French taxes are renowned for being high, what with income tax and social charges on all forms of income, as well as an annual wealth tax. However, although the headline rates sound high (52.1%!), it is often unlikely that a retiree would have to pay such high taxes.
Below are some aspects of French tax that may be advantageous for retirees in France:
In France, where there are two or more living in the household, the amount of income tax due can be reduced by applying the parts system (parts familiales) whereby the total income of the household members is divided by the number of parts, calculated by reference to the people living in the household, including children. The income tax scale rates are then applied to this lower figure, and having computed the income tax due, it is multiplied by the number of parts applied to provide the tax due.
A married or PACS couple’s income would always be divided into two parts and an additional half part is available to someone with a disability.
Say for a retired couple with no dependent children, one spouse has income of €40,000, and the other has income of say €8,000, instead of one being taxed at the scales rates of up to 30%, and the other being taxed at a top rate of 5.5%, in France the household income would be €48,000, divided by 2, and the tax rates applied to this half share of the income. Thus, the top tax rate on this income would be 14% under the parts system.
Allowance for over 65s
Those over 65, whether or not retired, are entitled to a deduction from your net taxable income, although this benefit is lost where that individual’s income exceeds around €22,000.
10% deduction for pension income
A 10% deduction (minimum €367, maximum €3,592 per household in 2008) is made from the gross pension income.
Social charge exemption
Social charges are another form of tax in France and are paid at the rate of 7.1% on retirement or disability pensions and apply to 95% of the gross amounts received. British expatriates in receipt of their UK state pension are entitled to Form E121, which exempts their non-French pension income from social charges. Those not yet in receipt of their UK state pension but who have a recent UK National Insurance Contributions record may be entitled to a Form E106 for a maximum of 2.5 years after moving, which also exempts the holder’s non-French pension income (if any) from French social charges whilst valid.
Various tax credits are available. These are not deductible against the gross or net income, but deductible against the actual tax payable. Of particular interest to retirees would be the tax credit of 25% for installation or replacement of special equipment for the elderly or disabled and 15% for certain lifts. Until the 31st December 2009, this credit is limited to expenses of €5,000 for a single person and €10,000 for a married couple, with increases for each dependent.
There are also a tax credit for employing a home help, for example for domestic work or as a gardener, of 50% of the remuneration paid to a home help from his tax liability, of up €12,000 plus €1,500 per dependent or member of the household aged over 65, up to a maximum of €15,000 (increased to €20,000 if the home help is required due to a serious handicap or if the taxpayer is living with someone who is handicapped).
Other tax credits are available on dividends; fitting energy-efficient items in the main home (such as condensing boilers, or those that use a renewable energy source, for example); purchase of an environmentally friendly car; filing tax returns electronically and paying tax by direct debit or electronically; mortgage interest; residential care; and for the costs of a nursing home, hospital, convalescence or special care retirement homes.
Invest in an Assurance Vie
Assurance Vie is a specialised form of life assurance which is very tax efficient in France. It allows you to hold your own choice of assets as the investment content of the policy.
Significant lifetime tax savings can be made by investing in this way: there is no French income tax or capital gains tax if the income and gains are accumulated within the policy, and no withdrawals are made. Only the ‘growth’ element of the amount of withdrawals is taxable. So if the whole portfolio of assets within the policy has grown by, say, 7%, only 7% of the withdrawal is taxable; 93% of the withdrawal is tax-free!
Even then, you can choose to apply the usual income tax rates, or, if more beneficial, you can opt for special withholding tax rates (47.1% in years 1-4, 27.1% in years 5-8 and 19.6% thereafter, inclusive of social charges). After 8 years of ownership, the first €4,600 each of taxable income is tax-free (although this is still subject to 12.1% social charges).
These tax breaks are exceptionally favourable. As an example, if the investment has grown by, say, 40% after eight years, the effective tax rate on withdrawals would not exceed 7%, whilst no tax is due on monies that remain invested within the Assurance Vie contract. Compared with conventional investments, where the income is taxed annually, regardless of whether or not you take it out of the vehicle it is held in, the tax and social charge savings can make a big difference to your income.
An Assurance Vie may also reduce your wealth tax liability if it is a non-French policy, under the new wealth tax exemption (see below).
If you take out an Assurance Vie before you move to France then the tax savings will be even more beneficial: an Assurance Vie established before becoming French resident for those under age 70 means that there is no French succession tax liability on death. If the Assurance Vie is established after moving to France, there is an exemption of €152,500 per beneficiary, after which a special withholding tax is payable at a flat rate of 20% (which may reduce the tax burden on children, and particularly to stepchildren, which would normally be subject to succession tax at a flat rate of 60%). Payments made to a surviving spouse or PACS partner are exempt from succession tax. Furthermore, if not a UK policy, the funds held in the policy will also be exempt from UK inheritance tax.
Those arriving to live in France after 6th August 2008 who were not resident in France in the previous 5 years, will be exempt from wealth tax on their non-French assets for the first five years of arrival, so keeping assets out of France may give rise to significant tax savings.
At first glance and by reputation, French taxes may appear high, but this does not mean that relocation to France will result in you paying a lot of tax, and some people who move to France end up paying less in taxes than they did as UK residents. Seek advice from a tax specialist who knows the UK and French tax systems well, to enable you to maximise your income.
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