Fine wine, exquisite cheeses, access to one of the best healthcare systems in the world… and a totally different taxation system await you.
After healthcare, it is the French system of taxation that causes the most concern to potential retirees. As a resident of France, you will find you are subject to a whole new tax regime, on your income, possibly on your wealth – and eventually the forced succession laws and inheritance taxes will come into play.
Of course, this shouldn’t come as a surprise. After all, you are moving away from the UK so you cannot expect to take the taxation system with which you are familiar across the Channel. But as different as the French system is, many people find that they are actually better off in respect of their tax liabilities than they would have been had they remained in the UK.
One of the major advantages of living in France is the quality of the French healthcare system. However, there are conditions you must satisfy in order to join; you must either be in receipt of an S1 form from the UK, be paying into the system via your employer or self-employment or have been resident in France (i.e. paying taxes) for five years.
You will be required to make contributions to the healthcare system unless you satisfy one of the following:
• You are paying healthcare contributions via your employer/self-employment
• You are entitled to a “short term S1” (formerly E106)
• You are entitled to a “long term S1” (formerly E121)
The contribution has been set at 8% of your taxable income, after allowances, above a standard allowance of €9,164 (for a single person).
However, if you are in receipt of a UK State pension, or if you are married and your spouse is in receipt of the UK State pension, you will be entitled to join the healthcare system in France without having to make healthcare contributions, provided you can show you have a long term S1.
In the event that you are fortunate enough to be taking early retirement- and are not yet in receipt of your State pension – you may be eligible for reciprocal cover, under a short term S1 [changes are expected to this eligibility so double-check to see if you are entitled] depending on your National Insurance Contribution record over the last two to three years.
You should contact the Department of Work and Pensions for more information.
It should also be noted that an S1 will only cover you for French healthcare up to a certain percentage of the tariff de convention amount. A top up insurance policy is essential to ensure you are covered for the balance over and above the tariff.
You will pay tax in France on your pension income. You do not have a choice as to where you pay tax, although certain pensions, typically public service and government schemes, will remain subject to UK tax. However these pensions MUST still be declared on your French tax return.
Due to certain pension allowances, for example the 10% abatement on pension income (up to a maximum of €3,660) and – if married – the method of taxing you as a household rather than as individuals, means many people retiring to France find they are taxed more efficiently in France than in the UK.
Additionally, if you hold an SI you will not be subject to Social Charges (which is a separate ‘tax’ applied to your income) on your pension income.
Inheritance tax and succession laws
Inheritance law is applied in a totally different manner to the way with which we are familiar in the UK. Inheritance tax between spouses has been abolished, however, this has no impact on the forced succession rules. The threshold for assets passing to children starts after an allowance of €159,325 (each child has their own allowance of €159,325), but for assets passing between unrelated individuals, i.e, to step-children, or an unmarried partner, the threshold is only €1,594 with tax payable at a punitive 60% on anything over this amount!
As mentioned, the French have forced succession laws which mean that any reserved heirs (i.e. birth or adopted children) have rights to certain portions of your estate when you die. This can become complex in the event of children from previous relationships.
So, how do you ensure that your assets pass to your chosen heirs on your death without your beneficiaries paying substantial rates of tax? A highly effective way of reducing the tax burden in France is through the use of French approved life assurance policies.
These can be structured to protect your capital in a way that will not only mitigate income tax and social charges but also reduce and in some cases diminish entirely the inheritance tax payable on capital passing to your chosen beneficiaries. With planning these investments can also be used to leave your capital to whomever you chose, rather than pass according to the succession rules. There are further tax benefits to be gained if you plan in advance of your move.
There is a lot to be gained from taking professional advice. The first step would be to seek independent professional advice from an adviser who can not only advise you on the structuring of your assets to make them tax efficient in advance of your move – but who can also take you through the other aspects of the French system, including the taxation of your pensions and existing assets, and apply these to your personal situation.
Revised: November 2011