The 2015 budget proposal has three goals: cut the budget deficit; promote growth, and reduce tax for lower earners. It includes only limited changes to the tax system, but investors are still affected by previous budgets.
The 2015 budget proposal was released on 1st October. It has three goals: cut the budget deficit; promote growth, and reduce tax for lower earners. In contrast to previous years, it includes only limited changes to the tax system.
Autumn has been quite an interesting time in France over recent years, from a tax perspective. The draft Finance Bill for the following year is officially released at the end of September, though the government usually provides some advance information through the media over the summer. The budget then goes back and forth through the parliamentary process over the autumn months, with some of the proposals having to be changed, until the constitutional council agree the final law at the end of December.
Recent budgets have not been good for French taxpayers. We have had tax hikes, and tax reforms resulting in higher taxes for many of us. Over the last three years the government’s tax revenue increased by €70 billion.
So it was welcome news when earlier this year President François Hollande said that he would stop rising taxes. Then, in early September, Prime Minister Manuel Valls declared his intention to remove the 5.5% income tax rate as part of the government’s policy of seeking to lower the tax burden for lower and middle income families.
The main change this year is the removal of the 5.5% income tax band which currently applies to taxable income between €6,011 and €11,991. The 0% tax rate will now be extended up to €9,690, when tax kicks in at 14%.
The other income tax thresholds will be increased by 0.5% to keep in line with inflation. So the top rate of 45% tax will be charged on income over €151,956.
One small further change is that the décote (the income tax credit where tax liability is below a certain level) will increase from €1,016 to €1,135 for a single person and from €1,016 to €1,870 for a couple.
Many households will see their income tax bill lowered a result of the two changes. For example, an individual taxpayer with an annual income below €12,400 will pay no income tax, whereas the same individual with income of €14,500 would pay around €440. A married couple will start paying income tax from an annual income of approximately €23,800, whereas the same couple with an income of €26,000 will have a liability of around €455.
The budget includes a number of reforms to taxes relating to real estate, designed to help stimulate the economy. They are not wide reaching though, so may not affect you.
With the current taper relief system, property is free from capital gains tax after 22 years. With development land it takes 30 years, but the budget reduces it to 22 years. This does not affect social charges (15.5%), which in both cases remains 30 years. There will also be an exceptional 30% reduction for gains on development land sold before 31st December 2015.
The tax administration updated its documentation with these new rules in September, so they are already in force.
The government is also proposing two further gift tax allowances on development land and newly built properties.
A €100,000 gift tax allowance will be given on donation of development land between 1st January and 31st December 2015, if a residential property is built within four years.
A temporary allowance for gifts of newly built properties will be introduced for properties not yet used for residential purposes. The amount will depend on the relationship between the donor and the beneficiary and ranges from €35,000 to €100,000, with a cumulative limit of €100,000 per donor.
Once in force, gifting a property or development land would have the effect of extending the applicable gift and succession allowances. This could be done in addition to a usufruit, which would allow you to use the property during their lifetime. If this is of interest to you, you should seek professional advice to ensure you achieve the result you are looking for.
For those who rent out French property, the current Duflot’s law, which provides a tax credit when investment property is let out for nine years, is replaced by the new Pinel Law. This provides a tax credit for leases of six, nine and twelve years. It will also now be possible to rent the property to descendants or ascendants without losing the credit.
There are no changes that affect investors directly. However, the removal of the 5.5% income tax band does present some interesting and worthwhile tax planning opportunities.
There is a big difference in France between income and taxable income. If you arrange your investments to produce non-taxable “income and gains”, this can make a huge difference to your resulting tax bill and improve your disposable income. This is one of the most underutilised and effective tax planning opportunities in France. If you are looking to make substantial tax savings you should investigate this advantageous procedure as soon as possible.
There may be no specific changes to investment taxation this time, but the previous budget changes continue to result in higher taxes for higher earners. With the way the tax system works, it can take almost two years between the tax changes being announced to you feeling the effects, so many are only now realising the impact.
However, if you have owned shares for a number of years you could take advantage of favourable tax reliefs to sell the assets now and reinvest them in more tax efficient arrangements.
As always, the 2015 budget tax reforms may be amended as they go through parliament, and social security budget proposal may also contain further tax measures. And as always, remember that your tax planning has to be designed for your specific circumstances and objectives, so take personalised and specialist advice to improve your tax situation in France.
17 October 2014
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 is advised to seek personalised advice.