15th September saw the first annual deadline for the declaration of assets held in trust.
These new rules basically involve two actions :
1. A special declaration is made by the Trustees of any trust which has a French resident beneficiary or Settlor, stating the value and detail of assets in the trust on 1st January 2012 and any action taken since 1st July 2011. As mentioned, the deadline was fixed at 15th September and will be the 15th June from next year onwards. No specific form for declaration has been produced, so we have assumed that a simple letter is expected.
2. The French resident settlor or beneficiary should be including the trust assets in all tax declarations, as if they were in his/her name. Thus any trust income and gains should be included in your income tax return, the value of trust assets should be included in your wealth tax return, for those concerned, and eventually included in your estate for inheritance tax purposes.
The penalty for non declaration is high, with a fine of 5% of the trust assets, minimum € 10,000, plus a wealth tax charge of 0.5% of the trust assets, so it is obviously important to make some form of declaration. It is difficult to see how the French authorities can enforce this declaration against foreign trustees, and it is likely that many do not even know about the new rule, but the problem is that the French resident beneficiary or Settlor is jointly liable for ensuring that the declaration is made.
Discussions we have had with many of you have shown that a considerable number of British expatriates have become unwittingly caught up in these new rules and that many of you genuinely consider that the assets concerned are really not “yours”, so you would find it very hard if you had to pay tax on them.
The question is whether you have any argument for not including the income and assets in your future tax returns, even if you have to make the special trust asset declaration, to inform the French authorities of the existence of the trust.
You must remember that we are not lawyers and cannot be held responsible for any non-declaration of income and assets. The aim of the following is to provide some logical arguments for any of you, who are concerned by the new rules, in your discussions with your local tax office, which might allow you to reduce the tax consequences of these new rules for the future.
Some common examples that we have come across in our discussions with clients are :
1. You are the capital beneficiary of a trust set up through the will of a parent in the UK or the US, which allows a life interest to your surviving parent.
Your trustees therefore have the new declaration to make and, in theory, you are liable to income tax on trust income and wealth tax on the assets, when you receive no income whatsoever, and have no right to touch the capital until the death of your surviving parent.
In fact, French law caters for exactly this situation, with the idea of the “dismemberment of property”, where a French will leaves the “nue-propriété” (the capital) to a child and the “usufruit” (the right of use) to the surviving parent. The surviving parent thus receives all income and the “child” cannot touch the capital until that person’s death. In that case, it is logically the surviving parent, who pays the taxes.
Whilst the legal principle of trusts is completely different , we have in the past argued successfully with local tax offices, that the tax treatment of this type of trust should be the same and that the French resident beneficiary should have nothing to declare until the death of his/her surviving parent. Whether or not this will continue to be accepted under the new rules is unclear, but it is certainly a logical explanation, which allows the French authorities to relate the trust to a situation they know well.
2. You are the Settlor of a trust of which you are NOT a beneficiary.
You may have set up a trust, for your grandchildren’s education for instance, which is irrevocable and gives you no possibility of recovering the capital, nor using the income.
It would be important that the trust was settled before you became French resident, since the whole point of the new rules is that setting up a trust in no way changes your ownership of assets.
It would also be important that NONE of the beneficiaries are part of your French “tax household”, nor even French resident.
However, on that basis there is an argument to say that the assets are not yours and were transferred to a separate legal entity under the laws of the country of which you were resident at the time.
It is less likely that the French authorities would accept this without “discussion”, since they will have difficulty accepting the transfer of ownership, when the trust was created, so it would be important to have all supporting documentation at the ready.
3. You are one of many beneficiaries of the income from a family trust, set up several generations ago.
In that case, you have almost certainly been declaring the trust income for income tax in France, but have never considered any of the assets as “yours”, since you have no control over them and will never receive a share. In the recent past a court case was won by an American, tax resident of France, against the tax authorities. She was one of many beneficiaries of a US family trust income. The court agreed that she could not be held to own any of the trust assets.
It is difficult to determine whether this will be taken into account under the new rules, but is one of the few situations, where case law exists on trusts in France.
In the case where you are one of several beneficiaries and will one day receive a share of the capital, then it is obviously logical that you should only declare your share, if it can be determined. It is our understanding that this will be accepted, on condition that supporting documentation can be produced. The problem remains that many such trusts are “discretionary”, which means that the share of each potential beneficiary is not defined.
4. You are the beneficiary of income from a trust that is domiciled in the UK and is therefore paying UK tax on its income.
This is a difficult one, since there is no obvious method of eliminating double taxation, since you personally have not paid any tax in the UK. In any case, the double tax treaty gives no protection against wealth tax consequences, once you have been here for more than five years.
On the other hand, one reading of the new double tax treaty between the UK and France appears to give the right to tax UK trust income to the UK authorities, with the French authorities obliged to recredit any tax generated by that same income in France.
There is a certain logic to this, since the UK Trust will always be OBLIGED to pay tax in the UK, but, unfortunately, we have already seen instructions given by the tax authorities to local tax offices, which suggest that they do not agree with this reading and that trust income is not covered by any of the dispositions of the treaty! The only exception would be a UK trust, whose only asset is UK immoveable property.
We remind you that we are not lawyers and double tax treaties are complicated legal documents, so we cannot give any legal opinion on who is right. In any case, it is clear that you would want to ensure that any tax paid in the UK is set off against the French tax bill, so it is vital to have details of the tax paid in the UK by the trust.
We know, from our discussions with many of you that these new rules are causing much confusion, anxiety and a feeling of injustice, since, in most cases, you had nothing to do with the setting up of the trust and have no power whatsoever to influence any decisions.
The important point is to remember that these new rules were set up to “catch” French tax residents, who have used foreign trusts to “hide away” certain assets, normally in tax favourable jurisdictions.
Unfortunately, the law does not take into account the fact that trusts come in all shapes and sizes, so we are hopeful that the tax offices will be willing to listen to logical explanations from those upright citizens, who have always tried to fulfil their obligations and have not been trying to hide anything.
However, there is no question that, for the future, a French resident should avoid involvement with a foreign trust, if at all possible.
David Hardy, Poitou-Charentes Regional Manager for Siddalls France, who have been providing impartial independent financial advice to the British community for over 15 years.
If you wish to discuss your own financial planning requirements in more detail, please contact our Head Office on 05 56 34 75 51 to speak to your local Regional Manager.