Financial Planning Ahead of a Move to France

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Financial Planning For Residence in France

An Introduction To: French Tax, Social Security & State Pension Treatment

This report is based on the French Finance Act 2022, French Financing of Social Security Act 2022, the Brexit related Withdrawal Agreement and Trade and Co-Operation Agreement (TCA) and the Franco-UK double tax conventions of 21/06/1963 and 19/06/2008.

1. A Question of Residence - France or the UK?

The tax conventions between France and the UK determine, for tax purposes, the residence and domicile of the individual as well as the method under which different income categories may be taxed. In addition, each State's own regulations have an impact on the taxation of revenue derived in that State by a non-resident.

It is often thought that the tax burden for the individual resident in France was heavier than that in the UK, but increasingly, this is a misconception - particularly for those in retirement. More often than not, the tax burden for a retired resident of France is now more favourable than in the UK, especially if the move has been properly planned beforehand.

Residency

For the purposes of the scope of the taxes covered by the double tax treaties, it is only possible to be tax resident in one State: either France or the UK.  The determination of that tax residence is not elective. A UK resident and national can’t decide to settle down in France but elect to pay tax in the UK because all of their income is generated within or paid from the UK.

Instead, tax residence is determined by the facts of the behaviour of the taxpayer, typically, but not always, by reference to the amount of time they spend in each State.

The Double Taxation treaty determines residency firstly by referring to the internal definitions of each contracting State. Only if, by reference to those internal rules, the taxpayer is deemed to be resident in both States at the same time, does the Double Tax Treaty come in to play in order to settle the matter for the period being considered.

So, the process to follow when considering your tax resident status is to answer the following questions in order:

• Am I UK tax resident by reference to UK tax rules – via the UK Statutory Residency Test (SRT)?

Irrespective of whether the answer to this is Yes or No, you also have to answer whether

• Over the same period, am I French tax resident by reference to French tax rules – via CGI (Code General des Impots) Articles 4A and 4B?

Only if the answer to both and for the same period considered is Yes, would the provisions of the Double Tax Treaty come into play.

Effective dual residency and its tax consequences could therefore frequently arise. The Tax Treaty makes provision for this.

When an individual is a resident of both states, residency shall be determined as follows:

1. He/she shall be resident in the State in which a permanent home is available. If this is true in both States, he/she will be deemed to be resident in the State with which his/her personal and economic relations are closest (deemed to be the centre of vital interests).
2. If the centre of vital interests cannot be determined, he/she shall be resident in the State in which he/she has a habitual abode.
3. If he/she has a habitual abode in both States, he/she is deemed resident of the State in which he/she is a national.

If this latter item fails to resolve the issue, the question is solved by mutual agreement.

It is our opinion therefore that in order to avoid loss of residency in the UK (if this is the preferred State), not only should a property, (left vacant for immediate use), be owned or rented, but the major source of income and location of assets should also be in the UK in order to determine the centre of both personal and economic interests. Otherwise proof of the length of stay in the UK over a period of years may be needed, in order to illustrate that the habitual abode is either equally or predominantly in the UK.

2. Taxation & Residence: Income Tax

Residents of the UK, if also UK domiciled, are liable to tax on global income and gains wherever they arise.

Likewise, residents in France are liable to tax on global income, gains and, as beneficiaries of gifts, whenever they arise.

Residents of the UK, by virtue of the Double Taxation Treaty or not, may also be taxed in the State in which overseas income, gains and receipts of gifts or inheritance, arise.

Similarly, this is the case for residents of France.

The treatment by the tax authorities of revenue generated and already taxed abroad differs between France and the UK, whilst the Double Taxation Treaty between France and the UK determines what should be taxed and how. In addition, the treatment of revenue received by non-residents will also very often differ to the treatment of the same revenue received by residents.

2.1. The UK - General Summary

Present day taxable income falls into 5, (if we allow for the erosion of the annual allowance when income exceeds £100,000), different tax rate bands, with spouses being taxed as individuals, and with income attributable to each spouse being taxed independently.

Taxable income from abroad is included in the overall annual income and is taxed according to the subsequent chargeable rate applicable to the level of income for that year (i.e. taxed at the marginal rate). Any tax already paid on that income from abroad, where there is a Double Taxation Treaty, subject to the provision of that treaty, will be credited against tax due in the UK on the same income. This would be the case with income generated in France and taxable in that country (e.g. rental income from the French property).

Income generated in the UK by non-residents may or may not be taxable in the UK depending upon the income category. Personal allowances will normally still be applied to income generated in the UK by a non-resident.

2.2. France - General Summary

In France the basic system is somewhat more complex. However, once through the myriad of different additions and deductions, the resultant net income tax due is often less than the tax that would be chargeable on the same amount of income as a UK resident.

Unlike the UK, the tax year in France follows the calendar year.

One essential difference to the tax regime in the UK is the taxation of married couples:

• Married couples are taxed jointly, as one unit, with income generated independently being aggregated to create one global household income.

The "Quotient Familial"

• This income is then divided into equal parts, in accordance with the civil status of the primary taxpayer, (married, divorced, single or widowed), the number of people in the household,  their age, civil and economic status and their relationship to the primary taxpayer.

To calculate the gross tax due, although there are many exceptions, the general principle is as follows:

The global taxable income attributable to the household is then divided by the number of parts as described above, with the subsequent value of each part being taxed according to a scale of 5 tax rates, (including a nil rate band), with the marginal level of income being taxed at the rate applicable to that particular band of income into which it falls (as in the case in the UK).

Prélèvements Sociaux

Independently of true income tax most income is also chargeable to one or more of the 3 Prélèvements Sociaux (“PS”) - the rate for which is up to 17.2%. Two of the three components making up PS – CSG and CRDS - are hypothecated social levies aimed at supporting the State Social Welfare budget, but which in themselves do not generate any personal social entitlement, (unlike standard Social Security contributions). The other component: Prélèvement de Solidarité (“PDS”) has been paid into the general taxation account since 2018 and therefore can be interpreted as a component of general taxation.

Income From Abroad

Income from abroad, as for the UK, is included in the overall income and taxed according to the rate applicable to that level of income for that year. By reason of the relevant Double Tax treaty, some types of income, (e.g. income from UK property, UK public sector pensions), which remain taxable in the State where it was generated, will not be directly taxed in France. Nonetheless, such income will be included for the purpose of calculating the rate of tax to be levied against remaining income taxable in France. Consequently, such relieved income has the effect of increasing the French tax rate applicable to French sourced income or income from abroad.

Other income (e.g. dividends) will be taxable both in the State of its source as well as France, when a tax credit in France will be given for the foreign tax paid.

Again, by reason of the tax treaty, other income (e.g. private sector pensions, state pension, interest), may only be taxable in the State of residence and so arrangements will need to be made with the tax office of the State in which such income is generated so that such income is paid gross and therefore without any tax deducted at source.

Income generated in France by non-residents may or may not be taxed in France depending upon the category of income and the Double Taxation Treaty, although when income is taxable in France this will normally be done so at a flat rate of 20%.

Section 3: Taxation & Residence : Capital Gains Tax

3.1. The UK

For the individual, ordinarily resident in the UK, global gains realised are in general, subject to UK Capital Gains Tax.

The net chargeable gain, calculated after deducting certain exemptions, allowable expenditure and personal allowances, is then taxed at a flat rate of between 10% and 28% depending on personal income tax status and the nature of the taxable asset being disposed.

For the individual neither resident nor ordinarily resident in the UK, capital gains from the disposal of land and buildings located in the UK normally remain subject to UK tax assessment, as do all assets which would be assessable had the disposal taken place when UK tax resident and any period of non-UK tax residence during which the disposal occurs lasts less than 6 consecutive UK tax years.

Indeed, disposals of residential (as opposed to business) land and property are required to be assessed and disclosed within 60 days of the disposal.

Otherwise, due to double tax treaty provisions, gains realised on most non-property related financial assets, as well as land and buildings located outside of the UK are not normally within the scope of UK tax, unless they form part of a business located in the UK.  

3.2. France

For the French resident, Capital Gains Tax is due, in general, on global gains. Currently however, the French - British Taxation Treaty requires that gains from most movable property arising in France or the UK is taxable only in the country of residence of the individual - although the draft new treaty not yet ratified , changes this arrangement.

As a resident of France, Capital Gains Tax is normally payable at the same time as Income Tax, and is usually included in the same annual tax return. However, the calculation of the gain and the tax rate applied will vary according to the nature of the property from which the gain has been derived.

3.2.1. Capital Gains Tax Made on the Disposal of Financial Assets

Unless invested in a specifically exempt French investment product, (UK ISAs are not exempt from French CGT), or the gain relates to the disposal of certain business assets on retirement, all gains realised are taxable from the first € and must be included in the annual French tax assessment. Unlike the UK there is no CGT annual allowance.

The rate at which chargeable capital gains are taxed will either be 12.8% or their composite rate of income tax, depending on whether the taxpayer elects for all of their investment income to be taxed at a flat rate of 12.8% or for such income to be included in their worldwide income and applied to the progressive income tax bands.

Prélèvements Sociaux (“PS”) will be added to this rate. The PS rate will be between 7.5% and 17.2% depending on the status of the taxpayer.

Note that shares in an SCI, whose assets are predominantly represented by land and buildings are taxed as immovable instead of movable property.

3.2.2. Capital Gains Tax On The Disposal Of Immovable Property

See our Technical Guide to the disposal of private property which goes into some depth on this topic.

When the sale concerns a French property, the CGT is assessed at the point of sale and the tax is deducted from the sales proceeds by the notaire.

When the sale concerns a foreign (e.g. UK) based property, the assessment to French tax still applies but, because no French notaire is involved, the responsibility for assessment and disclosure falls on the taxpayer instead. French rules require such a disposal to be assessed and declared by the 15th of the month following the month of disposal. A credit for UK tax paid, however, is claimable and offset against any the French tax due.

What the above guide doesn’t cover is the CGT computation and assessment to tax when the disposal concerns a business asset.  In such instances, the gain normally forms part of business income for the year and therefore forms part of the trading profits (or losses) of that business year. If the business is subject to income tax, full and partial exemptions are potentially available.

4. Taxation & Residence: Inheritance Tax

A tax treaty between France and the UK concerning the avoidance of double taxation of assets arising from inheritance exists separate to the main tax treaty which covers solely tax on income and gains. However, the same regulations apply regarding residency for Inheritance Tax purposes. In both the UK and France, the deceased who was resident in their State at the time of death would in principle give rise to Inheritance Tax on assets held globally. The Double Taxation Treaty itemises the residency of the deceased, the nature of the assets, and their location for the purposes of taxation, and the country in which the asset is to be taxed.

The avoidance of double taxation is accounted for by providing a tax credit in the second state for tax already paid on the property concerned in the other state.

A further double tax avoidance is provided for with the requirement that having determined tax residence for the purpose of the Treaty, no tax may be deducted in the State where the individual is not resident, (despite general statutory regulations to the contrary in the absence of a Treaty), on any property which is not located in that State, (location having been determined by the Tax Treaty).

Lifetime gifts are not subject to any double tax treaty provision, rendering them taxable according to the internal rules of each state.

4.1. The UK

Nonetheless, in the case of an individual who remains legally domiciled in the UK, as interpreted by any law of the British Isles, all of the estate which is devolved by any British law, remains chargeable to UK IHT as a priority over French tax.

In principle Inheritance Tax is chargeable whenever a transfer of value, which is not otherwise exempt, is made by an individual which reduces the value of the transferor's estate.

Unlike France, (see next section), the tax is calculated on the reduced value of the transferor's estate, with the overall number of beneficiaries being immaterial. (An estate worth £500,000 would be subject to the same tax treatment whether there were 12 inheriting brothers and sisters or only 2). Payment of the tax is by the beneficiary following the death of the transferor, whilst in the case of lifetime transfers the tax payment may be made by the donor.

4.2. French Succession Law & Inheritance Tax

Tax is calculated as a function of the value of the asset transferred and the relationship of the beneficiary to the donor or the deceased. Tax is then payable by the beneficiary, rather than the estate, (the estate being the taxpayer in the case of the UK).

Credit is given to the French taxpayer for any UK IHT payable on the same asset.

It should be noted that due to the identification of certain rights granted to direct relations, (and collateral in the case of intestacy), unless the taxpayer has elected for a UK Succession Law to apply the distribution of immovable property located on France, will often be affected by French Succession Law, whereas in the UK no such anti-disinheritance provisions exist.

This therefore leads to a trade-off: Adding the value of the French property to the estate exposed to French tax in return for increased freedoms over the devolution of that property.

Close attention needs to be paid to this potential trap and it is often worthwhile exploring whether intentions can be met by the flexibilities of French Succession law before opting for UK succession law, particularly when UK structures may give rise to burdensome French IHT.

Section 5: Taxation & Residence: Social Security Benefits And Contributions

One condition for a successful application for French residence is the requirement to have comprehensive medical insurance in place, be this in the form of National or Private insurance

The subject of National Insurance and the respective remit of French or UK legislation applying to a UK national resident in France, is broad, complex and dynamic to the extent that during the period of French residence an individual may find themselves subject to French and UK legislation at different times, particularly pre and post UK state pension age. The complexity has been made more so since 01/01/2021 when, as a result of Brexit, we now have two international treaties impacting outcomes: The Withdrawal Agreement, which maintains EU rules and the Trade and Co-operation Agreement (TCA) which does not.

It is not within the scope of this introductory guide to consider all the issues to any great degree, suffice it to say that there is a need for proper Social Security planning and an awareness of entitlement which should go hand in hand with the need for investment and tax planning advice, prior to the move to France.

In broad terms, however, a French resident will normally be subject to French National Insurance legislation in any of the following circumstances:

• Inactive and not yet of UK State Pension Age
• Employed in France
• Pursing a professional self-employed activity in France
• Employed or self-employed in the UK or elsewhere but part of the work is carried out in France, (including working from home)
• Of French State Pension age and receiving or entitled to receive a French State pension

UK National Insurance legislation may potentially apply when an individual is

• Inactive, of UK State Pension Age and not entitled to a French State Pension
• Employed solely in the UK and/or elsewhere, by a UK based employer and little or no work is carried out in France, (including from home)
• Pursuing a self-employed activity in the UK of a type which would normally generate UK NI contributions and little or no work is carried out in France, (including from home)

As is ever the case with these topics, the devil is in the detail and obtaining, in advance of any move, clarification of status in light of intended behaviour, is strongly recommended because unanticipated consequences can be financially impactful and have long term effect.

Section 6: State, Public & Private Pensions

6.1. State Pension Entitlement (UK)

A British national retiring or already retired in France, does not lose their entitlement to the UK State pension. The value of the pension entitlement will depend upon the number of contributions made and when they were made. The calculation of the % entitlement will also take into account any NI contributory period in France even when the contributions in that period were made to the French system.

If French NI contributions relating to earned income are made, then entitlement to a French State pension is accrued. Similarly, the calculation of the % of entitlement will then take into account NI contributory periods in the UK.

This arrangement of each state recognising the contributory periods made in the other state when calculating state pension entitlement remains in place post Brexit.

6.2. Taxation Of Pension Income

1.  Public Pensions According to the Double Taxation Treaty, a public pension is defined as any pension paid to any individual in respect of services rendered of a governmental nature, (e.g. civil servant). Such pensions are taxable only in the UK and are therefore paid net of UK income tax to the resident in France.

   The same income will not be taxed directly in France but will be added to all other taxable income when computing the rate of tax applied to that other income. The existence of a public pension therefore has the effect of increasing the rate of French tax charged on other income..

   For example:

   	€'s
   Chargeable Income	20.000
   UK Public Pension Income	15.000
   Tax on 20.000 € charged at rates applicable to total income of	35,000

2.  State & Private Pensions:The UK State Pension, company pensions and private personal pension income will be taxable only in France. Arrangements should therefore be made for the person to be paid gross from the UK.

6.3. Taxation Of Pension Contributions

It is worth mentioning here that pension contributions made by the resident of France to a pension scheme held in the UK may receive relief against French income tax provided that:

1. You were contributing to a scheme already operating prior to taking up residence in France
2. The scheme operated is a qualifying pension scheme, in accordance with UK requirements - contributions may only be made out of UK generated "net relevant earnings"

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A major role of Charles Hamer is to help format a financial plan ahead of becoming French resident. This will often involve working with your UK accountant and/or Investment Adviser to enable our generic tax and N.I. information to be dovetailed with their own knowledge of your needs and circumstances in order to arrive at a suitable long term outcome for your move to France.

As a first step this involves our establishment of a comprehensive generic financial assessment of your position as it stands, to quantify annual tax and social security liabilities as well as any capital taxes (IHT, CGT, Wealthtax), as compared to remaining UK resident.

Not only does the exercise assess the feasibility of your plan but it also acts as a benchmark against which subsequent solutions can be assessed.

For more information contact:

Alex Romaine (tax@charleshamer.co.uk), 01844 218956 or use the Contact Us form.