Many English trusts have a connection with France, often because they own French assets like a holiday home or involve beneficiaries, trustees, or settlors residing in France. Understanding how French trust rules apply is crucial to avoiding unexpected tax liabilities and legal complications.
Understanding French residency and its impact on Trusts
A person is generally considered a French resident for any calendar year in which they spend 183 days in France, even without a permanent home there. Additionally, a person may be deemed a French resident if their main home is in France. This makes it easy for an English trust to inadvertently acquire a French connection, particularly if there are numerous beneficiaries.
Why legal expertise matters
Navigating Anglo-French legal matters requires specialised knowledge. Sarah Walker offers expert assistance in preparing French Wills, advising on French estate and inheritance tax planning, and handling trusts with French assets.
What is a Trust?
A trust is a legal structure used in England and other jurisdictions to allow designated individuals (trustees) to manage assets for the benefit of others (beneficiaries). However, trusts are not recognized in the same way in France. Since 2011, France has imposed tax regulations on foreign trusts connected to the country, applying a broad definition of what constitutes a trust.
How English Trusts can acquire a French connection
Here are some common scenarios where English trusts may become subject to French regulations:
Case study 1: The Discretionary Trust
- Isobel Turner established the Turner Family Trust in 1989. It’s a discretionary trust with her children and grandchildren as intended beneficiaries.
- In 2019, Isobel’s great-nephew Zak spent eight months working in France and became a French tax resident.
- Despite Zak having a minimal likelihood of benefiting from the trust, its connection to France could trigger French reporting and tax obligations.
Case study 2: The Will Trust with French Assets
- Joseph, a UK resident, creates a Will trust for his wife and children, including his French holiday home.
- Upon his death, the trust will fall under French regulations due to the presence of the French property.
- A separate French Will could have bypassed these issues.
French Trust regulations and compliance
Foreign trusts connected to France must comply with strict reporting requirements, including annual declarations to the French tax authorities. Additional declarations are required if the trust is modified or terminated.
Non-compliance penalties:
- Fines of €20,000 or 12.5% of the trust’s total assets.
- French authorities can investigate up to 10 years of past non-compliance.
- Severe cases can result in criminal sanctions, including up to 5 years in prison and a €500,000 fine.
French wealth tax and inheritance tax
- Trusts may be subject to the annual French wealth tax at 1.5% of worldwide assets if the settlor or beneficiaries are French residents.
- French inheritance tax may also apply upon the settlor’s death or when assets leave the trust.
- Income distributed to French residents is subject to French income tax.
While the UK-France double tax treaty may offer relief, this remains a complex area requiring specialised legal advice.
How to avoid the French trust regime
To mitigate the risk of French trust rules applying to your trust, consider these proactive steps:
- Create a separate French will: This ensures French assets are dealt with under French law without interfering with your English will.
- Avoid trusting French assets: Unless absolutely necessary, consider other estate planning solutions for French properties.
- Exclude French residents as beneficiaries: Keep French residents off the beneficiary list unless unavoidable.
- Choose non-French trustees: Appoint trustees who are not French residents to prevent further tax complications.
- Seek legal advice before relocating: If a beneficiary or trustee plans to move to France, professional legal advice can prevent unforeseen tax exposure.
Do other countries have similar rules?
Yes. While French trust rules are well-known, other countries may also impose stringent regulations on foreign trusts with local connections. It’s vital to seek legal advice for any cross-border estate planning.
For personalised guidance on managing trusts with French connections, contact Sarah Walker . With her expertise in Anglo-French legal matters, she can help ensure your trust remains compliant and tax-efficient.
