French tax - new regime

In recent years there have been many changes to the French tax system and with a new President there are expected to be more reforms. Financial expert Bill Blevins sheds some light on the new rules and looks at how they might affect you

The tax rules and rates in France have been changing fairly frequently over recent years, making it hard for people planning to move to France or buy property there to keep up with it all. Now that there is a new President in charge there are even more tax reforms underway.

At the end of July, the French parliament approved the first Finance Bill of President Fran�ois Hollande (pictured above). This was a supplementary bill for 2012 and the tax measures included in it have immediately came into effect. During his electoral campaign he had unveiled various tax reforms. The ones not included in the 2012 bill are expected to come into effect next year. We should hear details of them soon.

The key measures of the reforms approved so far relate to wealth and succession tax, and tax on property owned by non-residents. These are all topics I’ve covered this year, so here is an update.

Tax on holiday homes

I wrote a short piece for the September issue of Living France on M. Hollande’s unexpected proposed new tax levy on holiday homes. At the time of going to press there were reports in the UK media that, following a meeting between M. Hollande and David Cameron, it may be withdrawn or amended.

However, the reform went ahead as planned and has been approved by the French parliament. Therefore, the changes outlined in my September piece have now come into effect.

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In short, if you own a property in France but are not resident there, you now need to pay social charges on top of the other taxes due. If you rent out your property you are now (backdated to 1 January 2012) liable for 20% income tax and 15.5% social charges. If you sell a French property after the law came into force, you have to pay the 15.5% social charges on top of the 19% capital gains tax due. Taper relief may be available for both the tax and social charges on the gain, depending on how long you have owned your property.

Two of the social charges are included in the UK/France double tax treaty so you will not have to pay tax twice on them, but the others, namely the Pr�l�vement Social et Contribution Additionnelle (PS) and Revenu de Solidarit� Active (RSA,) which amount to 6.8% are not.

Wealth tax

Former President Nicolas Sarkozy reformed wealth tax last year, which reduced the liability for many people. M. Hollande has now reversed these changes.

The 0.25% and 0.5% tax rates I outlined in my April article have been scrapped, and the former wealth tax bands have been reinstated for 2012 as follows:

0 - €800,000 – 0%

€800,000 - €1,310,000 – 0.55%

€1,310,000 - €2,570,000 – 0.75%

€2,570,000 - €4,040,000 – 1.00%

€4,040,000 - €7,710,000 – 1.30%

€7,710,000 - €16,790,000 – 1.65%

€16,790,000 plus – 1.80%

M. Hollande has kept the €1.3m threshold, so if your household’s chargeable wealth amounts to less than this, you do not have to pay any tax. However, if you are over the €1.3m threshold, only the first €800,000 is tax free, as shown in the above table.

Since wealth tax returns have already been submitted and the tax paid this year, the difference between the old and new rates will be payable as an ‘exceptional contribution’ in November. There is no cap on the amount you can pay.

As before, if you are resident in France you are liable to wealth tax on your worldwide assets. If you are non-resident, you are only liable on assets located in France. The five-year wealth tax holiday for new arrivals in France, where you only pay tax on assets located in France, remains in place.

Successions and gift tax

In 2007, M. Sarkozy tripled the tax-free allowance for children from €50,000 to €150,000 per child. It had increased to €159,325 by 2012. Unfortunately it has now been cut again, so that each child now has an allowance of €100,000. At least inheritances between spouses remain tax free (don’t forget, though, that there is a limit to tax-free lifetime gifts to spouses).

The tax-free allowances for gifts renew after a number of years. It used to be after six years but this was increased to 10 a few years ago. M. Hollande has now increased it again to 15 years. At the same time he also abolished the taper relief mechanism that was introduced when the time limit was increased to 10 years. Capital gains tax on real estate – no change yet

During his electoral campaign in the spring, M. Hollande said that he wanted to go back to the pre-2004 property capital gains tax regime. This was actually good news, as it would mean that the gain you make on selling a French property would be exempt from tax and social charges after 22 years. At the moment you have to wait 30 years.

However there was no mention of this in the supplementary Finance Bill for 2012, so we hope it will be included in the 2013 Finance Bill.

Currently, the gain is taxed at a flat rate of 19% (plus 15.5% social charges), but it is possible that as part of next year’s reforms the gain will be taxed at the income tax scale rates instead.

Other changes expected next year

It is understood that the government will introduce two new top rates of income tax next year: 45% on income above €150,000 and 75% on income above €1m. The 75% is expected to be a temporary measure to help the government reduce its deficit, and will probably remain in place until at least 2017.

As mentioned above, some fixed rates of tax, such as 24% on bank interest, 21% on dividends and 19% on capital gains could be scrapped. Instead the income will be added to your other income for the year and taxed at the scale rates of income tax.

If you are planning to move to France or buy property there, and even if you are already living in France, if you think you could be affected by any of these changes you should seek professional advice to establish exactly how they impact you – it may not be as bad as you think.

It is often also still possible to reduce your tax liabilities in France to a lower level than expected, but again, you should take advice as getting it wrong could prove costly. With the rules changing so frequently, your adviser should either be based in France or have colleagues and strong contacts there, so that he is fully up to date on the tax rules and tax planning opportunities available in France. LF

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. Tax information has been summarised; an individual must take personalised advice.