Over recent years I have had to write quite a few articles about tax reforms; reforms that usually led to higher taxes. So it makes a refreshing change to write about tax cuts this time.
For general income (employment, pensions etc) taxation will remain pretty much the same as this year, but 2018 will see significant changes to how investment income and wealth are taxed.
President Macron released his first budget at the end of September, which followed up on the tax promises made in his electoral campaign.
As always in France, the budget takes a few months to be debated and pass through parliament. In fact, the Constitution states that 70 days have to elapse between the budget being proposed and approved. So, nothing is certain until it is approved towards the end of the year. There may be changes to the reforms I outline below, but since Mr Macron’s party has a majority in the Assemblée Nationale we do not expect major changes.
Wealth tax – The present-day Impôt de solidarité sur la fortune (ISF) – was introduced in 1982 by President Mitterrand. It has been unpopular among France’s wealthier families ever since, causing some to leave the country to avoid it.
President Nicolas Sarkozy made an effort to reduce the tax burden, but this was soon overturned by President François Hollande.
Under current rules, you are liable to wealth tax if you are resident in France on January 1 and the taxable wealth of your household amounts to more than €1,300,000.
It is based on worldwide assets, from property and investments to jewellery and cars.
The first €800,000 is exempt from this tax, with rates then rising from 0.5% to 1.5%. Non-residents are liable on assets they own in France.
It is paid by around 350,000 households and earned the government €5billion in 2016.
Under the Macron government reforms, from January 1, 2018 this form of wealth tax will be replaced by the Impôt sur la fortune immobilière (IFI). This is still a ‘wealth tax’, but the plan is that it will now only apply to real estate.
After coming under criticism that this was a budget for the rich, it looks likely that this tax will be extended to cover luxury items like gold, expensive sports cars and super-yachts.
But, importantly, savings and investments will be excluded from the new wealth tax.
So whether your investment portfolio is €100,000, €1,000,000 or €10,000,000, it will no longer be liable for wealth tax. This includes assurance-vie policies.
The thresholds, tax rates, time periods, payment etc remain the same for the new wealth tax as for the current version. Main homes will continue to benefit from the 30% exemption and the 75% limit (capping taxes at 75% of income) will also still apply.
It is calculated that this reform will cost the government €3.2bn in tax revenue.
Flat 30% rate on investment income
One of the key reforms of President Hollande’s government was to remove the fixed rates of tax for investment income – interest, dividends, capital gains on the sale of securities etc – and to start to tax it at the scale rates of income tax.
For higher earners, this meant higher tax bills. Income tax rates go up to 45%, plus another 4% for income over €500,000, plus social charges of 15.5%.
The 2018 budget will reinstate a fixed rate of tax for investment income, and a lower one than we had before.
If it all goes ahead as planned, unearned income (so income from investment assets) will be taxed at one fixed rate of 30%.
And while normally you would have to add social charges on top, in this case the 30% includes social charges – so the income tax part is just 12.8% (with social charges of 17.2%).
Lower earners will not pay more tax under this system, as the fixed rate will only apply to assurance-vie and other investment policies over €150,000 (€300,000 for a joint policy). Those with lower policies will continue to pay the scale rates of income tax.
This 30% tax rate and rules will also apply to assurance-vie policies set up after September 26, 2017 (though the fixed rate will not start being applied till January).
If you already have an assurance-vie policy, then you can still use the old fixed rate system, and can still opt for the scale rates of income tax if that works out better for you.
Whether you have an old or new assurance-vie policy, taxation continues to apply only to withdrawals, and only to the gain element of withdrawals (provided that you have an approved policy). Income and growth will continue to roll up tax-free.
Policies held for more than eight years will also continue to benefit from the €4,600 prélèvement libératoire allowance (€9,200 for married couples / PACS partners).
All the succession planning benefits of assurance-vie policies continue to apply; there are no proposed changes here.
Social charges are made up of five elements, and the Contribution sociale généralisée (CSG) part increases by 1.7% from January. This means that in 2018 social charges will be 9.7% on employment and self-employment income; 9.1% in pension income and 17.2% on investment income (including rental income).
Remember, however, that you do not need to pay social charges on pension income if you do not yet have access to the French health system or have an EU S1 Form.
Bear in mind that, as stated, these reforms still need to be finalised and so may change as they pass through parliament, and we also still need full clarification on how they will work.
Overall, this budget is good news for expatriates who have investment wealth.
The combination of the new flat rate on income and not having to pay wealth tax could make a considerable difference to how much tax you pay next year.
You need to make sure you understand how the new rules will affect you and make sure your wealth is set up to take full advantage of the reforms.
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
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.