It is not difficult to appreciate why so many people fall in love with France and consider making it their home. There are, however, some tax and financial essentials you need to plan for if you are to get the best out of living in France.
It is not difficult to appreciate why so many people fall in love with the local lifestyle and consider making France their home. There are, however, some tax and financial essentials you need to be aware of and plan for if you are to get the best out of living in France.
Most of us would wish to make sure we do not miss out on any opportunities to save tax in France and the UK. Wherever possible you should look at the tax implications and tax planning before you become resident of France, but it is rarely too late to correct earlier errors of understanding or bring one’s affairs up to date with current, fast changing legislation.
Taxation in France and tax planning
The starting point when moving to France is to understand how you become resident for tax purposes. Tax residency in France is not just about day counting. You could also be resident even if you do not live in France but your spouse does, or if your principal activity or most substantial assets are here. You need to understand the tests for residence to avoid the risk of inadvertently becoming the victim of a tax investigation.
You become a tax resident in France the day after your arrival, if you have the intention of living in France indefinitely. Any gains made before arriving in France (from assets outside France) are therefore tax-free here. Any gains made after you arrive will be subject to French tax. If you are still resident in the UK at the time of realising gains they would be liable for tax there, but with specialist advice you may be able to avoid these taxes.
French resident taxpayers have a particularly high tax burden. For example, although income tax is up to 45%, in most cases you have to pay social charges on top, at rates of 15.5% for investment income. There is also an annual wealth tax.
When living in France, you need a thorough understanding of the French tax system and how it applies to you. Only then can you establish what steps you can take to lower your tax liabilities. Because there is the good news – there are ways to lower taxes on your investment income, assets, pensions and estate, often significantly. However this is not an area for DIY financial planning, you do need specialist guidance – the risks of getting it wrong are high and dangerous.
French wealth tax
France also imposes an annual wealth tax. This is charged on the value of your household’s worldwide assets. If your total net wealth is below €1.3m, no wealth tax is due. For those with assets in excess of €1.3m, the 2016 rates range from 0.5% (€0.8m to €1.3m) to 1.5% (€10m and over) if you are resident in France on 1st January of any year.
France does apply a ‘tax cap’, where your combined wealth tax, income tax, social charges and local property taxes cannot exceed 75% of your total income. While 75% sounds high, it can create attractive tax planning opportunities to mitigate wealth tax by reducing taxable income (without reducing spendable income). One method is to spend capital, equivalent to the income earned, while allowing income to accumulate, free of tax, in an approved tax-planning vehicle.
New arrivals in France benefit from a five year ‘wealth tax holiday’ on assets outside France, so with careful planning you can arrange for your investments to be held in arrangements outside France.
French succession tax and law
Succession tax in France works quite differently from UK inheritance tax. It is calculated on and paid by each individual beneficiary and the tax rates and allowances vary according to who the beneficiary is. The rates range from 5% right up to 60% and some exemptions can be very low. Careful planning is therefore necessary to avoid or lower this tax burden.
You also need to understand French succession law which imposes forced heirship. Assets do not automatically pass according to your will. You cannot leave everything to your spouse or partner because children are protected heirs in France, inheriting up to 75% of the parent’s estate. You need to understand how the law affects your family.
From August 2015 a new EU succession law allows foreign nationals to elect for the succession law of their country of nationality to apply. Note though that this only applies to succession law, not tax. It may also have unexpected consequences so take specialist, personalised advice.
Another important tax issue to consider as early as you can when living in France are the tax implications of buying and selling property. When is the best time to sell your UK property? When is the best time to buy in France? You could easily end up paying tax that could have been avoided, so look into this carefully.
Pensions are another key issue when retiring to France. The UK pension reform provides you with more options, but you need to consider all the tax implications in France. You need to weigh up all the options, and there are a few, and how they work for you. If you have not yet started drawing your pension, seek advice before you do, otherwise it may be too late for some opportunities.
Savings and investments
Last here but certainly not least, you need to review your savings and investments. You need to make sure that they are structured in the most suitable way for your new circumstances and objectives, always taking your appetite for risk into account. At the same time, you want them to be structured in the most tax efficient way for France, as well as to meet your estate planning wishes. So overall, it may be time for some restructuring to ensure you do not pay any more tax than you need to.
The sooner you carry out your tax and wealth management planning, the sooner you can get on with enjoying your new life in France.
Any questions? Ask our financial advisers for help.
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.