IMAGINE it: you are a British expatriate, living in your new home in France, enjoying the pace of life, the food and the lifestyle and have left behind the weather, your old lifestyle, and all the things that annoyed you most in the UK.
This is what you have worked hard for and now is the time to reap the rewards.
Then you receive a letter (or even a visit) from the French tax office. They say you owe thousands of euros in unpaid taxes, plus interest and penalties. Your reaction is you have been paying taxes all along – in Britain. The problem is: once you have left the UK to live in France, your income is taxable in France.
You cannot choose where you pay taxes.
You may be made to pay back taxes in France, and have to try and recoup the taxes paid incorrectly in the UK. You will also be charged late payment interest, and possibly penalties as well.
It is no idle threat as France has around four times as many tax inspectors as the UK for a similar-sized population and they can go back six years for income tax and 10 for wealth tax.
They also have the power to freeze your bank accounts.
If you live in Country A, then that is probably where you will have to pay taxes. You either are, or are not, a French tax resident under certain rules.
Some income (eg. UK rents) remains liable to tax in the UK, but may also be taxable in France, subject to any double tax relief.
If you have failed to declare your tax residency in France, when the tax office catches up with you, you will have to go through the whole process of the investigation – in French – and pay for advice to sort everything out, as well as the unpaid taxes, penalties and interest.
Perhaps you have been living between the UK and France, relying on the UK’s “91-day rule” to either make yourself resident or non-resident in the UK?
If you have got this wrong, and the tax authorities in either country challenge you, you could face a large bill for unpaid taxes, interest and penalties.
In the UK such investigations can go back for many years, particularly if it is suspected you deliberately did not declare your position. You will then also have to pay for advice to sort this all out.
The same can also be true for people renting out a property in one country and living in another who have not been reporting the income to the tax authorities in one or both countries.
Under the UK-France double taxation treaty rental income from a UK property is taxed in the UK as that is where it arises.
While rental income is not directly taxed in France, it should still be declared as it is taken into account in calculating the taux effectif – the effective rates of tax applying to your other income that is directly taxable in France, such as investment, salary or pension income.
It is also subject to French social charges at 12.1%.
Many British people move abroad and continue to pay taxes in the UK believing they have a choice as to where they can pay tax; they might not realise they have become resident in another country; they might think that as long as they pay tax somewhere they will be safe. They are wrong.
Residence is a matter of fact. It is where you are spending your time. However, each country has different rules used to work out who is resident there for tax purposes.
If you satisfy either the French or UK rules, you are tax-resident in that country.
This will make you liable for tax on your worldwide income and gains and, in France, also on your wealth.
Equally, many people claim not to be resident in the UK when in fact they are – or at least, when HM Revenue & Customs thinks they are.
Most double tax treaties, including the UK/France one, have “tie-breaker” clauses to find where someone is resident if they fulfil both countries’ domestic requirements, but it can be dangerous to rely on these – your interpretation may not be the same as the tax authorities’.
Circumstances can change – through illness or in other ways which may make your position different from that which you believed it to be.
HM Revenue & Customs takes the view you have to have left the UK for a “settled purpose”, so even if you are spending less than 91 days in the UK on average over up to four UK tax years, they may still view you as resident if they consider you have not left for a settled purpose.
They will also look at your family, business, professional and investment positions.
French domestic rules start with where your main home is located, but running a business in France can also make you resident there.
You should always take professional advice regarding your situation from an adviser who specialises in the tax rules in both countries.