted to the bar in both Paris and New York (and based in Paris) only in very specific cases can certain people maintain their fiscal domicile in the United States rather than France. This is outlined in Article 4 section 3 of the US-France estate tax treaty.
This applies to those who "can prove they are only temporarily in France," according to Assouline.
In most cases, it is applied to posted workers and their spouses, as they would be in France for a fixed period of time and would have the intention of returning to the United States.
It can only be applied if the person in question was living in France "less than five years during the 7-year period ending with the year of his death," the treaty states.
Wealth tax
There is one other reason you might hear about a 'five-year rule' - and that is in relation to the wealth tax (IFI), which can be applied to people with total assets worth more than €1.3 million.
For the first five years of residency in France, the wealth tax considers only assets based in France, not abroad. However, once you enter six years of residency in France then your global assets will be considered. This means, for example, if you own a home in London or New York, as well as in Paris, you might find yourself hitting the threshold of assets above €1.3 million.
The wealth tax might become relevant to you if you have been resident in France for over five years and you inherit a family home or another property outside of the country.
Once you have a high enough net worth to be considered for the wealth tax, you should consult the tax treaty in place between your home country and France to determine if any tax credits would be available. For Americans, as there is no wealth tax equivalent in the US, the French-US tax treaty does not offer tax credits to avoid double taxation.
Six out of 10 years
The other rule you might hear about is the '6 years in 10' rule - and this has to do with beneficiaries of a gift or inheritance from outside of France.
If you have been a tax resident of France for six out of the last 10 years, then you will likely have to declare any foreign inheritance you receive - for example if a relative in the UK dies and leaves you a UK property.
According to French tax authorities, anyone who is a French resident and has been one for six out of the last 10 years is liable to French tax on both "movable and immovable property located in France and outside of France that they inherit."
This includes "public funds, interest shares, assets or rights forming part of a trust, debts and generally all French or foreign securities of any kind."
As such, after six years of living in France, assuming you have reached the threshold for the size of the inheritance - which is over €50,000 for direct heirs or the surviving spouse/ civil partner, or over €3,000 for other heirs - then you must declare the inheritance to French tax authorities.
Depending on whether your home country has a tax treaty with France, you may be able to qualify for tax credits. For example, if you are an American receiving an inheritance from a parent in the United States, then the US assets are taxable in France, but France will provide a deemed tax credit to avoid double taxation.
Comments (1)
See Also
Estate planning is a generally complex topic, especially for foreign tax residents of France.
French inheritance law has its own quirks - for example you cannot disinherit your children - and inheritance can be taxed at up to 60 percent.
Death and taxes: What you need to know about estate planning in France
And if you're a foreigner either living in France or with assets (such as property) in France, you're likely to come across discussion of the '5-year rule' or sometime the '6 years in 10 rule'. These are often misunderstood, so here's a look at what they actually say and who they refer to.
What doesn't the 5-year rule affect?
First let's be clear on what we're talking about - this is to do with inheritance tax, not inheritance law.
French inheritance law enforces the principle for forced heirship, which means that you cannot disinherit your children and must leave them a fixed portion of your estate.
For foreigners living in France, however, it is possible to have your will administered under the terms of your home country - which means that French inheritance rules would not apply. Find out more here.
What does the 5-year rule affect?
What the length of your residency in France can affect is inheritance tax, and also the wealth tax - if applicable.
It's a common misconception, but even if you have stipulated that your will is to be administered under the terms of your home country, that doesn't mean that you will avoid French inheritance tax.
Inheritance tax is paid by the recipient of the inheritance and can apply if the recipient lives in France, or if the deceased lived in France or had French assets. The rate it is paid at varies depending on the relationship between the deceased and the heir, but it rises to 60 percent at the highest level.
Reader question: Why pays French inheritance tax?
Before reading on, you will need to determine if you are a tax resident of France. To do so, you can consult The Local's guide for tax residency.
French residency
When you become a French resident, several tax obligations will automatically apply to you, such as having to fill out a yearly tax declaration (and if you're American you will also need to report to the taxman any trusts that you are listed in, whether you are the beneficiary, grantor or trustee. You will not be taxed until distribution, but failing to report a trust can lead to steep financial penalties of up to €20,000).
READ MORE: What Americans in France need to know about trusts
If you die as a French tax resident, then the general rule is that the French taxman can consider your global assets for taxation purposes - so that would include assets in France as well as other assets eg property or shares in the UK or the US.
This happens even if you noted in your will that you wanted it to be treated under the laws of your home country.
Practically speaking, this means that your heirs would be required to pay French taxes - you can learn more about what to expect from our estate planning guide.
If your country has a tax treaty with France, it is possible that tax credits to avoid dual taxation might be available. In order to find out more, you should consult assistance from a cross-border tax specialist.
In the majority of cases, if you are a French tax resident, then France will consider your global assets for inheritance tax upon your death.
READ MORE: Reader question: Who is responsible for paying French inheritance tax?
Five years residency in France
There is however, one small exception to this - the 5-year rule.
The first thing to note is that it specifically applies to Americans - this is because of the France-US tax treaty which takes into account the fact that the US practices citizen-based taxation (rather than residency-based taxation as is more common).
If the 5-year rule applies, it means that only your French assets would be subject to French inheritance taxes, while cash, property, shares or other assets held in the US would be taxed there.
Be aware, however, that the 5-year rule does not apply to all Americans.
According to tax attorney Jérôme Assouline, who is admitted to the bar in both Paris and New York (and based in Paris) only in very specific cases can certain people maintain their fiscal domicile in the United States rather than France. This is outlined in Article 4 section 3 of the US-France estate tax treaty.
This applies to those who "can prove they are only temporarily in France," according to Assouline.
In most cases, it is applied to posted workers and their spouses, as they would be in France for a fixed period of time and would have the intention of returning to the United States.
It can only be applied if the person in question was living in France "less than five years during the 7-year period ending with the year of his death," the treaty states.
Wealth tax
There is one other reason you might hear about a 'five-year rule' - and that is in relation to the wealth tax (IFI), which can be applied to people with total assets worth more than €1.3 million.
For the first five years of residency in France, the wealth tax considers only assets based in France, not abroad. However, once you enter six years of residency in France then your global assets will be considered. This means, for example, if you own a home in London or New York, as well as in Paris, you might find yourself hitting the threshold of assets above €1.3 million.
The wealth tax might become relevant to you if you have been resident in France for over five years and you inherit a family home or another property outside of the country.
Once you have a high enough net worth to be considered for the wealth tax, you should consult the tax treaty in place between your home country and France to determine if any tax credits would be available. For Americans, as there is no wealth tax equivalent in the US, the French-US tax treaty does not offer tax credits to avoid double taxation.
Six out of 10 years
The other rule you might hear about is the '6 years in 10' rule - and this has to do with beneficiaries of a gift or inheritance from outside of France.
If you have been a tax resident of France for six out of the last 10 years, then you will likely have to declare any foreign inheritance you receive - for example if a relative in the UK dies and leaves you a UK property.
According to French tax authorities, anyone who is a French resident and has been one for six out of the last 10 years is liable to French tax on both "movable and immovable property located in France and outside of France that they inherit."
This includes "public funds, interest shares, assets or rights forming part of a trust, debts and generally all French or foreign securities of any kind."
As such, after six years of living in France, assuming you have reached the threshold for the size of the inheritance - which is over €50,000 for direct heirs or the surviving spouse/ civil partner, or over €3,000 for other heirs - then you must declare the inheritance to French tax authorities.
Depending on whether your home country has a tax treaty with France, you may be able to qualify for tax credits. For example, if you are an American receiving an inheritance from a parent in the United States, then the US assets are taxable in France, but France will provide a deemed tax credit to avoid double taxation.
Join the conversation in our comments section below. Share your own views and experience and if you have a question or suggestion for our journalists then email us at [email protected].
Please keep comments civil, constructive and on topic – and make sure to read our terms of use before getting involved.
Please log in here to leave a comment.