Charlotte Macdonald, Senior Associate Solicitor (consultant) in Stone King’s international and cross-border team, answers legal and practical questions that are often asked by her clients in relation to buying or selling property in France, inheritance law, or how inheritance and capital gains tax are treated between the UK and France. Here, she looks at how changing your nationality from British to French affects your tax obligations.
Question: ‘I have now been living in France for several years, and I’m thinking of changing my nationality from British to French – if I do this will it improve my tax situation?’
It is a common misconception amongst British people that our nationality directly affects our tax status. In fact, very few countries around the world tax their citizens based on their nationality (the USA is a notable exception).
Neither the UK nor France tax based on citizenship – instead our income tax status is based on our residency. Both countries have their own definitions of what it means to be resident.
In the UK our residency status is determined by the Statutory Residence Test (‘SRT’). There are a number of tests set out within the SRT. Broadly speaking, if a person spends at least 50% of the year (183 days) in the UK they will be considered UK tax resident. However, if they retain a number of ties to the UK they may still be considered tax resident even if they spend far fewer days in the country (in some cases as few as 45 days). These ties include:
- Having a UK resident family
- Working in the UK for 40 days or more
- Whether they have UK accommodation available to them
- If they were present in the UK for at least 90 days in either of the past two tax years, and
- Whether they were present in the UK more than in any other country (only applicable in some cases)
This means that in some circumstances it is possible to be tax resident in both France and the UK. In these cases, it is necessary to analyse the UK/French double taxation convention (2008) to see which country can tax which income.
Inheritance tax is not based on nationality either. In the UK we base inheritance tax on ‘domicile’. This is an old-fashioned concept and very broadly correlates with the country that we feel is ‘home’. The exact application is complex, but in broad, simple terms our domicile of origin is where our parents believed their home to be at the time of our birth.
We can displace our domicile of origin and acquire a domicile of choice by moving to a new country, with the intention to remain in that new country permanently. This intention will be proved by how we conduct our life following the move. There is no one factor which can definitively prove intention, but acquiring the nationality of our new country is a helpful indicator.
Whilst gaining a new nationality can help to prove a new domicile, it won’t be the only factor which will affect which country can tax a person’s worldwide assets on death.
It is common for people who have assets in both the UK and France to be subject to both UK and French inheritance taxes on their death. This is because, alongside domicile, inheritance tax is also assessed on the location of the asset.
Where both countries wish to tax the same asset following a death, the UK/French double taxation convention (1963) will determine which country can tax which asset. Where the deceased is resident in both France and the UK on the date of death, there are a number of ‘tie breaker’ tests to work through to see which country can tax their worldwide estate. The fourth tie-breaker test (used if it isn’t possible to ascertain where the deceased lived or was most closely associate to) is the nationality test, by which the country of which the deceased was a national has the greater taxation rights.
So, although nationality can come into play here, it will only do so where the residency of the deceased cannot be easily ascertained.
If you have assets in both the UK and France, or are living in both countries, your nationality is unlikely to make any difference to the taxation that you, or your estate, is liable to pay.
Your tax status (and that of your estate following your death) will be decided by your residence (income tax) and by your domicile and asset location (inheritance tax).
You may have other very good reasons for wishing to change your nationality, but tax is unlikely to be one of them, as it isn’t possible to choose the most beneficial tax system for your circumstances by changing nationality from British to French, or by becoming a dual national.
For more information please contact the international and cross-border team at Stone King LLP –Charlotte Macdonald, Dan Harris, Raquel Ugalde, Emma Seaton, Bryony Anning and Marina Emmanouel either by calling +44(0)1225 337599 or by emailing [email protected].
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