Financial Planning For Residence in France
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Financial Planning For Residence in France
An Introduction To: French Tax, Social Security & State Pension Treatment
Prepared and Compiled by: Charles Hamer Financial Services (FRANCE), 87 Park Street, Thame, Oxfordshire, OX9 3HX | Tel: 01844 218956/7 | e-mail: email@example.com | Website:
The report is based on the French Loi du 23/06/2006, French Finance Bill 2009 and Franco-UK double tax conventions of 21/06/1963, 22/05/1968 and their subsequent amendments.
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 effect on taxation of revenue derived in that State by a non-resident.
In general it used to be the case that rate of taxation in France was heavier than that in the UK in all categories: Income, Gains, Inheritance. However, following a number of reforms in France, this is now a misconception: often - particularly for retired persons - the tax burden for a resident of France is now more favourable than in the UK, especially if the move has been properly planned beforehand.
The Double Taxation treaty determines residency according to the laws of each contracting State.
In the UK, this would generally mean spending at least 183 days in the UK in the tax year, or (when regular visits to the UK are made) averaging 3 months per year.
In France an individual is determined as resident whenever their or their family's (spouse and children) normal place of abode is situated in France, or when their principal professional activity is carried out in France, or when their principal economic interests are located in France. Residency can also be determined by the period spent in France and elsewhere during a French fiscal year.
Since the French tax year runs from 1st January to 31st December, and the UK tax year from 6th April to 5th April of the following year, the problem of dual residency is easy to envisage.
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:
- 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).
- 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.
- 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 3 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 number of people in the household, their relationship to the taxpayer, their civil and economic status, their age, and also according to the civil status of the tax payer himself (married, divorced, single or widowed).
To calculate the gross tax due, the global taxable income due to the taxpayer 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).
Independently of true income tax most income is also chargeable to one or more of the Contributions Sociales - the rate for which is up to 12.1%. These are hypothecated taxes aimed at supporting the State Social Welfare budget, but which in themselves do not generate any personal social entitlement, (unlike standard Social Security contributions).
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. Any tax already paid on that income, if generated in the UK will normally not be taxed in France, (with the exception of income from dividends or royalties), however such income will be included for the purpose of calculating the rate of tax to be levied against remaining income taxable in France.
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 25%.
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 18%.
For the individual neither resident nor ordinarily resident in the UK, all capital gains from assets located in the UK are tax exempt, subject to certain conditions being met.
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 On Movable Property
Gains From The Disposal Of Financial Assets - General Regime:
The following summary relates only to financial investments located worldwide and EXCLUDES gains made from chattels, futures and options trading, and disposal of directly owned company shares.
In any one year, upon realisation of a disposal from which a gain is made, the gain may or may not be taxable depending on the value of the disposal made and the cumulative value of disposals of the same general nature made in the current year. Whenever, the non-taxable cumulative value threshold as described is exceeded, the total gain, (not just the amount relating to the excess), is fully chargeable to Capital Gains Tax.
The non-taxable threshold will vary annually, and according to the nature of the asset disposed of.
The rate at which chargeable capital gains are taxed is 18%, this being a fixed rate which is not affected by the level of the gain in any one tax year or the overall rate of tax charged on income.
The Contributions Sociales of 12.1% (described in the Income Tax section) are also then charged, thus giving a composite rate of 30.1% on any taxable gain.
Financial assets representing Direct Shareholdings, gains on chattels, futures and options trading, gains from sale of shares in a Partnership.
More specific regimes of taxation are applied to these categories, details of which would form part of any case study, whenever appropriate.
In general however, the 18% basic rate, and 30.1% combined rate is still usually applicable, albeit after taper relief being applied which can result in total exemption if the asset has been held long enough.
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
Although the annual allowances are not applied on a general basis, certain gains can be avoided either by means of exempt disposals, allowable deductions, the appreciation of annual and one-off allowances, or a combination of these.
- The use of the property before and at the point of disposal
- How long the property has been held
- The financial and civil status of the taxable individual at the time of the disposal
- The existence of relevant allowable expenditure
The net gain is then taxed at the fixed rates of 16% (28.1% when including Contributions Sociales), although taper relief is available which can lead to total exemption.
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 tax payer in the case of the UK).
Credit is given to the French tax payer 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), the distribution of immovable property located on France, will often be affected by French Succession Law, whereas in the UK no such anti-disinheritance provision exist. See our page "French Inheritance Tax" for more details.
Section 5: Taxation & Residence: Social Security Benefits And Contributions
In the event of France being made a main residence, in most instances contributions to UK national insurance will cease and accordingly the benefits accrued in the UK against such contributions will either be lost or stop growing. This is notable in the case of the Basic State Pension which currently requires a contribution period of 90% of a normal working life to obtain full rights, as well as invalidity benefit, unemployment benefit, maternity allowance and sickness benefit, which all rely on National Insurance contributions having been made to allow for a valid claim.
It may be possible to partly account for some of these benefits by making Class 3 voluntary National Insurance contributions, although these only count for basic retirement provision and widow's benefits.
Class 2 contributions which would count for pension, widows, sickness and maternity benefits would be allowed for those self-employed, (however the self-employed may also be obliged to contribute in France - see below).
For those who are moving to France and who will continue to be employed by a UK employer, or who are to be salaried once in France through a French employer, contributions to one or other country's social security will continue, and thus benefits will be carried over. Problems will however arise for those retiring to France, receiving investment or other unearned income, and even the self-employed, when the payment of Social Security contributions is not automatic.
Unless proper arrangements are made for the payment of Social Security, the unwary emigrant to France could suffer a miserable retirement if State pension benefits are lower than anticipated, and the full cost of medical care and treatment has to be serviced out of dwindling capital and income resources.
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.
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 British State pension and State sponsored additional pensions, subject to at least six years full National Insurance contributions having been made prior to retirement. The value of the pension entitlement will depend upon the number of contributions made and when they were made.
6.2. Taxation Of Pension Income
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 (as schedule E income), and are therefore paid net of UK income tax to the resident in France.
The same income will not be taxed in France but will be taken into consideration when computing the marginal rate of tax appropriate to the total income chargeable to tax.
£'s Chargeable Income 10,000 UK Public Pension Income 5,000 Tax Applied To The Chargeable Income Will Be Applied To The Total Income Of 15,000
State & Private Pensions The Basic State Pension, Additional State pensions, company pension 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:
- You were contributing to a scheme already operating prior to taking up residence in France
- 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"
A major role of Charles Hamer is to help format a financial plan ahead of becoming French resident and to liaise with both French and UK tax offices in order to give every chance of the move being successful and stress free.
As a first step this involves our establishment of a comprehensive generic financial assessment of you r 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.
This then acts as a benchmark against which solutions subsequently identified recommended can be applied.
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