French taxation in 2021 – what we can expect?

Has the latest French budget changed any tax for 2021? Get to know the tax rates for income and investments, social charges, French wealth tax and succession tax.

Anyone who has been living in France a while knows how frequently tax rules can change, and how significantly too. Some reforms are good news for taxpayers, while others increase their tax burden.

President Macon made some significant changes soon after he came into power, reforming wealth tax and introducing a fixed rate of tax for investment income from 2018. The following budgets for 2019 and 2020 were relatively uneventful from a tax point of view, and likewise the 2021 budget proposal published at the end of September did not include any significant tax reforms. Unsurprisingly, this budget is focused on providing a stimulus package to help companies and individuals hit by the Covid-19 measures.

While the main French budgets are released at the end of September each year, they are not finalised until the end of December. In the meantime, they are debated by Parliament and some measures can be dropped or amended during the process and new ones proposed, so there may be changes to what we summarise below.

French income tax 2021

There are no changes to income tax rates compared to 2020, though the bands have increased slightly with inflation. The income tax bands and scale rates for income received in 2021 are:

Social charges in France

There are no changes to the standard rates of social charges, which are payable on top of income tax in France. Therefore the 2021 rates are:

• 9.7% plus pension contributions for employment income
• 9.1% for pension income
• 17.2% for investment income including rental income

As in 2020, a reduced rate of 7.4% may apply to those with low pension income. Also, currently, retired UK nationals holding Form S1 do not pay any social charges on pension income and benefit from a reduced rate of 7.5% on investment income. However, as at the time of writing, uncertainty remains over what will happen after Brexit.

French tax on investment income 2021

2018 saw the introduction of the Prélèvement Forfaitaire Unique, or ‘flat tax’ as it is commonly known. This applies to interest, dividends and capital gains on the sale of shares and securities (but not to rental income). The rate remains 30%, which includes both income tax and social charges.

Lower income households can opt to use the scale rates of income tax instead (plus social charges), though this would have to apply to all your income.

There is no government proposal to amend taxation of assurance-vie policies, which continue to provide tax and wealth management advantages to investors in France.

French wealth tax 2021

The other big 2018 reform was the abolition of wealth tax on financial assets. It was replaced by the Impôt sur la Fortune Immobilière (IFI) which, although it follows the same rules and rates as the previous version, only applies to real estate assets. Your savings and investments, including assurance-vie policies, are therefore exempt from wealth tax.

The budget proposal published in September did not include any changes to this tax. It will continue to only apply to real estate; the current €1,300,000 threshold and €800,000 allowance stay in place for 2021; the scale rates of tax (0.5%-1.5%) are unchanged, and the 75% limitation remains available.

However, this reform had met with some significant opposition when it was introduced and, considering how much the pandemic is costing the government, some politicians are asking for the wealth tax on financial assets to be restored. But many budget suggestions do not get very far, so hopefully this is not something to worry about just yet.

French succession tax

There have been no changes to France’s inheritance tax for a few years now and it is not included in the 2021 budget either.

If you have not reviewed your estate planning for a while, though, it is always worth doing so to ensure you are taking advantage of all the opportunities to lower this tax for your family and heirs – particularly for heirs who face the higher tax rates.

Tax planning for France

While on the surface French and UK taxation may appear similar, charging income, capital gains and inheritance taxes on worldwide assets, the systems are actually completely different.

To give one example, in the UK income tax is calculated on each individual, who receives a personal allowance. In France it is based on the whole household. The number of family members (‘parts’), including children not earning any income, is added together and tax calculated on that. This can prove especially helpful where, for example, one spouse receives a much higher income than the other.

If you are new to France, you therefore need to put any preconceptions of taxation behind you and focus on how the French regime works and applies to you. You also need to follow the France/UK double tax treaty to establish where you will pay tax on UK income.

First of all, you need to make sure you are declaring everything and paying tax correctly but also having a good understanding of the French regime can present opportunities for effective and compliant tax planning. While the system is complex and France can be a high tax country for some, many people are surprised to find they can pay considerably less tax than they first expected. How you hold your assets can make a noticeable difference to how much tax you – and your heirs in future – pay. It is definitely worth reviewing your wealth management to establish if it is designed in the most tax-efficient way for France. Re-structuring could prove very profitable.

French taxation can be complicated enough, cross-border taxation and international tax planning even more so. Take specialist advice from a professional with deep knowledge of tax and financial planning in France.

Contact a France-based adviser

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; individuals are advised to seek personalised advice.