The key objective of many savers and investors is to preserve their wealth. Threats to your wealth include historically low interest rates and inflation, but perhaps the biggest threat is the imposition of higher and higher taxes on investors’ capital.
The key objective of most investors is firstly to preserve their wealth against inflation and to seek real growth. This is vital if you are approaching retirement or already retired. Key threats include high taxation, historically low interest rates and inflation, all of which erode the value of your capital and income arising from it.
At present, the immediate threat is the current taxes on investors’ capital for those living or owning property in France, something we need to avoid wherever possible. All the recent tax hikes require all of us to reconsider how these changes will impact on our long term wealth and to consider what action we need to take to reduce the impact of each of the threats. No one can afford to be complacent. You stick your head in the sand at your peril!
Another misconception of British expatriates is that investments, which are tax free in the UK, will continue to be so in France – this simply is not the case. These assets are often highly taxed once reported or discovered in France.
Consider the following:
In France, you can no longer select how interest is taxed. The previous fixed rate was abolished from 1st January this year. All interest is now added to your other income for the year and taxed at the higher income tax rates.
If your French bank deducts a 24% withholding tax, or you pay the 24% advance tax payment each month on foreign income, this is payment on account and not necessarily the final tax due on the income. You need to consider how you may hold cash on interest deposit type investments without the same punitive tax treatment (see below).
The often lower fixed rates that were applicable to capital gains on the sale of shares and dividend income in the past have been abolished. All of your investment income and gains are now taxed at your marginal rate of income tax – almost invariably, higher than before!
Tax reliefs ranging from 5% to 40% were introduced according to the length of ownership of shares, but from a start date of January 2013.
The tax deductions previously available for dividends have gone. You are now required to pay a 21% advance tax payment on foreign dividend income to be offset against your final tax liability.
It is worthy of note that if you own shares directly you are almost certainly liable for much more tax than holding the same assets in an approved tax planning structure, e.g. Assurance Vie.
Many British expatriates hold onto their ISAs, PEPs, National Savings and Premium Bonds assuming they continue to be tax free in France – they are not! They too are taxable at your marginal rate of income tax.
If you are lucky enough to win one of the big Premium Bond prizes you could lose over 60% of your winnings in tax!
Income tax rates
The current tax rates are:
|Up to €5,963
|€5,964 to €11,896
|€11,897 to €26,420
|€26,421 to €70,830
|€70,831 to €150,000
There is also a temporary surcharge of 3% for income between €250,001 and €500,000 and a 4% surcharge for income over €500,000.
All the sources of income above are additionally subject to 15.5% social charges.
Wealth and succession taxes
If your household’s total wealth amounts to over €1.31 million, you are liable for wealth tax. It starts at 0.5% for wealth over €800,000 and rises progressively to 1.5% for wealth over €10,000,000.
If you reside in France when you die your worldwide assets are liable to succession tax here, with high rates potentially applying dependent on who the beneficiary is.
Tax efficient investing
While these taxes are high, you do not necessarily have to pay at these rates. The taxes you pay must be in accordance with the law, but with careful planning you can often reduce your tax liability significantly.
For example, if you hold assets within an approved and well established Assurance Vie “tax wrapper”, the taxation treatment is considerably more beneficial than holding them outside such an arrangement. The longer you hold your assets in an Assurance Vie, the better the tax benefits over time.
All income and gains in capital value can be rolled up totally tax free – if you do not take withdrawals, you do not pay tax.
Most importantly, when you take withdrawals, only the gain element of the withdrawal is taxable. E.g. if your Assurance Vie has gained 10% in value, then only 10% of the withdrawal is taxable leaving 90% income tax free.
When you have held your Assurance Vie for a number of years, withdrawals can be taxed at favourable special fixed rates. For higher earners these can be significantly lower than income tax rates. The lowest fixed rate is just 7.5% and you also receive a €4,600 allowance per person. You still need to pay social charges however.
Assurance Vie will normally also help lower the succession tax liability for your beneficiaries. In particular, considerable tax and social charges savings can be secured if the policy is established whilst you are under age 70, although they can also be useful if established when you are over 70.
The impact of taxation on savings income and investment growth has become a bigger issue over recent years. What matters, after all, are after-tax returns. To properly protect your wealth for the long-term future, for yourself and your dependents, you need both intelligent investment advice matched to your circumstances and aspirations as well as appropriate tax planning. Assurance Vie, a long-standing proven medium of tax planning, enables you to combine your tax and investment planning whilst also offering other practical benefits beyond the remit of this article.
It is important to seek personalised, professional advice in these often complex areas of financial planning
23 August 2013
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.