Tax in France works very differently to the UK so it is important to understand the rules and how they affect you and your family, as well as the opportunities for effective tax planning in France. Here we look at income tax, social charges, succession tax, and the annual wealth tax imposed on property.
Are you moving to France? There is so much to look forward to as you plan your new life there and then settle in and make it home. The French lifestyle provides so many benefits you should enjoy a long happy life there. There are occasional downsides along the way though, such as dealing with local bureaucracy and a complex, foreign tax regime.
Whether you will live permanently in France or just buy a property there, it is important to familiarise yourself with the French tax system. There are significant differences between the French and the UK tax regimes and many people get caught out by the unexpected, or because they do not fully understand how they are affected by the rules.
Here we summarise the key elements of French taxation you need to be aware of. It is also a useful checklist for those already living in France.
Tax residency in France
First of all, you need to understand what will make you a tax resident in France – in other words, whether you will be obliged to declare and pay French tax on your worldwide income and assets. It is not simply a question of day counting and is not always clear-cut.
You will be deemed to be a tax resident of France if any of the following tests are fulfilled. You become a tax resident from the day after your arrival if you intend to live there indefinitely.
- France is your main residence or home – your ‘foyer’, the place where your close family (spouse, minor children) live.
- France is your principal place of abode, your ‘lieu séjour principal’. This usually means you spend more than 183 days in the country per calendar year, but can also be applied if you have spent more days in France than any other single country.
- Your principal activity is in France.
- Most of your substantial assets are located in France (‘centre of economic interests’).
You also need to follow the UK’s Statutory Residence Test rules to establish if you could continue to be deemed a tax resident in the UK. If you meet the residence criteria of both countries, tie breaker rules will determine where you pay tax.
It is your responsibility to register with the French tax authorities and fully declare your income and wealth.
Income tax in France
In France, it is the income of a household that is taxed, rather than the individual members. To avoid the higher rates of tax, the family can be divided into a number of parts familiales, a system that benefits families with children, and where one spouse or PACS (civil) partner has much higher earnings than the other.
Income tax on earnings, such as employment, pension, and rental income is charged at progressive rates. The current rates (which apply to income received in 2022), are:
|SUBJECT TO TAX
|Up to €10,777
|€10,778 to €27,748
|€27,749 to €78,570
|€78,570 to €168,994
Pension income from UK funds is generally taxable only in France, after a 10% deduction (maximum €4,123 per couple), at the scale rates of income tax. The exception is government service pensions which remain taxable in the UK (and not France). You still include it on your French income tax return but receive a credit equal to the French tax and social charges.
Lump sums are fully taxable in France if received after you become resident. If, however, you are considering taking your entire pension as one lump sum, in certain circumstances you may be eligible for a fixed 7.5% income tax rate in France after a 10% deduction.
Investment income tax in France
Investment income – bank interest, dividends, capital gains on the disposal of securities etc – is taxed at a special fixed rate of 30% (the ‘Prélèvement Forfaitaire Unique’ or PFU), rather than the scale rates. This includes both income tax and social charges, so it lowers the tax bill for investors with larger portfolios.
Lower earners can opt to apply the progressive rates of income tax for their investment income instead, plus social charges.
French social charges
Besides income tax, France imposes a second, additional tax on income called social charges (or social contributions). The current rates are:
Employment income – 9.7%
Pension income – 9.1%
Investment income – 17.2%
Social charges on pensions are reduced to 7.4% if your taxable income is less than €2,000 a month (€3,000 for a couple). If you have Form S1, you escape social charges on pensions completely.
Likewise, if you have an S1 or are covered under the health care system of another EU/EEA country, the social charges applied to investment and property income are reduced from 17.2% to 7.5% – a significant saving. This continues to apply to UK nationals.
Property ‘wealth tax’ in France
As a resident of France, your worldwide real estate assets are assed for ‘Impot sur la fortune immobilière’ each year.
This is a wealth tax imposed on property, but you will only have to pay it if your household’s total real estate assets are valued at over €1.3 million. Also, UK nationals escape this tax for their first five years of residence.
The 2023 progressive rates of wealth tax are:
|NET PROPERTY ASSETS
|€800,001 to €1,300,000
|€1,300,001 to €2,570,000
|€2,570,001 to €5,000,000
|€5,000,001 to €10,000,000
If you are not resident in France you are only liable on property located in France, with the same thresholds and rates as above.
Succession tax in France
Succession tax is the French equivalent of inheritance tax but works very differently.
In France, each beneficiary is liable for the amount they receive, and the rates and allowances vary significantly depending on who the recipient is. Here are a couple of examples:
- Spouses are not liable to succession tax on inheritances, but they are on gifts
- Children each receive a €100,000 allowance and pay tax at progressive rates from 5% to 45%
- Siblings get a €15,932 allowance and pay tax at 35% or 45%
- Remote and non-relatives pay 60% tax with an allowance of just €1,594
You need to consider who your heirs will be then seek advice to see what you can do to reduce their succession tax liability and make the inheritance process easier for them.
Tax planning for living in France
French taxation can, unfortunately, be complex, potentially high, and daunting. But do not let this put you off moving to France as the regime can also provide some opportunities for effective tax planning, particularly for investment capital and certain pensions. Your French tax liabilities may be lower than you expect.
One thing for certain is that you need to review and adjust your tax planning once you move to France since what was effective in the UK is unlikely to be effective across the Channel.
This is only a summary of the taxes you will face on your income and wealth, so you will need to explore this further and establish exactly how the rules affect you and your family. Taking personalised cross-border tax and wealth management advice will give you peace of mind that you have all facts and are doing everything correctly, and can also help you lower your tax liabilities wherever possible, for both yourself and your heirs.
Take control of your financial planning for living in France, and contact us today.