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Tax reforms in France

This column is by Bill Blevins of Blevins Franks financial advice group who has written for the Sunday Times.

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.

AND SO they have begun. President François Hollande’s first tax reforms have been approved and have quickly come into effect - and there are more on the way next year. Households with large assets or high income will bear the lion’s share of the additional tax burden on individuals.

The tax measures formed part of the second Rectificative (supplementary) Finance Bill for 2012, which was formally adopted on July 31.

Wealth tax

M. Hollande has reversed the reforms former President Nicolas Sarkozy made to wealth tax only last year. He did not reverse the abolition of the bouclier fiscal, however, so it all adds up to a nice bit of extra revenue for the government – €2.3billion this year alone.

The 0.25% and 0.5% tax rates have been scrapped and the former wealth tax bands ranging from 0.55% to 1.8% reinstated. The €1.3million threshold remains in place but, if your chargeable wealth exceeds this amount, only the first €800,000 is tax free.

There is no cap on the amount of combined taxes an individual can pay on his income, for this year at least.

Since the deadline for submitting returns and paying wealth tax was in June, the difference between the old and new rates will be collected as an “exceptional contribution”. The payment deadline is November 15, 2012, and you will get notice of how much to pay.

You may be in for a shock. A government report shows its effects: Households with wealth between €1.3m and €1.6m will see the wealth tax burden rise by 14%; those with between €2.9m and €4m will see it rise an average 42% – and France’s wealthiest 10% will pay 143% more wealth tax than in June.

Succession tax

The tax free allowance for inheritances and gifts made in direct line has been cut by a third. Each child can now receive €100,000 tax free per parent, down from €159,000. Inheritances between spouses remain tax free.

The time limit for the renewal of allowances has increased from 10 to 15 years, and the taper relief mechanism has been abolished.

These measures are effective from August 18, 2012 the date the Finance Bill entered into law.

Social charges/new tax on holiday homes

The unexpected and controversial part of the 2012 reforms was the introduction of social charges for income and gains made on property owned by non-residents. Until now, nonresidents have been exempt from these.

There is some debate about whether the charges on rental income apply only to unfurnished property – due to the wording of the first draft – however, the final wording added a sentence to catch all property income so it looks like both furnished and unfurnished properties are affected.

Social charges currently total 15.5%, and are now paid on top of the 20% income tax on rental income and 19% tax on capital gains. Don’t forget, though, that there is taper relief when you sell French property, depending on how long you have owned it.

You need to look at the terms of any double tax treaty between France and your country of residence. In the case of the UK’s treaty, two of the social charges are included so you will not pay tax twice on them but the other two (amounting to 6.8%) are not.

There has been debate about whether this tax is discriminatory, but in fact it brings parity to the table since until now non-residents have paid less tax than residents on the same income and gains.

Social charges on rental income are applied retrospectively to January 1, 2012. The charge on capital gains began when the Finance Bill came into force.

Anyone living in France but not declarin themselves should think again as being a non-resident is unlikely to be an advantage. They may be paying more tax than they need to and should take proper advice.

Coming next on M. Hollande’s tax agenda

M. Hollande had outlined various tax reform plans during his electoral campaign. They have not all been included in the supplementary 2012 Finance Bill, so the rest are expected to apply from 2013.

We know he wants to introduce a new 75% rate of income tax for income over €1m. The government has suggested it will be temporary, remaining in place until France tackles its deficit. However since it is aiming for 2017, the 75% tax would be in place for a while. The president has also said he will levy a 45% rate of tax on income above €150,000.

Income from capital is expected to be reformed. Dividends can currently benefit from a rate of 21% and bank interest of 24%, but if the plans go ahead they will be taxed at the scale rates of income tax.

Assurance Vie

There was no mention of Assurance Vie in the 2012 Bill, so you have a further window to set up a policy, or top up an existing one, and lock in the full favourable tax treatment currently available.

Even if and when M. Hollande’s plans for Assurance Vie go through, it will continue to offer tax benefits. He has only proposed that tax on withdrawals be increased to scale rates of income tax for the first eight years.

This is expected to only apply for new contracts, i.e. those taken out either after the reform is presented to parliament or comes into effect.

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. At this stage it appears (the president has not threatened otherwise) that income and gains will still roll up tax free within the policy, and only the gain element of a withdrawal will be taxed, as opposed to the whole amount.

France was considered a high tax country before M. Hollande was elected; these latest changes may discourage more expatriates from living here.

Do not let tax put you off France, though, at least not before consulting a professional tax and wealth management adviser to establish exactly what your tax liabilities are and how you could take advantage of French tax compliant opportunities to lower them. Living in France need not be as taxing as expected.

Be aware that the tax rates, scope and reliefs may change. Any statements concerning taxation ar based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.

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