It is also useful advice for those who have recently moved over, or even for those who have been in France a while to consider if they have all the essentials in place. 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.
The starting point 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 to reside here indefinitely – 90 day rule. 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 – where there are few allowances compared with the UK. 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.
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!
I mentioned wealth tax earlier. This is a new, extra tax for British people affecting all those living in France. In summary, the value of your household’s assets is added up each year, and if above €1.3 million is subject to tax.
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, whilst allowing income to accumulate, free of tax, in an approved tax-planning vehicle.
New arrivals in France benefit from a five year ‘wealth tax exemption’ on assets outside France, so with careful planning you can arrange for your investments to be held in arrangements outside France.
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 beneficiaries are. 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.
This leads me on to succession law – another unfamiliar concept for British people. 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 will need to know how the law affects you and what your options are.
The good news is that from next August, a new EU succession law will come into force that 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.