Plan for your coming tax year in France
French residents have just had the pleasure of completing and submitting their household income tax returns for 2017 income. Working out how much tax we owe can be a bit of an eye-opener, so this is a good time to review your tax planning to see if you can improve the situation for next year’s return.
There are some key aspects to consider:
- There have been a number of tax reforms in France over recent years – are you up-to-date with the latest tax legislation?
- Are you taking advantage of the various opportunities that the French tax regime offers to save tax? Explore ways that you can lower both your income tax liabilities and inheritance tax liabilities for heirs.
- Are you sure your tax planning is fully compliant in France and that you are paying tax in the right country? Cross-border tax planning can be confusing but in today’s world of automatic exchange of information make sure you are getting it right.
Income tax and the 2018 reforms
Income tax for 2017 (payable in 2018) covers a range of income, including employment, pensions, rental and investment income. The progressive rates of income tax range from 14% for income over €9,807 to 45% for income over €153,783.
There is an additional tax on ‘high income’ – 3% for a single person with income between €250,000 and €500,000 per part (nothing is due from a family) and 4% for income exceeding €500,000 per part for an individual, 3% for a family (unless exceeding €1million per part).
As always, additional social charges will be payable later in the year. The current rates for these are 9.7% for employment income; 9.1% for pension income (unless exempt) and 17.2% for investment income – all 1.7% higher than last year.
For 2018 income, though, we will move from former President Hollande’s income tax system (where he had scrapped fixed rates of tax for investment income to start taxing it as general income), to the new system introduced by President Macron at the start of this year.
A new 30% flat rate of tax will now apply to investment income. This prélèvement forfaitaire unique (PFU) applies to interest earnings, dividends and capital gains from the sales of shares and securities.
It includes both income tax (12.8%) and social charges (17.2%), so for higher earners could prove a significant tax saving.
Those with lower income would pay more tax under this new PFU, but households in low-income brackets keep the option for progressive income tax rates and avoid paying more tax.
When it comes to capital gains, the 50% and 65% tax reliefs for owning shares for a number of years is no longer available under the flat tax system. It now only applies if you opt for the income tax rates and only for shares bought prior to 2018.
Likewise, the 40% deduction for dividends has been abolished, and is now only available to those who elect to apply the scale rates instead of flat tax. The 30% flat tax also applies to investment policies.
This includes assurance-vie contracts set up after September 27, 2017. If the premium of your policy is less than €150,000 (€300,000 for joint policies), you can choose whether to pay tax at 30% or the scale rates of income tax, whatever works best for you.
Note, though, that if the policy is unapproved for French tax purposes, eg. an Isle of Man or Channel Islands policy, the scale rates will always apply.
The prélévement libératoire system remains in place, so assurance-vie policies held for more than eight years benefit from a €4,600 allowance (€9,200 married/PACS couples).
Wealth tax reform
2018 also introduced a second significant reform that affects investments. The old wealth tax Impôt de Solidarité sur la Fortune (ISF) has been abolished and replaced by a new wealth tax Impôt sur la Fortune Immobilière (IFI). This IFI only applies to real estate assets, so all your savings and investments, including assurance-vie policies, are no longer subject to this tax unless they relate to certain holdings in property.
Reviewing your tax planning
It is worth exploring the various ways you can hold your investment capital to see how you can take full advantage of these tax reforms.
For example, if you are deciding between investing in property or shares, consider both the wealth tax reforms and how rental income is taxed compared to investment income. Using specialist tax and wealth management advice here can find the solution that works best, both for you today and your heirs in the future.
There are no significant changes to the taxation of pension income in France, other than social charges have increased from 7.4% to 9.1%.
As usual, you can avoid these charges completely if you are not affiliated to the French healthcare system or if you hold Form S1.
If you are resident in France your UK pension income is taxed only in France, at the normal income tax scale rates, with a 10% allowance on gross pension income (max €3,752 per household).
There is one exception – UK government service pensions remain taxable in the UK. They are not taxed in France but still count towards your annual income for the purposes of calculating your tax rate, so must be included on your French tax return.
Pension lump sums are fully taxable in France as income (with an exception for “accidents of life”). So taking a lump sum can be expensive – unless you meet certain conditions.
If you can take your whole pension fund as one lump sum, and the pension contributions were deducted from your or your employers’ taxable income, then you may be able to benefit from a low tax rate of 7.5%.
This could enable you to invest your pension savings in more tax-efficient arrangements in France. But you need to be careful when making such big pension decisions, as getting it wrong can affect your retirement financial security, so take professional, regulated advice.
This article is by Bill Blevins of Blevins Franks financial advice group who also writes for the Sunday Times on overseas finance. He is co-author of the Blevins Franks Guide to Living in France (www.blevinsfranks.com).
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 is advised to seek personalised advice.