Luxembourg has an attractive tax system in terms of inheritance: no inheritance tax between spouses; no inheritance tax in the direct line within the limit of the extra-legal share and, above this, a lower tax scale than in neighbouring European countries.
In addition, gift tax rates can be advantageous or even non-existent when it comes to a gift of novable property not registered by a notary in Luxembourg. Inheritance in Luxembourg often have an international character, because the heirs are in one or more other countries, or because part of the assets being inherited are located abroad.
Impact of French rules for heirs in France
When an estate in Luxembourg passes to heirs and all or some of them are in France, the tax framework changes for these people. Indeed, France applies a very broad principle of territoriality in inheritance tax and gift tax. It is enough that an heir is tax resident in France for him to be liable for inheritance tax in France, even though the deceased was not tax resident in France and the estate does not include any property in France.
According to French law, anyone who has been tax resident in France for at least six out of the previous ten years is considered to be an heir who is tax resident in France.
Let’s take the example of a couple who are resident in Luxembourg with two children:
- one resident in Luxembourg
- the second living in France
The family’s assets are located in Luxembourg: at the event of the parents death, the child resident in France will be subject to inheritance tax in France, and possibly also to inheritance tax in Luxembourg if the amount of the child’s statutory inheritance is exceeded.
The child residing in Luxembourg will only have to pay inheritance tax in Luxembourg, if applicable.
In the case of a cross-border inheritance between Luxembourg and France, a French heir would therefore be liable for inheritance tax in France, of up to 45%.
In this situation of potential double taxation for the French heir, he would not be able to rely on the application of a double taxation treaty, as Luxembourg has not signed one with France in relation to inheritance and gifts.
In this context, life insurance is a very effective asset management tool enabling the transfer of assets in an advantageous way.
Indeed, if subscribed before the insured reaches 70 years of age, it enables the insured to have a capitalization wrapper available at any time; and it enables his beneficiaries to not be subject inheritance tax but only to a flat rate tax of 20% up to €700,000, and of 31.25% above this, on the value of the transferred capital, after a deduction of €152,500 per beneficiary.
The subscription of capitalization contract policy with a gift of the bare ownership of the policy to the heirs in France may also be of interest, depending on his objectives. The latter also enables him to accumulate his estate assets and to transmit a policy to each of his heirs, leaving them free to keep the policy and to continue the capitalization, or to dispose of it according to the personal needs and wishes of each heir.
In terms of tax, only the gift of bare ownership is taxed in France, and potentially in Luxembourg if it is registered before a Luxembourg notary.
At the time of death, the extinction of the usufruct does not entail the payment of additional inheritance tax.
In other words, different estate plans are therefore possible. Life insurance and the capitalization contract are flexible inheritance tools to be adapted to the personal situation and objectives of each person.
Please do not hesitate to contact us for more information on this subject.