We lost a fixed rate of tax on investment income, then a few years later a new one was introduced… All this can create headaches for effective tax planning.
You need to carry out regular reviews to make sure your tax planning is up to date and you are taking advantage of the tax mitigation opportunities the French tax regime has to offer.
2019 draft budget
A new President usually means tax reforms, and we had that with the 2018 finance bill. The 2019 budget, however, is one of those rare occasions where very little changes.
The budget is not normally fully approved until the end of the year, but from a tax point of view we do not expect any significant announcements.
There is one big change in 2019, which is the introduction of a pay-as-you-earn (PAYE) system in France (as discussed later in this article), but that was part of the previous budget.
Income tax and social charges
There are no changes to income tax rates, though the bands have increased very slightly with inflation.
The 0% rate will cover income up to €9,964 and the highest 45% rate income over €156,244.
Social charges remain the same as last year: 9.7% for employment income, 9.1% for pensions and 17.2% for investment (including rental) income.
2018 saw the introduction of the Prélèvement Forfaitaire Unique, or ‘flat tax’ as it is commonly known. This applies to interest, dividends and capital gains on the sale of shares and securities. It does not apply to rental income.
The rate is 30%, which includes income tax and social charges.
The draft 2019 budget does not change this rate. Lower income households can opt to use the scale rates of income tax instead (plus social charges), though this would have to apply to all your income.
The draft 2019 budget does not include any changes to assurance-vie. This is great news for savers and investors who are looking for an arrangement that provides both tax-efficient income and estate planning advantages.
The 30% flat tax applies to policies set up after 26th September 2017.
Older ones can continue to opt for the previous flat tax system.
The allowance for policies held for more than eight years stays in place for all policies (€4,600 for individuals and €9,200 for married/PACS couples).
2018 also heralded a big reform for wealth tax. Instead of covering most of your worldwide assets, it now only applies to real estate assets. Savings and investments (including assurance-vie policies) are no longer subject to this tax. Again, no changes have been proposed for 2019. The current threshold of €1,300,000 remains in place. Tax rates start at 0.5% for assets between €800,000 and €1,300,000, rising progressively to 1.5% for assets over €10,000,000.
This reform put property at a significant disadvantage to capital investments, particularly when you consider that rental income does not benefit from the 30% flat tax either.
If you are wondering where to invest, weigh the tax considerations carefully. If you already own more than one property, it may be worth downsizing your property portfolio.
No changes have been announced for the succession tax regime. If you have not reviewed your estate planning for a while, though, it is always worth doing so to ensure you are taking advantage of all the opportunities to lower this tax for your family and heirs – particularly where heirs will face the higher tax rates.
PAYE finally comes to France
After being in the pipeline for a number of years, the new PAYE system start next year. It means that from January 1, 2019, French tax residents will be subject to a monthly withholding tax on income.
Note, however, that the French system is different from what you may be used to, for example in the UK. The amount of PAYE deducted each month in 2019 will be calculated on your 2017 income, as declared in May 2018. Any balance of tax must be settled by the end of year.
Income subject to PAYE includes (but is not limited to) employment income, retirement income (pensions, lifetime annuities) including UK pensions, other overseas income which is taxable in France and rental income, including from French properties earned by UK residents.
Investment income – interest, dividends, capital gains and gains from life insurance policies/non-French assurance-vie – is excluded from PAYE. It also does not apply to non-French income that receives a tax credit in France under a double tax treaty (eg. UK rental income earned by a French resident).
For French source income, monthly PAYE will be collected by the paying agent. For all your other income, you will need to set up monthly or quarterly direct debits to pay it yourself.
No-one ever said French tax was easy. Last year’s reforms were welcome, and many people who have savings and investments will see a difference in their tax bills this year. But this does not lessen the need for a good understanding of the complex regime and considered tax planning. With different assets being taxed quite differently now, it is worth, with the help of a tax and wealth management adviser, reviewing your investment assets.
As always, your tax planning arrangements should be structured around your specific family situation and your objectives.
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.