Wealth transfers: the next big reform?
Article up to date at 1 February 2021, drafted in accordance with French legislation in force, and applicable to individuals whose tax residence is in France.
According to a recent survey(1), eight out of 10 French citizens want to lower inheritance taxes. But not everyone agrees. In fact, taxes on wealth transfers have been a key topic of public debate for several months. The question is nothing new, but in 2021 a number of analyses fuelled the discussion:
A report by the OECD on inheritance taxation (May 2021)(2) maintained that inheritance taxes could do more to redistribute wealth and emphasized that “the inheritances and gifts reported by the wealthiest households (top 20%) are close to 50 times higher than those reported by the poorest households (bottom 20%).”
The Tirole-Blanchard report (June 2021)(3) proposed that inheritance tax should be beneficiary-based and take into account the total transfers received by the beneficiary throughout their lifetime.
More recently, a report by the Conseil d’Analyses Économiques (December 2021)(4) recommended “rethinking inheritance”.
Heightened challenges for wealth transfers
Wealth transfers pose real challenges that have been heightened by the excess savings accumulated due to the COVID-19 crisis, which the Banque de France estimated at nearly €170 billion at end-September 2021(5). Furthermore, people are inheriting wealth later in life: the average age for receiving an inheritance was 42 in the early ’80s, but it is 50 today and will be 58 in 2050, according to a report published by France Stratégie in 2017(6). This raises the question: how can this wealth be directed toward productive economic activities?
It should be noted that, among OECD member countries, France is an unusual case characterised by high taxes on both inheritance and capital. France has the third highest level of inheritance tax, which accounts for 1.4% of tax revenues. It is only surpassed by Belgium (1.46%) and South Korea (1.59%), while the average is closer to 0.5%.
What are the options for changing how we tax inheritance?
The various reports mention several possibilities that form part of a debate in which there are as many proposals to increase taxes as there are to reduce them. Meanwhile, the latest measures taken for transfers are meant to encourage people to transfer their wealth while they are still alive. In fact, that was the logic behind the temporary tax-free allowance of €100,000 for family gifts made between 1 July 2020 and 30 June 2021 that, to stimulate the economy, could only be applied to gifts that were used to improve energy efficiency, build a principal residence, or create or develop a new business. However, the conditions were very strict, so it had very little impact.
Other ideas could be considered to help encourage the movement of capital, such as:
Encouraging wealth to skip a generation by increasing the exemption for transfers from grandparents to their grandchildren. This is currently significantly better for gifts (€31,865) than for inheritances (€1,594), but it is still lower than the exemption for transfers from parents to their children (€100,000).
Reduce the tax reminder period (i.e., the length of time that gifts must be counted toward the exemption), which is currently 15 years (7).
Establish two different scales: one for gift tax and one for inheritance tax, incentivising people to give while they're still alive.
Adapt to changes in society by making it easier to transfer wealth outside the family(8) (transfers to heirs outside the direct family line are currently taxed at 60%) or even encouraging philanthropic endeavours.
Key factors that must be considered to properly prepare for transfers
The debate is ongoing but, whatever your priorities, we want to underline several points to put things into perspective:
1/ Planning ahead is still, and will always be, the most effective step you can take: assess the situation (what will happen if you die? How will that impact your business, both financially and in terms of governance?) and clarify your objectives.
2/ Solutions are available and, depending on your objectives, could require you to take several different steps (changing your matrimonial regime, drawing up a will, donating, and so on). Improving the tax base is often more effective than lowering the tax rate. It’s never too early or too late to plan ahead, even though there are some key moments when planning has more of an impact, such as before a sale of securities.
3/ Taxes aren’t everything! Some things are more important, such as protecting your loved ones, keeping the peace within your family, making sure your business can last, and so much more.
Our experts at Societe Generale Private Banking work alongside your wealth advisors to assist you in making these decisions.
(1) OpinionWay – Square survey conducted in January 2022 for « Les Echos » and Radio
(2) « Inheritance Taxation in OECD Countries », April 2021: https://www.oecd.org/tax/tax-policy/inheritance-taxation-in-oecd-countries-e2879a7d-en.htm
(3) « Les Grands Défis Economiques », Olivier Blanchard, Jean Tirole, June 2021 : https://www.strategie.gouv.fr/sites/strategie.gouv.fr/files/atoms/files/fs-2021-rapport-les_grands_defis_economiques-juin_0.pdf
(4) « Repenser l’héritage », Conseil d’Analyse Economique, December 2021 : https://www.cae-eco.fr/staticfiles/pdf/cae-note069s.pdf
(5) « L’Epargne réglementée », Banque de France : https://www.banque-france.fr/sites/default/files/medias/documents/rapport_er_2020.pdf
(6) « 2017/2027 Comment réformer la fiscalité des successions ? Actions critiques », France Stratégie, January 2017 : https://www.strategie.gouv.fr/publications/20172027-reformer-fiscalite-successions-actions-critiques
(7) Consists in reporting prior gifts of less than 15 years for the purpose of calculating estate taxes.
(8) This concerns all transfers made to nephews, nieces, brothers, sisters, cousins, cohabitants, unrelated persons.
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