Projet de loi de finances 2018. Conversion of French ISF into a tax on immovable wealth IFI: trustees

Rather than place the whole article on the Forum, those interested in the path being taken in relation to Wealth tax, trusts and the new régime may wish to go to this link, updated on 7th October.
It looks as if the 2181 Trusts1 declaration requiring the declaration of the constitution, modification or termination of a trust will remain in place, untouched, as will the gross asset valuations required on that filing.

That is because the gift and succession duty aspects of the Trust régime are not on the agenda for change, despite the grotesque pastiche of all trusts as being in some manner “Grantor” or settlor controlled. That point is currently the subject of a QPC before the Conseil Constitutionnel, although it is unlikely that the full consequences of any finding in favour of the appellant taxpayers will be implemented in a change. Once the French establishment has managed to convince itself that a trust is a contractual contrivance, rather than a mere property disposition, there is little that can be one to eradicate that.

However, the annual return 2181 Trusts2 levy declaration will be significantly changed as article 990J CGI is being amended so as to be restricted to the scope of new tax: immovable property and immovable property holding structures. It looks as it only trusts with a French resident constituant or beneficiary having a deemed interest in French and foreign immovable property will be made to file an annual levy return; as will any trustees holding directly or indirectly French immovable property or rights in such immovables for the benefit of a resident or a non-resident.

Perhaps the main point to note is that the French Wealth tax, which is held by some political economists as a modern day “must-have”, has just been cut back to the extent where it is no longer recognisable as a wealth tax as such.

The main change is that the IFI will be charged on a net valuation, subject to capping mechanisms over a certain percentage of debt, not the gross market value.

That change is purely mechanical based upon the relative transparency of land as a security, and should not be taken as implying any change in the attitude towards the full declaration of movable and immovable gross asset values in the residual gift and succession duty arena, which looks to remain unchanged. There will therefore inevitably be a widening difference between the current 2181 Trusts1 and Trusts2 declarations in this area, simply in that the first will be gross value, and the second net values.

Also the current facility of being able to notify subtle changes in the trust through 2181 Trusts2 Cadre 5 will become increasingly difficult for those trustees who do not hold English land or its equivalent. Technically, under the previous legislation, an English trust of land escaped the definition in article 792-0 bis I CGI. It remains to see whether the same argument will hold good under the amended legislation, which it should, as the definition in article 792-0 bis I remains unchanged.

Peter Harris

The main issue exercising the minds of the French Parliament will be the various anti eluding provisions proposed by the Tax administration to remove the use of bullet or term repayment mortgages, and deem these to be reduced over the term, thus reducing their deductibility over time.

There is disallowance of loans to the owner to purchase the property from what could be described as a related person - here a faux ami or family member.

It is likely that there may be clarity given as to whether loans from a company in which the owner of the property is interested will also be disallowed.

Trustees who have relied upon the trust concept to date might find that such arrangements, particularly offshore will need revisiting.

Peter Harris