Frequently asked questions about tax in France:
Q. Is there any reason that I would be better off paying all my taxes in France?
A. If you are resident in France then you must pay your taxes in France except for income received from certain government employment or government service pensions.
Q. Do I have to tell the French about my investments if all of them are in Britain?
A. Yes, if French tax resident. Investment income is taxable in France if you are resident in France, regardless of where the income arises. If tax has been deducted at source, then you will be able to claim a tax credit against your tax bill in France.
Q. Most of my British investments are tax free, but do I now have to pay taxes on some of them?
A. British tax-free investments will not be tax-free in France. Each investment needs to be assessed separately as the answer will vary depending on the type of investment and how income or capital is distributed.
Q. I’ve heard that a “tax wrapper” offers expatriates a legitimate method of tax avoidance. What exactly is it?
A. The term “tax wrapper” refers to a specialised form of life assurance arrangement, a structure which benefits from advantageous tax treatment. It is specifically designed to enable individuals to hold their own choice of assets within it, hence the “wrapper” concept. This type of investment has various names, including Insurance Bond; Offshore Bond, Private Client Portfolio and Personal Portfolio Bond. In France it’s called Assurance Vie.
This arrangement is popular in the UK and has also become very popular in other European countries. The tax treatment in France it is very favourable. Speak to us at the Blevins Franks office closest to your property to establish exactly how you may benefit and how you can save tax. These types of bonds offer many unique tax benefits, but when held in a suitable trust the advantages are even more exceptional. If you would like to lower your tax bill I recommend looking into these possibilities.
Q. My wife and I are considering retiring to France. I would like to know where I will stand with regards UK tax once I move to France, especially UK inheritance tax?
A.Once you are a permanent tax resident in France, you will basically no longer be liable for income and capital gains taxes in the UK, unless in some cases the income arises in the UK, or in the case of capital gains you permanently return within 5 tax years.
Inheritance tax (IHT) can be harder to leave behind. IHT liabilities are normally based on domicile, which is a more permanent concept than residence. However, there is a special treaty that shifts the tax position to France for permanent residents. This means no UK IHT except on UK assets – but French succession tax is payable on all worldwide assets (including the UK assets) and there is no blanket exemption for assets left to the surviving spouse (unlike in the UK). Only the first €76,000 is tax free in France, with tax at 5 to 40% above that. Seek professional guidance as this risk can be avoided.
For UK assets, IHT still also applies, although credit will be given in France for any UK tax. The 2005/06 nil rate band is £275,000, and, if you leave assets worth more than this to dependants other than your spouse they will have to pay 40% IHT on the excess.
Q. What are the succession implications of becoming a French Domicile?
A. If you are permanently resident in France, you will become domiciled under French law. On the death of one of you, then French succession law applies to your worldwide assets (except for immoveable property outside of France). This means that the children and the parents of the deceased (including children from earlier relationships) have prior rights to assets over and above the surviving spouse. These rights are not only against assets in the deceased’s sole name, but also against the deceased’s share of jointly owned assets.
Q. How will my pension and AVCs be taxed?
A. As a tax resident of France your pension will be liable to tax in France unless it is a government service pension. If you receive your pension net of UK tax you need to reclaim the tax deducted and apply to the Inland Revenue to have no tax deducted at source by the payer.
There is no choice to be made here as all French tax residents must declare and pay French tax on all worldwide income.
Q. I have heard that I will have to pay “wealth tax” in France, but am unsure which assets are covered by this tax. Can you give me some indication of what I will have to pay?
A. Wealth tax in France is known as ISF (Impôt de Solidarité sur la Fortune). If you become resident in France you will be taxed on your worldwide assets (including properties) based on your household wealth as at 1 January every year. Taxable assets include property, vehicles, debts owed to you, furniture (except antiques), jewellery, shares, bonds, redemption value of any life insurance, horses etc. If you are not resident in France, you will only be taxed on your French assets, excluding portfolio investments and cash. There are a number of tax planning methods designed to reduce wealth tax and you should contact us for advice in the complex area of tax planning.
Q. I will shortly be moving to France. I will leave a large amount of my capital in bank accounts in the UK and Isle of Man. How exactly will the EU’s Savings Tax Directive affect me?
A. The aim of this Directive is prevent tax evasion through non-disclosure, i.e. every EU citizen must pay tax on interest earnings to the country in which they are resident. If you are tax resident in France you are liable for income taxes on your worldwide income, including interest earned from accounts anywhere in the world.
Failure to declare these earnings is tax evasion and illegal. According to the terms of the Savings Tax Directive, the UK and French tax authorities will automatically exchange tax information each year. If you don’t declare interest earned from a UK bank account, the French authorities will find out about it anyway and you could be charged with tax evasion.
The Isle of Man will not exchange information initially, but instead will deduct a withholding tax of 15% (rising to 35% by 2011). You can opt for exchange of information instead and your bank should advise you accordingly.
The Directive starts in July 2005, but many EU Member States are already set up to deal with this from 1st January as this is the start of the tax year in all EU States except the UK. Make sure your affairs are fully legal for tax purposes sooner rather than later.
Q. I bought a house in France a couple of years ago and plan to spend more and more time there. I am aware of the residency rules, but I wonder how each country’s tax authorities will know where I am resident?
A. There are many points to be aware of. For a start, in most countries, including France, it is your responsibility to make yourself known to the tax authorities if you are tax-resident. If you are caught not declaring your tax residence you can be fined or even jailed.
A lot of information can be automatically passed to the French tax authority, including yacht registration, becoming a company director, buying property, receiving bank interest etc. Although passports are no longer stamped, think about the massive trail of paperwork you leave behind: telephone bills, electricity bills, bank statements, credit cards, parking fines, correspondence with professional advisers, medical files etc. All stand by to give evidence of your whereabouts on a daily basis.
Whether you are resident in France or the UK there are ways to legally mitigate your tax bill. Ask us at Blevins Franks (we understands both countries’ tax rules) for advice.
Q. I am just about to move to France permanently. My UK financial adviser assures me he can continue to look after my affairs after I move, but I wonder whether this is a wise thing to do?
A. France is a completely different ball game to that of the UK. I don’t recommend keeping a UK adviser, however good he may be, unless he is fully conversant with French tax and investment planning and can maintain current awareness of any changes that take place over the coming years. Without this knowledge and experience you are likely to be the victim of excessive tax and inappropriate investment arrangements.
There are plenty of English advisers based and living in France who are in a much better position to advise you. Alternatively select one in the UK with knowledge and experience of the French system, preferably one with permanent offices in France. I always recommend choosing an adviser working for a larger firm rather than a one-man-band. There are fewer cowboys operating in France than there were several years ago, but there are still a few around! Don’t be afraid to ask as many questions as necessary to ensure you are able to select the best available. Personal recommendation is best. Never pass your funds directly to the adviser, instead send the funds to the institutions he recommends.