A trust is created when a person (known as the ‘settlor’) transfers assets to two or more people or to a company (known as the trustees) and instructs them to hold the assets for the benefit of one or more people (known as the beneficiaries) – all of which is detailed in a trust deed. Anyone can be a beneficiary, including your spouse, children, grandchildren or even unborn children. A trust whose trustees are resident in a country other than that of the beneficiaries is called an offshore trust.
There are three main types of trust: an ‘interest in possession’ trust, a discretionary trust, and an accumulation and maintenance (A&M) trust, each of which is treated differently for tax and inheritance purposes.
Although in setting up a trust you in effect transfer ownership of a property, you can retain influence over the administration of the trust by drafting a ‘letter of wishes’. In some cases, you can reorganise the trust, e.g. by changing the trustees and/or beneficiaries.
Advantages of a trust may include protection of your property from economic and other vicissitudes, avoidance of inheritance tax (if you make your heirs beneficiaries) and delays in granting probate on your death, income tax advantages for you and the beneficiaries, the consolidation of assets held in different countries. An offshore trust can have the additional benefit of circumventing French inheritance laws.
Trusts aren’t cheap to set up or maintain. A typical set-up cost is between GB£1,500 and GB£2,500 and annual ‘running costs’ around £1,500 per year. As charges are usually unrelated to the value of the trust, the higher their value the more cost effective they become.
The main possible disadvantage of setting up a trust (apart from the cost) is that you or your beneficiaries must pay tax on their share of your assets. If you set up a trust in the UK and are a UK resident, you will be taxed on any gains made by the trust (i.e. increases in the value of the property held as an asset); if you’re resident in the France (or elsewhere) and return to the UK, you will liable for capital gains tax. Similarly, according to French legislation introduced in 1999, French residents must pay income tax on any foreign fiscal structure (which would include a trust set up in the UK, for example) in which they have at least a 10 per cent share. If your beneficiaries are UK resident, they may be liable for British income and capital gains tax, although they may avoid UK inheritance tax. There are, however, a number of exemptions to these rules and you should seek expert advice as to whether any of these would apply to your circumstances or those of your intended beneficiaries.
Tip: Setting up a trust for your French property is a complicated issue and you should obtain expert independent advice before doing so.
Pre-emption & Business Use
If the plot on which a property is built or the land which is sold with a property is over 2,500m2 (0.25 hectares/around half an acre), the Société d’Aménagement Foncier et d’Etablissement Rural must give permission for the sale according to the ‘pre-emption’ law (loi de préemption). This is usually a formality unless you’re contemplating buying a farm, a large estate or a vineyard.
It’s necessary to inform the notaire handling the sale if you’re planning to operate a commercial business from a property within three years of its purchase, as this will increase the taxes payable on completion.
This article is an extract from Buying a home in France. Click here to get a copy now.