The Blevins Franks Guide To Taxes In France

Transcription

1 To Taxes In France

2 Contents Introduction 1 Where are you tax resident? 2 Are you paying tax in the right place? 3 What about the UK/France Tax Treaty? 3 Are your investments tax-efficient for you? 4 What about your rental income? 4 What about selling your property? 5 What about offshore bank interest? 5 What are social charges? 6 Who is going to inherit your assets? 6 What about your will? 7 Who is going to pay the tax when you die? 7 What is wealth tax all about? 8 What if you are not married? 8 What about civil partners? 8 Summary 9 Rates of tax 10 D08.FR.Jan2018 Blevins Franks

3 Introduction Moving abroad is something that many Britons yearn to do, and France is a very popular destination for many of them. Yet how much do you know about the tax implications of moving to France? This guide looks at many of the issues facing people moving from the UK to France, to raise awareness of things that may affect you. Depending on your circumstances, however, there are likely to be things that you can do to minimise the problems, and you may even find that you can reduce your tax liability by moving to France. You should always take advice when looking to purchase property in and/or moving to any country, and in particular France, where many of the taxes sound the same but are calculated completely differently to similar taxes in the UK. There are even taxes which do not exist in the UK, e.g. wealth tax, and, for some people, healthcare charges. An adviser with a good understanding of both jurisdictions can help you to work out how to make your money work for you, protecting it against foreign taxes, and how to make the most of the opportunities available. 1

4 Where are you tax resident? Understanding where you are tax resident is important since normally the country of residence would tax you on your worldwide income and gains. In France, you are considered to be a tax resident if your main home is in France (your foyer). Alternatively, you would also be considered to be a tax resident if you spend more than 183 days in France during the French tax year (the calendar year), or if you spend more time in France than in any other country, or if your principal activity is in France, or if France is the country of your most substantial assets. Under the UK Statutory Residence Test, there are a number of steps required to assess your residency. To determine your residence status, you need to work through the following three tests in the order shown. The first test is absolute and trumps all other tests, so if you are non-uk resident under this test, the other two will not apply. If the second test applies, the third is ignored. 1. The automatic overseas test 2. The automatic residence test 3. The sufficient ties test Where your residence status is not determined under the first two tests, the third test determines whether you are resident in the UK based on a combination of the number of days you spend in the UK and the number of ties you have to the UK. The ties are: family; available accommodation; substantive work in the UK; more than 90 days in the UK in the previous two years and more time in the UK than any other country. There are specific definitions of each of these ties, and you should seek specialist advice on how they impact your position. Even where you satisfy the domestic residence criteria of France, as well as the UK domestic rules, under the terms of the UK/France Double Tax Treaty you can only be resident in either country at any one time, and the Treaty has tie-breaker rules to establish where you are resident. It might be dangerous to rely on the tie-breaker rules, as circumstances can change, often from year to year sometimes all it could take is a bout of serious illness and your residence position could change, and you have not taken advice or prepared for it. Also, your interpretation of the rules might not be the same as those of the tax authorities in the country in which you are claiming not to be resident. 2

5 Are you paying tax in the right place? Many people move abroad and continue to wrongly pay tax in the UK, when they should be paying tax in their new country of residence. This is quite common in France, particularly where people live in France and commute back to the UK, occasionally working from home in France. Some people just never declare themselves to the French tax authorities at all, until they get caught. It can be all very confusing unless you receive specialist advice. People who mistakenly assess their residence or who pay tax in the wrong country may end up paying more tax than they should be. Had they taken advice before they left the UK, they could have put into place tax-efficient structures for their money, saving them taxes and increasing their available income. If you are traced by the authorities in France and have not submitted appropriate French tax returns, or have under-declared your income because you are paying tax in the UK and believe that you do not need to declare the income in France, this will be treated very seriously by the French tax inspector. It is treated as tax evasion, however innocently arrived at, giving rise to penalties and interest on any underpaid tax. Declaring that you have paid tax in the UK on income which is actually taxable in France will not be considered a defence under French law. Indeed, certain types of income are subject to tax only in France and not the UK under the terms of the UK/France Double Tax Treaty. If this is the case and you have suffered tax in the UK, the French tax authorities will not allow a credit for UK taxes paid, so you will have to pay the tax in France and reclaim any UK tax paid on the income from the UK tax authorities. On the other hand, you might be working in the UK for a UK employer, or performing self-employment activities in the UK, and you may still have a tax liability in France. In such cases, in order to avoid double taxation, France will apply a tax credit to offset the French tax suffered. You could also find that you have been paying social security to the wrong country. This can affect your healthcare, state retirement pensions and other social welfare benefits. Again, there may be penalties and interest due on any underpaid social security. By getting this wrong you can cost yourself, and possibly your employer, a lot of money as well as losing healthcare, social security and pension rights. What about the UK/France Tax Treaty? Does it stop you paying too much tax? While the treaty between the UK and France means that the same income or gain is not taxed twice, not all income or gains are taxed in both countries. The problem is, if you do not know the rules, you can end up paying more tax than you need to if you are paying it in the wrong country. Also, where income or gains are taxed in both countries, although you can offset the tax paid in, say, the UK against the tax due in France, if the tax payable in the UK is higher you will not get a refund of the difference in France. So ideally, if you can avoid paying the higher UK rate altogether, you can reduce your tax bill this way. However, just not paying the UK tax is not an option, so you need to take advice to make all of your income as tax efficient as possible. In some cases, relief from double taxation is given in a different way. In certain circumstances, UK source income is not directly taxable in France in the hands of French residents; however, it is included as part of the taxable income, and a credit equal to the French income tax and social charges that would have been payable on this income is deducted from the final tax liability. This applies, for example, to UK source rental income and UK government service pensions. 3

6 Are your investments tax-efficient for you? For UK residents, income derived from ISAs and Premium Bond winnings are all completely free of tax. However, these are only tax-efficient investments for UK purposes. Once you become French resident all income from such investments is subject to tax in France (and also social charges see page 6). It is important to talk to us before you change residency if possible as there may be steps we can help you take ahead of your move that will save you paying tax that could have been avoided. Following recent major reform on the taxation of investment income (including capital gains on the disposal of shares and securities), most types of investment income are now subject to a flat rate of 30% (inclusive of social charges). Low income households still have the option of having investment income taxed at the normal scale rates if this results in a lower liability. Also, did you know that although anyone may hold Premium Bonds, regardless of where they are resident (subject to any local laws prohibiting such investments) only UK residents may contribute to an ISA? Those who have left the UK may continue to hold ISA funds, but can no longer add to these. Income derived from ISAs (regardless of whether it is withdrawn or not) is only tax-free in the UK and will be subject to tax in France. You also have to consider the French capital gains tax and social charges on disposal of these assets, including on shares held in ISAs, as these will be taxable disposals in France. Investment bonds are a vehicle that people often use, giving the freedom of deferring tax on any income or gains arising until money is withdrawn from it. If you are a UK resident this is usually for at least 20 years, and sometimes more, as you can take up to 5% (the 5% tax-deferred allowance ) of your original investment each year with no immediate liability to UK tax, while the income and gains within the bond roll up tax efficiently. The 5% limit is cumulative, so if not utilised in one year can be carried forward. The 5% tax-deferred allowance does not extend to French residents as these are UK tax rules for UK residents and the French rules on such income are different. There are very tax-efficient investment vehicles available to residents of France that can reduce taxable income, and thus income tax and social charges. They can also have an impact on French succession law and tax. If only ISAs were as beneficial for UK residents! What about your rental income? Many people retain UK property to let out when they leave the UK. For some, this is their pension fund, and they have one or more buy-to-let properties; others are unable to sell their UK main home when they leave the UK and so decide to let it out to provide an income. This income remains taxable in the UK and must be reported there each year on a UK tax return. This income is also taxable in France if the taxpayer is resident in France for tax purposes. However, in this case, a tax credit equal to the French tax and social charges should be granted in France in order to avoid double taxation. 4

7 What about selling your property? In France, the gain on the sale of your French main home is always exempt from capital gains tax provided that the property is your actual home at the time of sale. However, under the UK/France Double Tax Treaty, if you are French tax resident, gains arising on UK properties are subject to French capital gains tax at 36.2% including social charges (plus a surtax of between 2% and 6% where the gain is more than 50,000). This would apply even if the property was your main home before you moved to France. You could also be liable to UK capital gains tax and in this case, to avoid double taxation, you would get in France a tax credit for tax paid in the UK. There are alternative methods of investment available to residents of France that are much more taxefficient. Even where a property is not selling or being sold, it is worth taking advice to see if there is anything that can be done to mitigate taxes and social charges. What about offshore bank interest? French tax residents are subject to tax on their worldwide income, including bank interest arising anywhere in the world, even if you never use the account or withdraw the interest you earn. You have to declare all your bank accounts to the French authorities. Failure to do so will attract a fine of up to 10,000 per undeclared account per year. In addition, failure to declare the income will be seen as tax evasion in France. This applies regardless of whether the bank deducts a withholding tax at source or not. Under the Common Reporting Standard, which began in January 2016, almost 100 jurisdictions around the world are starting to automatically exchange information for tax matters. The French authorities will receive information each year on all your bank accounts, investments and other financial assets held outside France. 5

8 What are social charges? Are these like National Insurance Contributions? Social charges in France are nothing to do with social security; they are an income tax by another name, payable on all forms of income. Social charges are payable at a rate of 17.2% on all investment income, such as interest, dividends and rental income, and also on capital gains. A lower rate of 9.7% is payable on employment and selfemployment income (this is the only income that is subject to French social security contributions the French equivalent of UK National Insurance Contributions), and finally, 9.1% on pension income. Many UK nationals in receipt of pension income who have not yet reached UK state pension age when they move to France can be caught by this. Who is going to inherit your assets? French succession law applies to the worldwide assets of French residents (with the exception of non- French real estate), and to French real estate belonging to non-residents of France, even if held in a French company. Under French law, where the deceased spouse dies without a will, the surviving spouse has the right to receive 25% of the deceased spouse s estate or, at the surviving spouse s option, a life interest (usufruct) in the income of 100% of the estate (the ownership of the capital going to the reserved heirs on the surviving spouse s own death). The life interest option is not available in presence of step-children. Where the deceased spouse has prepared a will, any children of the deceased, whether from within the current marriage or outside that marriage, are reserved heirs who are entitled to up to 75% of the deceased s estate, even in preference to the current spouse. Your will (in whichever country it might have been written) will be ignored if it attempts to override these reserved heir rights. One child is automatically entitled to 50% of the deceased parent s estate, two children receive two thirds of the estate in equal shares (i.e. a third each), and three or more children are entitled to 75% of the estate on death, to be divided between them in equal shares. If the deceased does not have any children, a current spouse will become a protected heir and will be entitled to a maximum of 25% of the estate. This can be a big problem for people who have children of an earlier marriage or relationship, and even for those who do not, who want the spouse to inherit their assets on their death rather than the children. However, European succession regulations ( Brussels IV ) allow an individual to elect, via his will, for the laws of his country of nationality to apply. This was a welcome development for UK nationals living in France who wish to avoid French succession laws but you should take specialist, personalised advice first since choosing UK law may have consequences you are not aware of. You also need to watch out for high succession tax rates if you leave assets to distant or non-relatives (see page 7). In any case, there are things you can do to avoid some of these problems created by French succession law. You should take personal advice before buying a property (as matters may be sorted out by simply reviewing how the property should be held), and before moving to France. Even some of what people think of as the obvious answers, such as putting a property in the name of their children (for example, to avoid taxes on death) can have unexpected effects, some of which are to actually increase the tax liability. 6

9 What about your will? A UK will may be effective in France. However, for those without children and/or a spouse, ensuring that you have a valid will is essential to ensure smooth and cost-efficient transfer of assets. A UK will must go through the probate process in the UK, after which it needs to be translated and notarised and then go through the probate process in France. Thus it can take a significant amount of time before a will can be finalised and the assets distributed. This is also a very costly process. If you set up a French will, this may inadvertently revoke your UK will, leaving your assets intestate, which can take a lot of time to sort out. Alternatively, the new French will may be at odds with your existing UK one, leading to disputes between your heirs, which again may be expensive and costly to resolve. Taking advice can solve these problems, ensuring that any transfer by will is as smooth as possible for your survivors. Who is going to pay the tax when you die? French succession tax is a tax on both lifetime gifts and assets passing on death, and always applies to French real estate, regardless of where the person gifting/bequeathing the asset is resident. It is also payable on all assets of the donor/deceased if they are resident in France at the date of the gift/death. It is the person who receives the assets, whether by way of lifetime gift or as a bequest, who is liable to pay the tax (unlike the UK, where the estate pays the tax, unless specifically provided for in the will). However, as in the UK, the ownership of an asset cannot be transferred until the tax is paid. As you cannot sell the asset to pay the tax, problems can arise for the beneficiaries in France, where tax usually has to be paid within six months of the death. So as you can see, it is not only the laws that apply on death that are different from the UK, taxes on death are also different. However, there are measures you can take to avoid both French succession law and minimise (if not avoid) French succession tax completely. As you would expect, planning can start early, even before you actually purchase a property, and getting this right could save a lot of tax in the future. There is also the additional problem that, if you die owning UK assets, not only may French succession tax be due on those assets, UK inheritance tax might be due as well. There is a double tax treaty specifically covering taxes on death (so this does not cover lifetime gifts). However, there are particular situations whereby tax can be due in both countries, but on different events. In this case, as the tax is not due in both countries on the same event, there can be no offset of tax paid in one country against the tax due in the other country. This is where careful planning can help, so that the people you want to inherit your assets can do so at a minimum of tax, meaning that more of your money goes to them, and less to the governments of either France or the UK. 7

10 What is wealth tax all about? In France, the value of your real estate assets is added up on an annual basis as at 1 January each year, and is subject to tax. There is no equivalent tax in the UK, as this is effectively a tax on your capital assets rather than income or growth in value of disposed assets (i.e. capital gains tax). This can be a complicated tax, and can be very expensive for those who are unprepared for it. The effect of this tax can be mitigated by taking advice, particularly before you move to France. Even if you are not planning on moving to France, it is sensible to take advice to see if this tax will affect you, and how. It should also be noted that, for the five French tax years after first becoming a resident of France, wealth tax should only be based on the value of any real estate assets situated in France, and therefore all other assets will be ignored. This is known as the French wealth tax holiday for non-residents. In the sixth year following French tax residence, wealth tax would then be payable on worldwide real estate assets as normal. What if you are not married? For those who are not married, French succession tax is 60% on anything inherited or gifted between you, and in addition, you will not benefit from the Parts system which allows a family to utilise the lower income tax rate bands of all members of the household. However, unmarried couples are treated as one household for wealth tax purposes, so if you are living together, unmarried partners effectively get the worst of all worlds unable to take advantage of the income tax benefits and subject to high rates of tax on death, while being subject to the wealth tax limitations. There are ways around this, and they do not necessarily involve being married, but if you are unprepared for this when you move (or even if you own a French property and are resident elsewhere), the consequences can be terrible when the first partner dies. Under French succession law, the survivor will have no automatic right to inherit assets, particularly if the deceased has children (though the Brussels IV regulations from August 2015 would help avoid this, see page 6), and, in addition, may have to pay 60% tax on assets inherited from the first deceased. This can also be a problem for families with step-children, as step-children are also liable to pay tax at 60% on anything inherited from the step-parent. What about civil partners? The Pacte Civil de Solidarité (PACS) is recognised as a civil partnership for UK legal and tax purposes for same sex couples (but not for opposite sex couples). A UK civil partnership is now recognised in France. This means that if you are already in a UK civil partnership, you will be treated as PACS partners in France for tax purposes. Please note that same sex marriages are recognised in France. 8

11 Summary There are many issues facing UK nationals looking to buy property in and move to France, and a lot of these can be dealt with very easily, in many cases, provided you take advice. However, for you to make the most of such a purchase or move, the adviser needs to be cognizant of both French and UK tax law, as something that can save you tax in the UK can have the opposite effect in France, and vice versa. There is no one solution for everyone, because each situation is different. It is important to do your research, but there is no substitute for advice tailored to your specific circumstances. Despite the reputation that France has for high taxation, this is not always true, and many of our clients have found this out to their benefit. Can we do the same for you? 9

12 Rates of tax Income tax scale rates for 2017 income (2018 tax returns) NET INCOME SUBJECT TO TAX BAND TAX RATE TAX ON BAND CUMULATIVE TAX Up to 9,807 9,807 Nil - - 9,807 to 27,086 17,279 14% 2, , ,086 to 72,617 45,531 30% 13, , ,617 to 153,783 81,166 41% 33, , Over 153,783-45% - - Income tax rates are usually only set at the end of the tax year to which they relate, or sometimes even after the tax year is over. They are very rarely set in advance of the relevant tax year starting. Most types of investment income and gains on shares and securities are subject to a fixed rate of 30% (inclusive of social charges) from 1st January Social charges for 2017 income CSG (Contribution sociale généralisée) CRDS (Contribution au remboursement de la dette sociale) PS (Prélèvement social) CA (Contribution additionnelle) PdS (Prélèvement de solidarité) CASA (Contribution additionnelle de solidarité pour l autonomie) SALARIES AND UNEMPLOYMENT BENEFITS RETIREMENT OR DISABILITY PENSIONS INVESTMENTS, ANNUITIES, RENTAL INCOME AND CAPITAL GAINS 9.2% 8.3% 9.9% 0.5% 0.5% 0.5% 0% 0% 4.5% % - - 2% - 0.3% - Total 9.7% 9.1% 17.2% 10

13 Wealth tax rates for 2018 Wealth tax is payable where the taxable household wealth (only real estate assets) exceeds 1,300,000. The applicable tax rates are as follows: NET WORLDWIDE ASSETS OF THE HOUSEHOLD BAND TAX RATE TAX ON BAND CUMULATIVE TAX Under 800, ,000 0% ,001 to 1,300, , % 2,500 2,500 1,300,001 to 2,570,000 1,270, % 8,890 11,390 2,570,001 to 5,000,000 2,430, % 24,300 35,690 5,000,001 to 10,000,000 5,000, % 62,500 98,190 10,000,000 upwards % - - TAXABLE GIFT Succession and gift tax rates for 2018 TO SPOUSES AND PACS PARTNERS (Gifts only) TAX ON BAND CUMULATIVE TAX Less than 8,072 5% ,072 to 15,932 10% 786 1,190 15,932 to 31,865 15% 2,390 3,580 31,865 to 552,324 20% 104, , ,324 to 902,838 30% 105, , ,838 to 1,805,677 40% 361, ,961 Above 1,805,677 45%

14 ...Succession tax rates for 2018 TAXABLE INHERITANCE/GIFT IN THE DIRECT LINE (including adopted children but not step-children unless adopted) TAX ON BAND CUMULATIVE TAX Less than 8,072 5% ,072 to 12,109 10% ,109 to 15,932 15% 573 1,381 15,932 to 552,324 20% 107, , ,324 to 902,838 30% 105, , ,838 to 1,805,677 40% 361, ,949 Above 1,805,677 45% - - TAXABLE INHERITANCE/GIFT BROTHERS AND SISTERS OTHER RELATIVES TO THE 4TH DEGREE MORE REMOTE AND NON- RELATIVES Less than 24,430 35% 55% 60% Above 24,430 45% 55% 60% Succession and gift tax exemptions for 2018 Spouses/PACS partners - gifts (inheritances exempt) 80,724 Each natural or adopted child from each parent/to each parent 100,000 Sibling 15,932 Grandchildren (gifts only) 31,865 Great-grandchildren (gifts only) 5,310 Nieces/nephews 7,967 Cash gifts to a child, grandchild or possibly nephew/niece - subject to donor s/donee s ages 31,865 Other (inheritances only) 1,594 To any disabled person additional to above 159,325 12

15 You may contact us either by phone or by using the details below. contact us now South East France Rob Kay Mike Marsden Stuart Stojkovic Simon Eveleigh South West France Thomas Marron Colin Leigh-Higgott Rupert Holderness David Hardy Peter Wakelin North West France Bradley Warden FREEPHONE FRANCE FREEPHONE UK france@blevinsfranks.com This guide has been prepared based on the laws of the UK and France as at January The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. It is a general guide only and, in explaining complex matters in a simple way, cannot be relied upon as a substitute for professional advice. Blevins Franks cannot accept any responsibility for loss occasioned by any person s action (or refraining from action) as a result of reading this guide. You must take detailed professional advice relevant to your particular circumstances before any action is taken. Blevins Franks Tax Limited provides taxation advice; its advisers are fully qualified tax specialists.

16 The Blevins Franks Group is present in FRANCE MONACO SPAIN GIBRALTAR PORTUGAL CYPRUS MALTA UNITED KINGDOM Blevins Franks Tax Limited REGISTERED OFFICE 28 St James s Square, London SW1Y 4JH, United Kingdom + 44 (0)