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Siddalls UK analyses the key provisions of the 2013 Finance Bill
President Hollandes government unveiled its first full annual Budget on September 28th 2012 with a raft of proposed measures designed to meet its declared aims of reducing the public finance deficit and reshaping the French economy over the next five years.
Following on from the tax changes already implemented through the Finance (Amendment) Act 2012 which passed into law in August, the Finance Bill for 2013 proposes a further range of tax reforms. In line with the governments stated objective to re-introduce fairness to the heart of the tax system the tax proposals are aimed at lightening the tax burden for low income households while requiring the top 10% of highest earners and wealthiest households in France to make a greater contribution from their income and assets towards the public purse.
Against this background the key provisions of the 2013 Finance Bill are detailed below.
A new higher tax band of 45% will be introduced for annual income in excess of 150,000 per household part. For a couple with no children living in a two part household the 45% band would therefore only apply where joint household income is in the region of 340,000 a year or more. The government expects this to impact on only 0.1% of taxpayers which it calculates at around 50,000 households.
Additionally a much-heralded 75% income tax rate is proposed on individual annual earned income in excess of 1 million. The Budget document shows that the 75% rate is calculated by adding together the new 45% rate band, the existing 4% additional rate for high earners, the 8% social charge rate payable on earned income plus a further 18% new contribution. The measure will apply only in 2012 and 2013 and the governments figures claim it will affect around 1,500 individuals in total.
There are also changes to the maximum tax benefits that can be gained through the operation of the household parts system. Again these are aimed at reducing tax breaks for the wealthiest families and, by way of example, a family consisting of a couple with two dependant children would need to be enjoying household income in excess of 77,000 per year to suffer any loss of post-tax income as a result of this measure.
At the other end of the scale the lowest income households, (defined as those with an income of less than 11,896 per part), will see a modest increase in the standard deduction figure applied to annual tax bills from 439 to 480.
Withholding Tax on Interest and Dividend Income
The current with-holding tax rates of 21% for dividend income and 24% for interest income will be abolished, (except where interest income is less than 2,000 a year), and with effect from the 2012 tax year all such income from capital will simply be added to other household income to be taxed at the applicable band rates. The current fixed annual allowance for dividend income of 1,525 (3,050 for a couple) will also be abolished.
Although not always understood, these with-holding rates have always been optional and indeed currently only benefit households with a marginal tax rate of 30% or higher. As a result the governments calculations show that only the highest income households will face a greater tax bill as a result of these changes, with most households actually benefiting from lower tax charges as a result of mandatory taxation of income arising from capital through the band rates.
Surprisingly the new Finance Bill makes no reference to changes to the optional with-holding taxes applying to gains on assurance-vie policies, which had been widely expected. Since the Bill was published the government has commented that the assurance-vie tax regime is still under review and may be subject to separate reform at a later date.
Taxation of Capital Gains on Sale of Shares / Collective Investments
Currently capital gains arising on the sale of shares and collective investments are taxed at a fixed rate of 19%. The 2013 Finance Bill proposes, with effect from the 2012 tax year, to add such gains to income to be taxed at marginal household band rates.
However to encourage investors to hold shares and collective investments on a long term basis a system of taper relief will be introduced to reduce gains arising according to the length of investment ownership.
For investment disposals in 2012, 2013 and 2014 there will be a temporary formula applied to reduce gains arising. In addition a permanent form of taper relief will be introduced giving a progressive reduction in gains based on 5% per annum for a period of ownership between 2 to 4 years, a set 10% for holdings between 4 and 7 years, plus a further 5% per annum for the next 4 years, giving a maximum of 40% relief after 12 years. This taper relief formula will be calculated using a base date of ownership of 1st January 2013, irrespective of the date that the shares or collective investments were actually purchased.
Taxation of Capital Gains on Sale of Building Land and Investment Properties
The governments Budget document describes France as suffering from a housing shortage with a requirement for the construction of 500,000 properties a year over the next five years including 150,000 social housing units.
To encourage land-owners to release retained building land to house-builders the 2013 Finance Bill proposes to abolish the progressive taper relief currently applying to capital gains from the sale of building land according to length of ownership. This measure is designed to remove any tax incentive for land-owners to hold back land which could be sold for housing development.
Conversely the Bill will introduce an extra 20% reduction, for 2013 only, in the capital gain arising on the sale of investment properties. This extra reduction will apply to the gain liable to 19% capital gains tax, but will not reduce the gain for liability to 15.5% social charges. This measure is clearly designed to encourage second-home owners to dispose of properties to allow re-purchase by owner-occupiers as a main residence.
Progressive tax bands are to be retained following their re-introduction through the Finance (Amendment) Act in August 2012, but there are adjustments to the bands and rates, detailed in the table below, designed to increase further the wealth tax take from the wealthiest households.
The new bands and rates will apply from 2013 where total assessable assets exceed a threshold of 1,310,000.
Because of the potential that total taxation could be more than income, a new ceiling has been introduced, which limits total tax payments to 75% of total income. This percentage is more generous that was expected, but total income includes all sources of income, even if not declarable for tax.
Up to 800,000 0%
800,001 to 1,310,000 0.50%
1,310,001 to 2,570,000 0.70%
2,570,001 to 5,000,000 1.00%
5,000,000 to 10,000,000 1.25%
Over 10,000,000 1.50%
The latest set of tax proposals in the 2013 Finance Bill are likely to be hotly debated by opposition parties but, given the governments overall majority in both chambers of the French parliament, the National Assembly and the Senate, there are unlikely to be significant amendments before the Bill passes into law.
For UK expatriates already resident in France, or for current UK residents planning a permanent move across the Channel, the reforming zeal of President Hollande and his government understandably makes for unsettling times. However, ignoring sensationalist media headlines and taking a considered analysis clearly demonstrates that the latest French tax reforms are aimed at those the government deems readily most able to pay. As such the majority of UK expatriates resident in France are unlikely to experience any real adverse effect on their standard of living from implementation of the 2013 Budget proposals.
For an objective assessment of the potential impact of the French Budget measures on ones own personal circumstances it is best to take advice from a French financial planning expert, who will be able to check all relevant tax breaks are being maximised and recommend any further beneficial actions that can be taken.
Director, Siddalls UK
Siddalls UK is authorised and regulated by the Financial Services Authority
2 October 2012