2011 was the year of increased austerity measures including exceptional tax increases across the board. Regrettably, there may be more to come in 2012 and beyond. Whilst investment
2011 was the year of increased austerity measures including exceptional tax increases across the board. Regrettably, there may be more to come in 2012 and beyond. Whilst investment opportunities will still be available tax mitigation has rarely been more important.
The French Finance Act for 2012 was approved on 21st December 2011 and contained confirmation of the various proposed tax measures that had been debated for some time.
The surcharge on high incomes received from 2011 has been approved. High earners will now pay an extra 3% tax on any income between ?250,000 and ?500,000, and 4% on income over ?500,000. For married couples and those benefiting from a PACS arrangement the thresholds are ?500,000 and ?1 million. There are specific calculations to help reduce the impact of exceptional income in one year (e.g. capital gains on the sale of a property).
The additional tax rates apply to all income subject to the normal scale rates of income tax, including income from employment, pensions, rental earnings and some investments. The top income tax rate is therefore now 45%. Of course social charges are also payable at 8% on salaries, 7.1% on applicable pension payments and a whopping 13.5% on investment income.
The tax surcharge was originally announced as a temporary measure until the deficit is down to 3%; the government is aiming for 2013 but realistically it may not be until 2016. Politicians seem to have a unique understanding of the word ?temporary? – income tax was introduced as a temporary measure in Britain by William Pitt the Younger in 1799 but soon became a fixed means of collecting revenue!
Unusually the tax bands and various ceilings, limits and allowances for income, succession and wealth tax have been frozen and remain the same as last year. This will result in many people paying more tax.
There has been a 15% general cut in existing tax breaks in France, up from the 10% initially planned. One?s individual entitlement has been capped at ?18,000 plus 4% (instead of 6%) on taxable income.
The general capital gains tax (CGT) exemption for shares held for more than eight years has been abolished, as have the scale deductions for those held for over six years. This applies to shares sold since 1st January 2011. Since the holding period could not start before 2006 these exceptions never even got to see the light of day! The CGT rate is currently 19%, plus social charges of 13.5%. CGT (but not the social charges) can be deferred in certain circumstances with planning.
When it comes to capital gains on immovable property, full exemption from tax now applies after 30 years of ownership rather than 15. The main home remains exempt.
Gains on a second home or investment property are exempt in certain circumstances, but this only affects people who have not owned a main home for four years or elderly/disabled people who have moved into a specialist care home and who meet certain other conditions.
Also coming into effect from January this year is the increase in the fixed rate of withholding tax applied to interest and dividends from 19% to 24%. This is in addition to 13.5% social charges. The same rates apply to interest and dividends earned outside France. This measure is aimed at higher rate income tax payers since lower rate ones are usually better off choosing to pay tax at the scale rates.
A leading British think tank has published a report called ?The Long Game? in which it described austerity as ?the new normal?. While the report was about the UK it can equally be applied to many countries across Europe, including France. There?s still a long way to go before budget deficits are brought down to acceptable levels and economic growth returns to something like ?normal? (whatever normal will be in the future!).
We?re fast approaching the general elections here in France, a time when politicians usually try to avoid alienating voters with talk of more tax rises ? but this doesn?t mean we will not see more tax increases following the election! In Spain the new government imposed surprisingly large tax increases just a week after taking office, in spite of pledging not to do so in its electoral campaign.
This is the time to look to protect your assets from tax as much as possible. With sound advice and appropriate planning it?s almost always possible to reduce tax on your investments and pensions. French taxation is complex, not to mention rapidly changing, so it?s important to seek professional guidance from a firm like Blevins Franks to make sure you get it right, and arrange your affairs to legitimately avoid paying more tax than necessary.
By Bill Blevins, Managing Director, Blevins Franks
6th January 2012
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practice which are subject to change. Tax information has been summarised; an individual must take personalised advice.