Still time to act before tax reforms

1 July 2012

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 co-author of the Blevins Franks Guide to Living in France.

NEW president François Hollande unveiled various tax reform plans during his electoral campaign, targeted at France’s higher income and wealthier residents. Hollande said he wanted to take back the “fiscal presents” accorded to the country’s “most privileged”.

There have been rumours about his plans and how they will affect individuals resident in France, so it is useful to outline what will happen next and what the changes are likely to be. Unfortunately it is true that many taxpayers will be hit by higher taxes – if tax planning was important before the election, it will be even more vital now.

Elections this month to elect the National Assembly will determine how much support Hollande will have to push through his agenda. On June 20 he will present his tax reforms to the Council of Ministers, which will be voted on by the end of an extraordinary parliament session planned for August 2.

Some of his tax measures are likely to apply from June 20 this year, so you may just have time to take advantage of the more favourable tax measures currently in force (though I cannot rule out the possibility that new tax measures will be applied retrospectively).

Income tax
Hollande plans to create a new income tax bracket for income over €150,000, with a tax rate of 45%. Annual income over €1 million will be taxed at 75%. These tax rises are expected to be included in the Finance Bill for 2013 so would come into effect next year. He has also said he wants to reform income tax, so that the CSG (Contribution sociale généralisée), which forms the bulk of social charges, will gradually merge with income tax.

Income from capital
He wants to align the taxation of the income from capital with the taxation of earnings. Dividends can currently benefit from a rate of 21% and bank interest at 24%, but under his plans they will be taxed at the “scale” rates of tax (currently up to 41%, but see above).

Wealth tax
Hollande has made it clear he wants to return to the wealth tax regime that existed before Sarkozy’s 2010 reforms. This reform could happen from this year or next. While theoretically he does not have time to pass changes this year, he wants to try and make the wealth tax reforms apply from 2012.

The 0.25% and 0.5% wealth tax rates will be abolished and wealth will be taxed at the old tax bands and rates, which range progressively from 0.55% to 1.8%. The first €800,000 will be tax free, though it is possible that only households with taxable wealth above €1,300,000 will be liable.

However, he will re-introduce the 85% restriction whereby income tax, wealth tax and social charges cannot exceed 85% of taxable income, but there is no prospect of a reintroduction of the 50% Bouclier Fiscal restriction that was abolished last year.

Succession tax on gifts
You can currently gift up to €159,326 to your children tax free, but Hollande wants to cut this to €100,000 per parent per child. The time limit for making another tax-free gift will probably rise from 10 years to 15 years. This could apply from June 20 this year, so you may have time to make a gift within the present allowance if you were planning to do so.

The spousal exemption for inheritances remains unaltered.

Assurance Vie
For French investors, assurance vie has been an extremely popular tax planning vehicle for many, many years. Hollande has not threatened to reduce the significant advantages of the tax-free roll-up within the policy or the tax on income withdrawals being limited to the growth element only (so if the growth element is 10%, then only 10% of the withdrawal is taxed). However, he has proposed that for new contracts taken out after June 20, tax on the growth element of withdrawals in the first eight years will be increased to “scale” rates compared with the current regime of 35% for the first four years and 15% in years four to eight. After eight years you can continue to opt for the special fixed rate of just 7.5%, and receive an allowance of €4,600 per person.

So while assurance vie will continue to enjoy its favourable tax treatment, it may make sense to start a new contract or to top up your existing policy before June 20.

Tax breaks
The new president wants to repeal €29 billion of tax breaks over the next five years and cap each household’s maximum tax credits at €10,000 a year.

Real estate
To finish with some good news, Hollande wants to go back to the pre-2004 regime, where gains on real estate are exempt from tax after 22 years (rather than 30 years currently), with a 5% annual deduction for each year after two years. The main home remains exempt.

This would apply from June 20, so anyone about to sell a property could benefit if they can manage to postpone signing the acte de vente until the end of June.

The various tax reforms may change as they go through parliament so it is more important than ever to seek professional advice to ensure you are on top of all the tax changes and find out if you can lower your tax liabilities.

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.

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