Until now, foreign pension lump sums received by French residents were not taxed in France. However, starting 1st January 2011, lump sum payments from pension funds (whether local or overseas) ar
Until now, foreign pension lump sums received by French residents were not taxed in France. However, starting 1st January 2011, lump sum payments from pension funds (whether local or overseas) are now taxable in France.
If you take your lump sum because of an ?accident of life? (unemployment, invalidity, death of a spouse etc), it is exempt, but in all other situations it will be liable to French tax.
The amount of tax payable depends on how the original pension contributions were made and whether they were tax deductible or not. The rules apply to private pensions, all occupational pensions, lump sums generated from deferral of UK state retirement pensions and Qualifying Recognised Overseas Pension Scheme (QROPS).
Tax deductible contributions = lump sum is taxed as pension income
With UK pension funds, your contributions would most likely have been tax deductible for either you or your employer. Under the new French rules, lump sums received from such UK registered pensions are taxable as pension income in France.
The usual 10% deduction for pension income applies, but it remains capped at ?3,660 per household and is measured against all pension income received by your household.
Social charges are payable on the lump sum at 7.1%, unless you hold Form S1.
Contributions not tax deductible = only the growth is taxed
If contributions were not tax deductible, then only the growth element of the lump sum is taxable.
If you have UK registered pensions this situation is very unlikely to apply to you, although it should for lump sums from a Qualifying Non-UK Pension Scheme (QNUPS).
Avoiding higher income tax rates
Receipt of a lump sum could push you into higher rate bands than normal, and could suffer up to 41% tax itself.
There is a mechanism available to avoid it being taxed at the higher rates where it exceeds ?6,000, but payment must be made in one lump sum (not instalments) and the contributions to the fund must have been 100% tax deductible on the way in to the fund.
If so, one fifteenth of the taxable lump sum is added to your other taxable income in the year of receipt. The amount of additional tax this generates is multiplied by 15 to produce the total tax liability.
You need to specifically claim this relief, either on your tax return or by writing to the French authorities.
If you cannot meet the above conditions, you can request for the lump sum to be taxed as one-off ?exceptional? income (revenu exceptionnel) whereby the lump sum is divided by four and one quarter is added to your other taxable income and taxed at the usual scale rates. The additional tax so calculated is multiplied back up by four to produce the total tax liability on the lump sum. This can avoid the lump sum being taxed at the higher rates, although it is not as generous as the method above.
Does this affect the taxation of the annuity income?
The taxation of income from UK personal pensions, QROPS and QNUPS is a grey area in French legislation. Tax treatment depends on whether the income is taxed as ?pension income? or ?purchased annuity? income. The latter can be much more favourable. However, if you now have a lump sum taxed as pension income, it is likely that future income from your fund will be taxed as pension income and you cannot benefit from the favourable annuity treatment.
You may therefore prefer not to take a lump sum if you are already resident in France, or people moving to France may take the lump sum before arrival. Existing pension income is not affected by the new legislation so if you are already receiving the annuity treatment it should continue. However as this is still a grey area the annuity treatment cannot be 100% guaranteed.
On death
Lump sum payments from pension funds are free from all French taxes and social charges when paid to the surviving spouse/PACS partner, whereas it will remain liable to income tax if paid as an income. It therefore usually makes sense to have a lump sum paid on the death of the member, and the surviving spouse can then invest the funds to achieve maximum tax efficiency.
You should take professional advice to establish what all your options are and how they would affect your tax bill. It is important that you take advice from a firm that is not only authorised to conduct business in France but is also authorised to advise on pensions by the UK Financial Services Authority.
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; an individual must take personalised advice.
By David Franks, Chief Executive, Blevins Franks
4th February 2011
