Tax traps when moving to France – Don’t get caught out!
When considering a move to France, tax planning is not usually at the forefront of one’s mind. For most, it’s one of the last things they look into over the more pressing concerns of opening a bank account, finding a property, buying a car, etc.
However, it should be one of the first things you look into, as leaving it too late can mean you miss the opportunities to save tax, and in some cases, you could even end up with higher tax bills.
Take advice before you go to avoid some of the most common pitfalls:
ISAs are not tax-free in France.
Income and gains arising in your ISAs are taxable in France if you are resident there, whether or not you withdraw funds. They are also potentially subject to 15.5% French social charges. What’s more, if you have a share ISA and cash it in whilst resident in France, your gains will be taxable from the date you took out the ISA, not from the date you moved to France, potentially landing you with a very large French tax bill that could so easily have been avoided by cashing in before you moved to France.
Selling your former UK home after you move to France.
Gains on the sale of your main home are only tax free in France if the property is your main home at the date of sale. Otherwise, the full gain is taxable from the date of purchase. Some people keep their UK main home after they move to France and then sell at a later date. If you do so, you may be liable to tax (and social charges) in France on the gain.
France taxes capital gains on real estate at rates of up to 25%, plus potential social charges of 15.5%, which could result in a top rate of 40.5%. Whilst reliefs are available depending on the length of time you have owned the property, with recent increases in UK property prices, you could find yourself faced with an unexpected tax bill that could have been avoided if you had sold the property before you moved to France.
Pension lump sum – opportunity or tax risk?
Your lump sum will be taxable in France if you take it whilst French resident, but would have been tax free if taken whilst UK resident so it may be worth taking this before you move to France. However, under the new UK pensions freedoms, you have the opportunity to take out your entire personal pension fund at a tax rate of just 7.5%. Care must be taken as the timings are crucial and will depend on each individual’s circumstances, so specific advice must be taken.
Making and receiving gifts.
In the UK, we are used to the fact that making a gift during your lifetime does not usually trigger a tax charge provided you survive for 7 years. In France, however, if you make a gift the beneficiary may suffer an immediate tax charge on the gift. Allowances are available but these tend to be small and renew only every 15 years, so care needs to be taken.
In addition, if gifts are made to non-blood relatives (e.g. between couples who are not married or in a civil partnership, or to stepchildren) a flat 60% tax rate is payable so the beneficiary will receive less than half of the value of the gift. Clearly, this should be avoided and advice taken as to how to mitigate this penal rate.
Trouble with trusts.
In July 2011 France introduced tax legislation setting out how trusts should be taxed. However, the legislation is silent on a number of points and leaves many questions unanswered. Generally speaking, if the settlor of the trust is resident in France, the trust assets will be treated as his for wealth tax purposes.
Beneficiaries are usually liable to tax in France when distributions are made to them from the trust, although in certain circumstances a beneficiary can be treated as a ‘deemed settlor’ and therefore liable to wealth tax on the trust assets. If trust assets are not distributed on the death of the settlor, the trustees may be required to pay tax at up to 60% on the value of the trust assets.
There are also stringent reporting requirements for the trustees where a settlor or beneficiary is resident in France and hefty penalties for non-compliance. If you are a trustee, settlor or beneficiary of a trust and moving to France, take advice so that you understand the implications as a resident of France and do not face unnecessary tax bills.
To avoid being caught out, plan before you go!
Give yourself enough time to restructure assets, investments and pensions with the advice of an investment and tax specialist who understands both tax systems and speaks plain English! .