Hollande’s tax reforms
How to manage the impacts of the new French taxes
With the milestone of 100 days in office now behind him President Hollande continues to press on with his tax reform programme, with the stated aims of returning the French economy to a balanced budget position by 2017 and creating a “fairer and more efficient tax system for both households and businesses”.
The first raft of measures came into force following the passing into law of the Finance (Amendment) Act 2012 on the 18th August and the next stage of the government’s fiscal programme will be revealed in the Finance Bill for 2013 which is due to be published at the end of September 2012.
With the government holding an overall majority in both houses of the French parliament, the National Assembly and the Senate, there is little to stand in the way of President Hollande implementing in full his pre-election manifesto commitments, despite fierce opposition to many of the new measures from minority parties.
So what changes have been implemented so far, what is to come, and how can the impact on the individual taxpayer be managed and reduced where possible?
Finance (Amendment) Act 2012
Enacted in August 2012 the key changes for personal taxpayers are-
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Wealth Tax: The abolition of the “simplification” changes to wealth tax introduced by the previous government of President Sarkozy and the reintroduction of wealth tax bands ranging from 0.55% to 1.8% where assessable assets exceed the starting threshold of €1.3 million. The immediate reversal of the previous government’s changes is being effected by the levying of an “exceptional contribution” for 2012 on households with assets above the threshold.
Inheritance Tax and Gift Tax: The amount that can be left tax free on death by a parent to a child has been reduced from €159,325 to €100,000.
The new law has also reduced to €100,000 the amount that can be made as a lifetime gift by a parent to a child without incurring an immediate tax liability. Previously this allowance was renewable every 10 years and has now been increased to 15 years.
Social charges on rental income and capital gains from French property received by non-residents: Rental income from French property owed by non-residents is already subject to French income tax, normally at the with-holding rate of 20%, and capital gains on the sale of French property by non-residents are taxed in France at 19%, although a tapered reduction in the gain may apply dependant on the length of ownership. The new measure extends the payment of social charges at 15.5% to non residents, increasing the rental income tax rate for EU-resident owners to 35.5% and the capital gains tax rate to 34.5%.
Finance Bill for 2013
Scheduled for publication on the 26th September the Bill is expected to include further reforms in line with President Hollande’s pre-election manifesto commitments.
Income Tax: Expect the introduction of an additional income tax band of 45% for income over €150,000 per annum plus a “special contribution” rate of 75% for the highest earners enjoying an income of over €1 million per annum.
Wealth Tax: The government has described the “exceptional contribution” levy in the Finance (Amendment) Act for 2012 as a “holding measure” and a more fundamental review of the structure and operation of the wealth tax system is expected to be included in the new Bill.
With-holding Tax Rates on Income from Capital. The optional with-holding tax rates for dividend income (21%) and interest income (24%) are likely to be scrapped, as are the optional with-holding tax rates for gains on withdrawals from assurance-vie policies in the first eight years, (35% for the first 4 years and 15% between 4 and 8 years). In future such income is likely to be amalgamated with other household income and taxed at the band rates applying.
What are the impacts and how can they be managed?
To start with the degree of impact does of course depend on the level of your household income and the value of your capital wealth. The French government’s own budget figures confirm that wealthy French “dynastic” families are the key target of the fiscal reforms, not the majority of retired expatriates with limited capital resources living on relatively modest incomes.
Moreover, with sensible financial planning the impact of many of the latest reforms can be greatly reduced or even eliminated. Key considerations and top tips for existing expatriate residents or those planning an imminent move to France include:-
- make sure you are fully conversant with the French tax system and how it works. Declaring income, such as UK rental income, or certain types of UK pensions, in the wrong ‘boxes’ on your tax return can cost you hundreds or thousands of euros in unnecessary tax or social charges.
- don’t think you can hide “under the radar” as a French resident and avoid the French tax system. As a French resident it is obligatory to declare your worldwide income and assets to the French taxman. Failure to do so can result in heavy penalties and fines and the new government is reinforcing its tax investigations programme in order to maximise its revenues. In particular remember that if you move and sell your existing home as a French resident, you will not benefit from the capital gains exemption on sale of a main residence if you cannot provide the notaire handling your sale with your tax reference number.
- make maximum use of French tax-free and tax-efficient savings vehicles, such as the Livret A and LDD savings accounts where investment limits per account-holder have recently been raised. Don’t leave investments in former UK tax-shelters such as ISAs and National Savings Certificates. These tax-shelters are not recognised by the French tax-man and you will be taxed on all interest, dividends and gains arising.
- investigate the correct use of the assurance-vie plan, the most popular savings and investment vehicle in France, for French nationals and expatriate residents alike. Despite recent changes and the expectation of more to come, these plans continue to offer effective ways to mitigate income tax, inheritance tax and the impact of French forced succession law. There is a wide range of assurance-vie plans available from providers in France and from French tax-compatible jurisdictions such as Luxembourg, where providers offer sterling-denominated as well as euro-denominated funds to suit all risk appetites, from risk-averse to adventurous.
- for new residents to France take full advantage, if appropriate, of the UK/France Double Tax Treaty provision which provides the opportunity to shelter assets held outside France from French wealth tax for the first 5 years of residency
- if succession and inheritance tax planning is a priority for you then make maximum use of lifetime gift allowances under the French rules to reduce the size of your taxable estate on death.
The key, as ever, is to develop and implement a financial plan tailored to your personal family circumstances, income and capital assets. Taking expert independent advice will ensure your plan meets your personal objectives while offering optimum tax efficiency.
Director, Siddalls UK
Siddalls UK is authorised and regulated by the Financial Services Authority