Gifting fairly and squarely
Article up to date as at 1 November 2020, drafted in accordance with French legislation in force,
and applicable to individuals whose tax residence is in France.
A gift is an irrevocable relinquishment of possession. For the donor, it is also an effective wealth engineering tool. Many people looking at how to transfer their wealth in their lifetime have a particular goal in mind: to help their children achieve a particular milestone, to prepare their estate and limit any disputes over the attribution of assets, or to spare their heirs the burden of inheritance tax. Transferring wealth in one’s lifetime is a complex affair. Moreover, the donor may only take advantage of the allowance and lower tax band every 15 years. The donor must therefore make carefully-considered choices to get the most out of his or her act of generosity.
Gifting fundamentals
As a starting point, the donor should be fully aware of the fact that gifting is an irrevocable act, except in cases of ingratitude, failure to perform attached charges (as declared by a court judge), or the donor outliving the beneficiary. A gift is always made without ulterior motive, and may come with “charges” or “special conditions”, such as the inability to give away, sell or transfer the gift to the beneficiary’s family (spouse), the obligation to pass down the gift to the next generation, or to provide for the donor’s needs. The gift may also be made on a given date or at a specified milestone – when the beneficiary graduates from university or embarks on a new life stage (birth of a child, signing a purchase agreement), etc.
The following questions can help guide donors in their choices.
What kind of rights do the gift confer?
First of all, the donor should give thought to the extent of powers conferred by the gift to the beneficiary. Does the donor mean to relinquish all rights over the asset in question, allowing the beneficiary to dispose of it as he or she sees fit? Or does the donor wish to continue to benefit from the asset and its income? Or perhaps the donor would like to give the beneficiary right to the income only. If so, would it be for life or for a set duration?
Indeed, the conferred rights must be qualified as either full ownership, bare ownership, life or temporary usufruct. The tax cost of dividing the attributes of ownership will depend on the value of the conferred rights, which is a percentage of the full ownership value which, in turn, is determined by the duration of the division. The usufruct value depends on the actual or theoretical duration of the usufruct – the younger the donor, the greater the usufruct value and the lower the bare ownership value. If the donor opts for usufruct with retention of income, therefore, the earlier he or she starts gifting ownership (bare ownership in this case) the better it is for the calculation of transfer duties.
What is the nature of the gift?
The second step is to consider the nature of the intended gift. Is it a gift of shares in a trading or non-trading company? A residential or investment property? A sum of money? A piece of art? The choice of gift too influences the transfer duties. With a share transfer, any liabilities in the company balance sheet are reflected in the value of the gifted shares. For cash gifts, in some cases, and subject to conditions, beneficiaries have a personal tax-free gift allowance of up to €32,000; while beneficiaries of company shares are entitled to a 75% tax rate allowance under the “Dutreil” scheme, as well as a gift tax reduction where applicable.
Who are the benificiaries?
Thirdly, the donor must determine whether the gift is for his or her children, spouse, parents, or siblings, or for third parties, non-profit organisations, employees, etc. Indeed, the donor and beneficiary need not necessarily be related. That said, the donor is bound by the reserved portion of his or her estate*. Barring any specific tax schemes (possible exoneration for structures deemed of public interest, tax advantages for employees who take over a business, etc.), the further the degree of separation from the donor, the higher the tax expense. So, while a donor can make a tax-free gift of €100,000 to his or her child every 15 years, it would cost €60,000 if the gift is made to a third party or to a family member beyond the fourth degree of kinship.
Choosing the right time
The final question is when is the best time to transfer one’s wealth. Indeed, the tax implications vary depending on the timing of the gift. That is why provisions should be made ahead of time in order to minimise duties, especially since the tax allowance and the progressive scale on which it is based only apply every 15 years. In other words, any gifts made less than 15 years before the donor’s death are not eligible to the arrangement, and will need to be declared for the calculation of the inheritance tax on the donor’s estate. Likewise, a gift with reserved right of usufruct will in theory cost more over time, as the scale for evaluating usufruct is based on the usufructuary’s age on the day the gift was made.
Choosing when to make a gift also depends on legislative windows of opportunity. For example, until 30 June 2021, donors can gift up to €100,000 each to their child, grandchild, great-grandchild or, in the absence of this lineage, their niece of nephew, without having to pay any transfer duties. This is on condition that the beneficiaries use this capital within three months to do renovations on their primary residence or upgrade its energy efficiency. Alternatively, they can use the capital to create or develop a small business in Europe with fewer than 50 employees, that is less than five years old, that operates in the industrial, retail, craft, agricultural or liberal sectors, has never paid out dividends, is not listed, nor is the result of a merger, and has a balance sheet of less than €10 million. In addition, the business must be managed by the beneficiary for at least three years.
To conclude, as a donor you must give due consideration to your act of generosity. Your choice is final and will have tax implications depending on your relationship to the beneficiary, when the gift is made, and the nature of that gift. A wealth engineer is the best positioned to give you a comprehensive overview of your options, as well as general advisory services.
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* The portion of an estate that must be transferred, free of encumbrance, to persons legally recognised as “privileged heirs".
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