Beware capital gains tax changes
There are some major changes planned in France in 2011 if you hold assets, says Bill Blevins
THERE are some major changes planned in France next year if you hold assets including property, shares, open-ended investments (OEICs) and investment trusts. You may need to take action now to rearrange your assets to cut your capital gains liability.
The proposed changes not only increase the tax rate on capital gains, but also remove a valuable exemption that has to date protected many French residents, including foreigners living in France, from tax. If the proposals are passed, French residents only have a small window of opportunity to rearrange their assets in a more tax efficient manner.
If you are a resident of France, you are liable to a fixed rate of tax on your worldwide capital gains. Under the 2009 tax regime, the rate is 16 per cent on immovable property (real estate) and
18 per cent on movable property and negotiable securities such as shares. The gains are also subject to social charges of 12.1 per cent.
Under the 2011 finance bill proposals, both tax rates are set to increase to 19 per cent and social charges on immovable property gains are set to increase to 12.3 per cent. Other changes could also increase your tax bill. It is advisable to review your investment assets now, before it is too late, to establish if you can take action before the end of the year.
Negotiable securities: This term includes shares, corporate bonds, loan stocks and so on. Assets of this nature that are held for more than eight years are free from both capital gains tax and social charges. This rule now only applies from January 1, 2009, so you need to retain your shares until 2017 at the earliest to benefit.
There is a form of taper relief, whereby if you have held shares for more than six years, you need only pay tax on 66.67 per cent of the gains. Once held for seven years, you pay tax on 33.33 per cent of the gains.
To qualify for this relief, the shares must be held by a company that carries out a commercial, industrial, artisan, liberal, agricultural or financial activity. Its headquarters must be in an EU or EEA country (but not Liechtenstein).
Under the current tax regime, there is also a generous annual tax break on capital gains on shares. Sales of shares where the proceeds are e25,833 or less per household per year are exempt from any tax arising from their disposal (though they remain liable to social charges). This allows investors to take capital or income from their portfolios by encashing securities tax free if kept below the threshold.
Under the 2011 finance bill, this exemption will be abolished. To add insult to injury, at the same time the tax rate increases from 18 to 19 per cent.
This is a further blow for investors, as up until the end of 2009 the exemption also applied to social charges and the fixed rate was only 16 per cent. From 2011 investors will pay 15.1 per cent more in levies on gains below the threshold than they did in 2009.
These changes inevitably create a tax drag on equity portfolios, making it harder for you to preserve your spending power and increase your wealth.
The above rules apply to investors who directly own equity and bond funds and other negotiable securities. Those who have invested via more tax efficient vehicles such as a French approved assurance vie, however, benefit from significant tax advantages and the new rules will have much less
impact on them.
Dividends and interest generated from assets within assurance vie are not taxable in France. There is no income or capital gains tax for income and gains rolled up within the fund. Only the growth element of withdrawals is taxable. Depending on which is most
beneficial, withdrawals can be taxed with your other income or at special fixed rates that gradually reduce over eight years. An assurance vie may also help to reduce any wealth tax liability and provide succession tax savings.
So if you want to avoid the higher tax rates on investment gains, you could look into transferring your investment capital into an approved assurance vie. With only a few weeks to go before the end of the year, though, you have a limited opportunity to make the move and will need to take action right away. Seek professional advice to determine if an assurance vie would be appropriate for you and exactly how it works.
Immovable property: Currently, for each complete year of ownership after five years you get a 10 per cent reduction of the taxable gain. This means that, after 15 years, any gain is completely free from tax.
However, from 2011, it is proposed that social charges of 12.3 per cent will apply to the entire gain regardless of the length of ownership.
There is also a general abatement of €1,000 per person against property gains and where the proceeds of the sale per property are no more than €20,000 per owner, the gain is exempt.
Currently capital gains in relation to immovable property (except the main residence, which is exempt from tax) are taxed in France at a rate of 16 per cent plus 12.1 per cent social charges.
However, while examining the 2011 finance bill, the National Assembly adopted an amendment that, if agreed by the Senate, will substantially increase the tax payable on capital gains made on property sales. Under the proposals, the fixed rate of tax and social charges will increase: tax from 16 per cent to 19 per cent and social charges from 12.1 per cent to 12.3 per cent.
The tax rate will still be calculated after the 10 per cent deductions for length of ownership, but the social charges will be calculated on the total gain before taking account of such allowances.
The gain is taken into account when looking at taxable income for the purposes of the bouclier fiscal (tax shield, capping total tax paid relating to a given year at a percentage of income in the year), but the amount will be the full gain before any allowances (previously it was just the taxable gain after allowances).
If you are in the process of selling a property you should therefore do your best to get the acte authentique signed before December 31, 2010 to benefit from the current rates.
2011 finance bill: This includes other tax changes besides those mentioned. The top rate of income tax will increase from 40 per cent to 41 per cent. The fixed rates of tax for dividends, bank interest and other income from moveable assets will increase from 18 per cent to 19 per cent. The tax credit on dividends up to €115 per person will be abolished.
The tax information in this article is intended as an overview and has been summarised. You should take detailed, personalised advice before making any tax planning or investment decisions.
This column is by Bill Blevins of Blevins Franks financial advice group (www.blevinsfranks.com) who has written for the Sunday Times on overseas finance for 10 years. He is the co-author of the Blevins Franks Guide to Living in France. This column is exclusive to Connexion.