For many years, wealth tax cast a shadow over France, scaring off affluent non-residents from even considering settling in the country.
We still see people going to extremes to avoid wealth tax, opening trusts (which do not work in France and can give rise to serious problems) and setting up foreign companies to own their assets, or indeed a combination of the two.
These tend to land people in hot water with the French tax office.
So how scary is wealth tax and what do we need to know before trying to take action?
The fairest tax there is
Importantly, since the beginning of 2018, wealth tax has been transformed to only a property wealth tax, known as impôt sur la fortune immobilière (IFI).
This means that today, in Europe, only Norway and Spain have an actual wealth tax. France joins Italy, with a partial wealth tax. Many people are unaware of this change and are still, unnecessarily, taking action concerning their capital. Some find it unfair that property has been specifically targeted in this way.
I would counter that, while clearly nobody likes to pay tax, France’s property wealth tax is arguably one of the fairest taxes there is.
‘A fair tax?’ I hear some scream (especially those in the business of selling property). Well, let me state my case.
Importantly, this tax only affects those with net property assets valued over €1,300,000.
Moreover, as we will see later in this article, the tax rates should be perfectly manageable for many, if not most, of those liable.
Finally, this is a tax that people can effectively choose to pay, or not. If you do not wish to pay it, the solution is simple: elect to sell property, so as to have net property assets valued under the €1,300,000 threshold.
With real estate prices continuing to rise around the world, including in France, more people are being obliged to consider this conundrum. To pay, or not to pay; that is the question.
Allowances and examples
To shed additional light on the dilemma, the simplest solution is to look at one or two examples. I often find that hard facts can help to break down myths and preconceptions. To start with, there are two important IFI allowances to be aware of:
1) A 30% allowance is given against the value of your main residence;
2) Property situated outside France is exempt for the first five years of residency.
This second point means those moving from another country to France have plenty of time to plan ahead. Of course, if/when selling, one also needs to consider any eventual capital gains tax, be that in the country of origin or in France, or in some cases in both countries.
Timing can be crucial. Hence, it is worthwhile planning ahead.
Let us now consider the hypothetical example of Mr and Mrs Brown. Their main home is valued at €1,000,000 and they have a second home valued at €480,000. With the 30% allowance on their main home, their net estate is valued at €1,180,000, meaning there is no property wealth tax to pay.
If they owned just one home, their main residence, then this can be valued up to €1,850,000 before having to pay a single cent of this tax.
As you can see, you need significant property assets to be liable to IFI!
Let us consider one more scenario. Mr and Mrs Jones have a main home valued at €1,000,000 (€700,000 after the 30% allowance).
They also have a second home valued at €650,000, as well as a rental property valued at €350,000, on which there is an outstanding mortgage of €150,000.
It is beyond this article to illustrate the full calculation, but on a basic level the IFI to pay would be €4,220. This represents less than 0.23% of the real net value of the property estate.
Moreover, we find that most couples moving from the UK experience a fair reduction in the level of income tax, courtesy of the parts system.
This comes as a shock to many. The result is that we can show many people that, even if stung with property wealth tax, their overall global weight of tax is lower than in the UK.
So if you are better off overall, why worry unduly about this tax?
All this supports my earlier claim that IFI should be perfectly manageable for many/most of those liable.
And there is better news still. Within an overall annual limit of €50,000, one can deduct 75% of the payments made for the benefit of certain charitable organisations. Hence, Mr and Mrs Jones may decide to donate €5,627 to charity, and thereby pay no IFI at all!
So you see, for the vast majority, wealth tax really is nothing to be scared of.
This article was written by Christopher Davenport of Kentingtons