Article 3 of a series of specialist articles written by David Anderson of Sykes Anderson, Solicitors, London.

PREOWNED ASSETS JUNE 2004

Please note that taxation is a complex subject and you should not take or refrain from taking any step without full independent advice on the particular facts of your case. The content of this article is of a general nature and no liability is accepted in connection with it.

Conversation with Saul Brownstein and Nicola Zoumidou on the way the Budget 2004 proposals and the 'reservation of benefit' rules will affect French property.

Q. The Budget 2004 has introduced an income tax charge on pre-owned assets. How does this work?

A. From 6th April 2005 you will probably have an income tax liability if you occupy a property of which you have given all or a share to, say, your children or a trust, with a view to avoiding Inheritance Tax ("IHT") on your death. In simple terms if you have given the property away, but reserve any rights to use it or benefit from it, then either you will have to pay income tax on it or it will be subject to IHT on your death.

Q. Will the new rules apply to homes abroad?

A. Yes. The Finance Bill expressly includes overseas homes. Take the case of simple gifts of money from you to your children who then buy the French home in their name and let you live in it; the existing legislation relating to "gifts with reservation of benefit" already catches this and deems the French property to be part of your estate. You are liable to UK IHT on overseas property if (broadly) you are UK domiciled, though this is subject to any double tax treaty which may overrule UK law.

Q. So, for UK IHT purposes, if I give money to my children (the transfer being a Potentially Exempt Transfer) and they buy the property but I live in it, or use if for holidays, it will end up being taxed in the UK to IHT on my death?

A. Yes. In fact what will happen is that any tax payable in France will be credited against your UK tax liability. The French tax liability as a legacy to your children will probably be less than the UK IHT. As you are UK domiciled you are taxable on your worldwide estate and in your case the French property will be taxed at 40% taking into account your other assets in the UK.

Q. Is there any way around this? I want the children to have the French house tax-free but I want to have the use and control over it until I die.

A. Yes. You could buy the property "en usufruit". This means that you have the use and benefit of the property exclusively until you die whereupon your children will own it. It is broadly similar to an English life interest trust.

Q. What actually happens on my death?

A. For French tax purposes no tax is payable provided the usufruit has been set up correctly at the outset. The property passes automatically to your children. Usufruits are commonly used for this purpose in France.

Q. Will I have to pay Inheritance Tax in the UK under either the gift with reservation rules or the Budget 2004 rules?

A. If you are UK "domiciled" you will probably be liable. This is because of the gifts with reservation of benefit rules. If you are French resident you will not have to pay any UK tax because the double tax treaty between the UK and France will exempt you. This is very useful in your case. It means you can simply side step all the UK's hostile IHT rules on your property.

Q. Does this apply to any French investment properties I may buy?

A. Yes. If you are in receipt of rents the UK will view this as a reservation of benefit. However, if the property is in France and you establish a French domicile the usufruit will exempt you from IHT.

Q. How do you decide if I am UK or French domiciled?

A. You look at the provisions in the double tax treaty. Broadly if you live in France most of the time you should be able quickly to establish a French domicile for these purposes. This "treaty domicile" is not the same as the classical concept of "domicile" so specialist advice is needed here.

Q. Can I keep a UK property for occasional use?

A. Yes, this is possible. It is best to rent the property out initially to help establish a French domicile and to show that your centre of interests is in France. After a few years you could have the property available to you in the UK for holidays back here.

Q. What are the other implications I need to consider?

A. There are many! The key to retiring successfully in France both for your personal happiness and financial well-being is careful planning. Do not be seduced by first impressions or do anything in haste. Consider all the options and if you have any doubts try it out first before committing yourself!

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David Anderson can be contacted at:

Sykes Anderson Solicitors
31 Bury Street London EC3A 5JJ

Tel: +44-207-702-1914
or fax +44-207-481-2840.
Or by email at: solicitors@sykesanderson.com

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