The United Kingdom-France Double Taxation Convention: Interaction With The Succession Regulation

Cross-border succession; Domicile; Double taxation treaties; EU law; France; Inheritance tax; Wills

Cross-border succession seems to generate more than its fair share of questions, practical as much as academic and theoretical, and therefore more than its fair share of learned articles in specialist journals. The present journal has carried at least three, mainly concerned with an assumed British desire to avoid the concept of "fixed heirship".¹ But none of those truly explored the complexities of the interaction between French law, the EU Succession Regulation and the double tax treaty which has been in force for more than six decades between France and Great Britain. That lacuna is filled now by the present even more learned (and even more practical) article, as clearly headlined in its title.

Introduction

1. The introduction of the EU Succession Regulation (EU 650/2012), originally known as Brussels IV ("the Regulation"), was greeted with a mixture of joy and relief.
2. The Regulation marked a major departure from the schismatic, often messy private international law systems of many member states (such as the one that still exists in England and Wales). Instead, the Regulation adopts a single connecting factor to determine the law applicable to a person's succession. The normal connecting factor is the deceased's habitual residence at the time of their death. However, art.22 of the Regulation also provides citizens of Member States with the flexibility and certainty of choosing their national law to apply to their succession (the so-called professio juris).
3. Nationals of common law countries, where testamentary freedom is a core principle of succession law, saw (and continue to see) this possibility to choose the law applicable to their succession as a chance to escape the confines of continental, civil law "forced heirship" regimes.² Solicitors, notaries and other practitioners around Europe looked forward to untangling the web of renvoi and conflict-of-laws woven by cross-border estates and replacing it with a single governing law.
4. Much has been written about the Regulation, particularly whether a testator with a suitable nationality can simply bypass forced heirship altogether or whether disinherited heirs and continental, civil law jurisdictions can stop them from doing so. At the time of publication, a series of challengesto the Regulation on ordre public (or public policy) grounds hassprung up around Europe, which in the short term undermines the certainty and simplicity that the Regulation was intended to bring. In France, those challenges were quashed by the Cour de cassation, which (in 2017, i.e. after the Regulation came into effect, but based on pre-Regulation facts) refused to hold that "forced heirship" rules formed part of French international ordre public.³ Nevertheless, the French legislature intervened in 2021 to introduce the "compensatory rights" mechanism (under an amendment to art.913 of the French Civil Code), which, in certain circumstances, can lead to the application of forced heirship rules by the backdoor, even in situations where the deceased's ties to France are weak.
5. By contrast, fuelled no doubt by tax being outside the competence of the Regulation, relatively little has been said about the tax implications of applying the Regulation. One such implication is the unexpected interaction of the Regulation with the 1963 double tax convention on inheritance taxes between the UK and France (the "Convention").⁴ This interaction will be of particular concern for individuals with significant ties to both countries and who hope to elect under the Regulation for English law to govern their succession. However, asthis article will discuss, the Regulation remains a useful tool in the practitioner's cross-border estate planning kit, provided that care istaken when it comesto UK inheritance tax.
6. As readers will be aware, on 6 March 2024, the British government (then formed by the ConservativeParty) announced itsintention to replace domicile with residence as a connecting factor for the purposes of determining an estate's liability to inheritance tax. As part of the campaign for the election on 4 July 2024, the Labour party confirmed that it intended to do the same. Until Budget papers were published by HM Treasury on the afternoon of 30 October 2024, it was unclear from this gnomic pronouncement how the new system would interact with the double tax conventions generally or with the Convention. It had been surmised that the Labour Chancellor would introduce a deeming provision to the UK's inheritance tax legislation providing that anyone within the scope of inheritance tax under the new much shorter residence-based regime (apparently to be defined "long-term UK residents" under a new s.6A of the IHTA 1984) will be treated as UK-domiciled for the purposes of the relevant conventions. However, the Budget papers cryptically announce that "there are no changes to the treaties or how these operate".⁵ This appears to be a reference to the provisions in the very last paragraph of the Draft Finance Bill Measures published the same day: Sch.6 Pt 2, para.48(1)(b) provides that the general repeal of the deemed domicile section of the IHTA 1984 (s.267) designed to abolish the old rules and build the long-term UK resident architecture is disregarded for double taxation arrangements. This leads to an inference that the new law will have a particular impact on conventions where deemed domicile is relevant, which is not the case for the Convention, as discussed below. It also appears that mismatches will occur where someone is a long-term UK resident (10 years) but not yet deemed domiciled (15 years) ... Watch this space! We may see some more arguments around the more purposive manner in which the OECD model commentary interprets the D word. The rest of this article was written prior to the publication of the Draft Finance Bill Measures.

Background and analysis

General tax position under English and French law

7. Under both UK and French tax law, the general position is (broadly) that if a person dies "domiciled" in that country, their worldwide estate is subject to that country'staxes on death. If they die domiciled outside that country, only their assetssituated in that country are subject to that country's tax.⁶ France also subjects to succession tax assets (wherever situated) received by a beneficiary domiciled inFrance for at least six years out of the 10 years before the death of the deceased.

The Convention

8. The Convention determines each country'staxing rights primarily by reference to the notion of domicile. The basic provisions as to taxing rights in arts V and VI are as follows:
   1. Where the deceased was domiciled in France, UK inheritance tax shall (crucially, subject to para.16 below) not be imposed on assets situated outside Great Britain;⁷
   2. Where the deceased was domiciled in Great Britain, French succession tax shall not be imposed on assets situated outside France;
   3. Where the deceased was domiciled in one country and the asset is situated in the other country, the country of domicile retains its taxing rights and the other country retains its situs taxing rights; and
   4. Where double taxation occurs as set out at para.(3) above, the country of domicile must give credit for the tax imposed by the country in which the asset is situated.⁸
9. Complications can arise where the deceased dies domiciled in Great Britain under the general law of England and Wales⁹ and at the same time domiciled in France under French law. This is a common occurrence where an individual has links to both countries, owing to the broad and asymmetrical nature of the two concepts of domicile.

Domicile

10. In English law, domicile is primarily a "connecting factor" to a home legal system for "civil" purposes, from which a tax conclusion may derive. The ingredient of residence for tax or civil purposes may play no or only an insignificant role in the determination of domicile. Domicile is the factor whose identification enables a conclusion to be drawn as to (inter alia) the succession rules applying to the person under consideration.
11. Under English law, everyone is born with a "domicile of origin", which is the domicile of their father (if their parents were married) or their mother (if their parents were unmarried) at the time of their birth. It is possible for a person to acquire a different domicile later in life, but the domicile of origin will never truly be "lost" and is relatively easy to revive. Someone who is born to a relevant parent with an English domicile but who then severs their ties to the UK and fully integrates into their new home (even to the point where they intend to remain in that new home indefinitely) can revert to their English domicile of origin if they abandon that new home.¹⁰
12. Under French law, a person's domicile is a question of fact with far less psychological and past historical involvement than in the UK. For French tax purposes, an individual will be domiciled in France if their foyer or their primary place of residence is in France, if they carry out a professional (but not ancillary) activity inFrance, or if the centre of their economic interests is located in France. Finally, it is worth noting that, from a French standpoint, the "connecting factor" is different for tax and civil purposes. That is to say that an individual can be domiciled in France for tax purposes without necessarily having their habitual residence in France under the Regulation.
13. Given the almost total lack of overlap between the English and French concepts, it is easy to imagine how a person might die domiciled in both countries under their respective laws (a "double domicile"): for example, it is easy to acquire a French domicile under French law through residence and difficult to lose an English domicile of origin under English law by absence alone. The asymmetric aspect is illustrated by someone born with an English domicile of origin who moves to France (thus moving their foyer to France and acquiring a French domicile under French law) but potentially retains their English domicile under English law indefinitely. By contrast, a French domiciliary moving to the UK will sever a French link forFrench purposes, while perhapsretaining it (or not acquiring an English one) in English eyes.
14. To determine a person's domicile for the purposes of the Convention, a series of tests(which will be familiar to practitioners) must be applied sequentially, starting with the person's permanent home and their centre of vital interests, then their habitual abode and their nationality, with mutual agreement between the two countries' tax authorities as a last resort.¹¹

Double domicile and a professio juris

15. Where an individual dies double domiciled, the tax consequences are as set out at para.8 above, save that "domiciled" is to be interpreted in accordance with the tie-breaker tests.
16. However, there is one critical provision in art.V(1) that only bites in the case of a double domiciled person who, following the application of the tie-breaker tests, isFrench-domiciled for the purposes of the Convention. The general rule for such a person (resulting from the application of the Convention) remains that French succession tax and not UK inheritance tax will be imposed on their assets outside Great Britain. In other words, the UK's internal taxing rights are partly disapplied—essentially, they are geographically limited to the UK. The Convention predates by over 20 years the creation of the notion of "deemed domicile" (through long residence) for UK inheritance tax purposes so in appropriate cases this effect of the Convention is powerful.
17. But there is an exception to this general rule for assets outside Great Britain passing "under a disposition or devolution regulated by the law of some part of Great Britain".¹² In other words, assets outside the UK passing under a will governed by (for the sake of argument) English law will be subject to UK inheritance tax (as well asFrench succession tax), therefore reinstating the usual position which would apply absent the rule described in para.16. In addition, if the assets are situated in Great Britain, both the UK and France will have taxing rights but a tax credit will be available as set out at para.8(4) above. However, if the assets are situated outside the UK, no tax credit will be available under art.VI, so these assets will prima facie be subject to double taxation.
18. This is where the impact of the Regulation comes into play. If a will (of whatever form) contains a professio juris for English law under art.22 of the Regulation, then any assets covered by it will—arguably at least—pass under a disposition or devolution regulated by the law ofsome part of Great Britain and not benefit from the exclusion from UK inheritance tax which otherwise applies.¹³ This is a troubling prospect for clients with cross-border estates and for their advisers, who have sought to rely on the Regulation for various reasons, including simplification or to avoid forced heirship regimes, but who, in the process, may have inadvertently exposed themselvesto double taxation without relief under the Convention.

Is this startling conclusion correct?

19. Some leading English commentary suggests that such an outcome "seems contrary to the intention of the Convention and it is understood that the argument will not be officially taken [by HMRC]".¹⁴ However, little has been written about the subject and the authors are not aware of any practice by HMRC to disregard the UK's taxing rights under art.V(1). While unilateral relief would be available in respect of French tax paid, credit for the full amount (up to a ceiling of 40%) would only be available in respect of property situated in France. For property situated in third countries, only partial relief would be available under the formula contained in IHTA s.159(3), so some tax leakage may be unavoidable.
20. Another argument against the imposition of UK tax in such circumstances is the fact that English private international law (domestically) remains schismatic and has no concept of a professio juris, preferring to refer back to the laws of domicile (for movables) and situs

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Footnotes

1. In Private Client Business alone, please see: P. Delas, "Jurisdiction and proper law under the Succession Regulation" [2019] 4 P.C.B. 25; P. Delas, "Reserved rights for European citizens under French law" [2022] 1 P.C.B. 4; A. Giannakopoulos, "Limits on the professio juris in the EU Succession Regulation" [2024] 1 P.C.B. 39; P. Delas, "Forced heirship is not a human right" [2024] 3 P.C.B. 126; H. Peisse and M. Rutili, "UK/France cross-border successions—not always an entente cordiale" [2024] 5 P.C.B. 101.

2. Also known as "reserved portion" regimes.

3. 27 September 2017, judgment no.16-17.198. The authors note that this judgment was recently cited approvingly by the European Court of Human Rights in Jarre v France (Application No.14157/18).

4.  Signed in Paris on 21 June 1963 and enacted in the UK as the Double Taxation Relief (Estate Duty) (France) Order 1963 (SI 1963/1319).

5.  Technical Note: Reforming the taxation of non-UK domiciled individuals (published 30 October 2024), para.158.

6. The situs rules of the Convention are outside the scope of this article, but it suffices to say that to add to the challenges of the analysis, in both countries an asset can be "situated" in the country for the purposes of the Convention even if it is physically located abroad. The rules differ from the UK's domestic rules on situs for the purposes of inheritance tax.

7. Note that the Convention refers to Great Britain rather than the United Kingdom in these provisions. This is for historical reasons; Northern Ireland had a different taxing regime (from estate duty, which only applied to Great Britain) at the time of the Convention. The application of the Convention to assets situated in Northern Ireland adds another layer of complexity and is outside the scope of this article.

8. Note that the Convention only provides relief in respect of tax payable on death (not on lifetime gifts, so lifetime chargeable transfers and failed potentially exempt transfers are outside the scope of the Convention).

9. Technically speaking Scots law is relevant here too, but the authors understand that domicile under Scots law is substantially the same as domicile under English law, so this article will only refer to the English law of domicile from this point on.

10. An individual who is resident in the UK for 15 of the previous 20 tax years will be "deemed domiciled" in the UK for tax purposes. However, under s.267(2) of the Inheritance Tax Act 1984 (IHTA), the deemed domicile rules do not apply to the interpretation of a double inheritance tax convention where the deceased was domiciled under the general law of both countries. Deemed domicile is similarly (to varying degrees) irrelevant for the purposes of other double inheritance tax conventions which predate the invention of the concept (as is the case with the French treaty, which was signed before "estate duty" was replaced by capital transfer tax, now inheritance tax under the IHTA)

11. The sequence in which the tests are applied is not straightforward. For example:

1. The centre of vital interest test is only applied if the deceased "had a permanent home available to him in the territory of each of the Contracting Parties" and not if the deceased had a permanent home in neither state; and
2. The habitual abode test is only applied if: (i) the deceased had a permanent home in neither state; or (ii) the centre of vital interests "cannot be determined", an unusual formulation given that a French or English court could surely in almost all circumstances determine the point on the basis of the evidence before it.

12. This carve-out is derived from Finance Act 1949 s.28(2), in force at the time of the Convention, which provided that the governing law of the relevant "disposition or devolution" was, together with the nature of the property (realty versus personalty), situs and domicile, one of the connecting factorsfor determining liability to estate duty. The words "disposition" and "devolution" were interpreted by Lord Denning in the case of Philipson-Stow (discussed at para.29 below) as follows:

"When section 28(2) speaks of the 'devolution' of property, it means a devolution by operation of law, such as heirship or kinship. When it speaks of a 'disposition', it means a disposition by instrument, such as a will".

The governing law is understood to be a question of substance (i.e. substantive validity) not form (i.e. formal validity or recognition of the relevant instrument as a will). Note that there are similar exceptions to the same general rule in the UK double inheritance tax conventions with India and Pakistan.

13. Note that British nationals (including those who made their wills before 17 August 2015) may also be deemed to have made an election of English (or Scots or Northern Irish) law under the Regulation.

14. C. Bradley and E. Chamberlain (eds) Dymond's Capital Taxes (London: Sweet & Maxwell, 2022), para.31.931.

Originally Published by Thomson Reuters and Contributors, Inheritance Tax

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.