Paying tax when you retire to France

Moving or retiring to France is a dream that many share. However, because France is viewed as a high tax jurisdiction many are put off when it comes to taking the plunge. We look at how spending your time in France can actually work to your financial advantage…

British retirees and business people fear that declaring themselves as French residents will mean that they will be subject to high French taxes and thus choose to stay put. Or they think (incorrectly) that they can continue to declare themselves UK residents while living in France. Incidentally, it should be pointed out that France’s high social contributions are one of the reasons behind the country’s high standard of living!

However, the above perception is not necessarily true and there can be many financial benefits for choosing France, rather than the UK, as your principal residence in retirement.

Take for example a retired couple earning €80,000 a year from private pensions, with a capital gains liability of €100,000. Transferring to the French system and declaring oneself as a French resident could be advantageous from a taxation point of view.

In France, residents are subject to tax on their worldwide income. That means a pension being drawn out of the UK must be declared in France (the country of residence).

In the UK there are now three tax rates, following the introduction of the 45% additional rate applying to annual taxable income over £150,000. France has four tax rates, with a top rate of 41%.

And of course there are always the extra tax deductions that France offers over the UK system. For example, there is a deduction of 10% on pension incomes which is capped at € 3,660 per household.

Another difference of the French tax system is the way in which income tax is calculated, namely by the use of ‘parts’. Tax is calculated depending on how many ‘parts’ the family is made up of. Put more simply, a ‘part’ is a family member. To illustrate:

– a single, divorced or widowed person is one part
– a married couple constitutes two parts
– in the case where there are still children living at home, every child or dependant person is equivalent to 0.5 part (or one part after the third child or dependant person)

So for a couple without children, the income will be divided by two. The tax rate will be based on this figure and then multiplied up by the number of ‘parts’, therefore the rate applied to the household income will be lower. This method is not used in UK tax calculations where we are taxed as individuals. A family or retired couple can gain by living in France, especially where one person has the lion’s share of the income e.g. from a pension or high earnings.

Residents in France are subject to capital gains tax, as is the case in the UK. Capital gains on investments are added to household income and subject to the standard tax bands and rates. However gains can be reduced according to the length of ownership of investment assets on the following basis:-

20% reduction for ownership between 2 and 4 years

30% reduction for ownership between 4 and 6 years

40% reduction for ownership over 6 years
UK capital gains tax is calculated differently. CGT is levied at 18% or 28% depending on the taxpayer’s income tax rate. However some exemptions and reliefs apply, and in order to find out more about these deductions, it is best to consult a tax expert. However, when it comes to initial exemptions, in the UK, the first £10,900 (2013/2014 rate) of gains is free from tax in the case of an individual.

Another way to reduce the tax burden in France is through the use of French-approved life insurance policies. There are tax benefits to be gained if these insurance policies are used correctly and planned ahead of a permanent move to France.

With these policies, any capital invested can be withdrawn tax-free, while interest earned on the investment can remain within the policy.

There are also inheritance benefits linked to these policies. If descendants are identified as beneficiaries to the policy, no inheritance tax is payable up to €152,500 per person. Estate duty over and above this sum is set at 20% rising to 25% for very large sums. This compares well to UK inheritance tax of 40% for assets over the nil rate band of £325,000 per person.

In order to illustrate that retiring to France need not be an expensive move, below is a table illustrating how much an early retired couple can expect to pay in income tax in the UK and France for a range of income levels where one person is receiving the income:

Notes
Notes

*Based on 2013/14 allowances and rates
**Based on an exchange rate of £1/€1.17
***Based on 2012 tax rates including 10% allowance up to max. of €3,660

It can therefore be seen that comparative income tax rates in France, coupled with the ‘household parts’ system of taxation, means that retiring to France is financially a very viable option.

It must also be noted that while tax planning is an important factor to bear in mind when retiring to France, it is not necessarily over-complicated or punishing from a financial and fiscal point of view.

Regarding wealth tax, the current UK/France Double Tax Treaty exempts assets held outside France from liability to French wealth tax for the first five years as a new French resident. There is also a tax ceiling of 75% of income which includes all taxes, meaning that if the majority of your income comes from certain types of investments your wealth and income tax bills may not be as high as first feared.

Anyone considering relocating to France from the UK needs to consult a specialist dealing in property and taxation issues to ensure that the right taxes are being paid in the right country and that there are no surprises in the purchasing process. With the help of experienced professionals, a move to France can be free from headaches and unexpected costs. As ever, planning ahead is the key, even if this means several years in advance to take advantage of UK tax rules.

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