French Mortgages and Inheritance Taxes in France
Thursday 18 August 2011
With a mortgage on your French property you may be able to reduce or eliminate your liability to French inheritance tax.
This is because, with a mortgage on your home, or other property in France, the outstanding debt is offset against the value of the property.
However, as all French lenders normally require that life insurance is taken out to cover repayment of the mortgage in the event of your death, this would rule out this option as a viable tax avoidance strategy, unless you were able to persuade a lender to grant a mortgage without obligatory life insurance.
In addition, as there is no inheritance tax between married couples and those in a French civil partnership, the value of a mortgage for this purpose is going to be restricted to those outside of these relationships.
If you are potentially liable then one strategy to reduce inheritance tax liability might be to retain the capital released from selling your current home, and then buy or improve your French property with a mortgage.
Alternatively, instead of funding improvements to your French home from cash resources, you could take out a mortgage to fund the work.
The mortgage repayments would be met from your current income (pension, salary, investments) whilst your retained capital would be kept in a savings account and regular withdrawals used to fund your revenue requirements.
Nevertheless, if you are resident in France, there are limits on the extent to which securing a loan against your home, or other property, can reduce inheritance tax liability.
This is because, even though the value of the fixed assets will be reduced by the level of the debt, if there are cash resources still available on death, then these will be taken into consideration for the purposes of French inheritance tax.
In addition, if the cash released by a secured loan is gifted to potential inheritors, then this will also form part of the inheritance calculation, if made within six years prior to death.
The longer the debt has been in existence, the less it is likely that the cash resources that were released will be a factor in the inheritance tax calculation. So it might pay you to not leave such action too late in your life.
Clearly, with this option you will also need to weigh the net cost of capital against your potential inheritance tax liabilities.
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