Following Mr Hollande’s successful campaign earlier this summer to become France’s first socialist president in 17 years, it looks like the UK might end up being the beneficiary of his new tax proposals. These include a 75% top rate of tax for those earning more than one million euros per annum and an increase in wealth taxes on real estate assets. Since Mr Hollande announced his plans earlier in the year, London (in particular South Kensington – the unofficial 21st arrondissement of Paris) has seen a steady stream of bankers, partners in private equity firms and high earners take refuge across the channel; but what are the tax implications and legal practicalities of relocating?There are now approximately 400,000 French nationals in the UK with 80% residing in London but, in order to make the move both a financial and a personal success for you and your family, it will be essential to take advice in both jurisdictions.
- Do I need a visa to live and work in the UK?
If you are a French national coming to work in the UK then you would not ordinarily require a visa. This is because nationals of countries in the European Economic Area and Switzerland have the right of free movement and residence within Europe. However, if any members of your family are not EEA or Swiss nationals, they can join you in the UK, but they may need to obtain an EEA family permit before they travel.
- When should I arrive in the UK/leave France?
UK advice:Not until after 5 April in any calendar year, having carried out your tax planning the tax year before. The UK tax year runs from 6 April in one calendar year until 5 April in the next. This would include a holiday or short visit during which you make long-term arrangements such as renting or purchasing a property or signing an employment contract if you are not working fulltime in France.
French advice: For individuals, the income tax period is the calendar year, or less if the taxpayer leaves in the course of a calendar year. But an important date for the annual net wealth tax (“I.S.F.”) is January 1st. It is on this date that the ISF is calculated for the current year, with no pro-rated reduction if you become nonresident later in the year. If you are a French resident on January 1 the ISF will apply, barring treaty relief and depending on their nature, to your worldwide assets. If you are non-resident on that date, only qualifying French situs assets will be taxable.
- How will I be taxed once I arrive in the UK/leave France?
UK taxation: Your first year can, by concession, be split into two periods of residency and non-residency for income and capital gains tax purposes. However, if you come to the UK with no intention to remain here indefinitely or permanently (and have retained your French domicile of origin) then you can benefit from the remittance basis of taxation (as a “non-dom”). This means that your offshore income and gains can arise free of UK tax provided they are not, directly or indirectly, brought to the UK. If you have been UK resident for seven years then you must pay an annual levy of £30,000 to benefit from this favourable regime; the levy increases to £50,000 after 12 years of UK residency. If part of your employment duties are fulfilled outside the UK, there are means of reducing tax on your remuneration.
French taxation: The fact of becoming a non-French resident accelerates liability for income tax which is accruing but not yet due in respect of the current year. However terms may be accepted if the tax payer provides guarantees of payment at the normal due dates.
Since March 3, 2011 there is also an “exit tax”. Taxpayers who have been tax residents of France for six out of the previous ten years may be liable for tax on unrealised capital gains in respect of any shareholdings if they represent more than 1% of the underlying company or are worth more than €1,300,000. However liability may be deferred if the taxpayer moves to another EU member state and no tax is payable after certain holding periods have been satisfied.
Subject to treaty relief, the non French resident taxpayer remains liable for French source income.
- Should I take any action prior to becoming resident in the UK and will this trigger charges in France?
UK advice: There are steps you can take prior to becoming UK resident for tax purposes (i.e. in the tax year before you arrive) to mitigate your UK tax liabilities once you are here. You can create new offshore bank accounts with one containing pure capital and another receiving the interest. The proceeds from offshore assets sold at a gain would be transferred into a third bank account offshore. Planning often involves selling assets standing at a gain, making offshore gifts (either to trusts or individuals) and taking out offshore borrowing to mitigate UK tax (be it capital gains tax or inheritance tax).
French advice: When no longer a French tax resident, subsequent on-going liability to French tax will result either from French source income, such as rent from a property, or from the annual wealth tax on qualifying French assets. Pre-departure planning to avoid these may include realising certain French assets by taking advantage of certain exemptions (for example on capital gains tax in the case of a sale of a principal residence) so as to lower or eliminate future net wealth tax liability. Furthermore, if heirs remain in France it may be advisable to consider accelerating intervivos gifts before leaving.
- How should I buy my home in the UK?
UK advice: Buying a home in the UK will not automatically affect your “non-dom” status but you should be careful how you go about buying it if this is done prior to the date upon which you wish to become UK resident. Furthermore, the UK’s 2012 Budget set out new rules regarding stamp duty land tax, capital gains tax and an annual charge on properties worth more than £2m owned by a “nonnatural” person which includes a company (a well trodden route to mitigate UK taxes). There are now many options available to investors and home buyers, be it purchasing in your own name or shared ownership using life insurance or borrowing or using a foreign limited partnership. We can help you identify which would suit you and your family best.
French advice: French tax residence is an issue of fact, and an individual may be deemed resident for tax purposes if any one of the following is found to be in France: his home and family, his main place of residence, his professional activity or the centre of his economic interests. If homes or secondary residences are maintained in France after a move to the UK it will be most important to be a position to demonstrate that none of the above tests continues to be met in France.
- Do I need to put a UK Will in place?
UK advice: If you own UK real estate in your own name, we would advise a UK Will dealing with UK situated assets but it will need to conform with French forced heirship rules (upon which there is more below).
French advice: We advise that a separate Will is drawn up to deal only with French assets. However, if the estate includes French real property the terms of the Will may differ depending upon how such property is held.
Domestic French law has “forced heirship” rules which require a testator to leave part of his estate to “reserved” heirs, that part depending upon the number of children (for one child at least half of the estate must be left to the child, if there are two children the reserved portion becomes two-thirds and this is increased to three quarters if there are three or more). French private international law holds that questions of succession to real property are governed by the law of the jurisdiction in which the property is situated and those relating to personal property, the law of the jurisdiction in which testator is domiciled at death. The shares in a French civil partnership (SCI) are personalty so that, if the testator is domiciled in the UK at the time of death and the French property is held via an SCI, the forced heirship rules will not apply and the testator is free to choose the beneficiary of the shares in the SCI. The tax situation will remain the same, whether the French property is held directly or via an SCI.
Au revoir Saint Tropez: Hollande declares financiers and the wealthy his enemy and attacks foreign holiday homeowners in France
Mr Hollande is aiming to increase government revenues, desperately needed to repay the country’s large budget deficit, by increasing income and capital gains taxes on foreign-owned second homes under the guise of a “social charge” due to be extended to foreigners on 1 January 2013. An estimated 200,000 British nationals own second homes in France (think of Dordogne-shire and the South West of France generally) and concern is widespread about how the changes will apply.
- I own a holiday home in France but live in the UK – what are the new French rules exactly?
French advice: Other than in the case of a sale (see below) there will be no impact if the property is not rented.
Article 29 of the 2nd Amending Finance Act for 2012 extends the so-called “social contributions” (C.S.G., C.R.D.S and two other levies, each with different rates but now representing a total of 15.5%) to real property income and capital gains realised by non-residents, a category previously exempt from these taxes. From January 1, 2012, French property rental income, chargeable to French income tax with a minimum rate of 20% will bear an extra 15.5%. The social contributions apply to the net taxable income so that the reliefs and allowances available when calculating real property income will continue to apply.
When the sale of a secondary residence in France is taxable (there are several exemptions) the flat rate applicable to capital gains arising on the sale realised by a UK based vendor was 19% (this is a concessionary rate applicable to EU residents. For non-EU residents the rate is 33.3% and 50% if the vendor is resident in a non-cooperating State). From January 1, 2012 the total rate will be 34.5% (19% + 15.5% for residents of the UK and the European Union), 48.5% and 65.5% depending upon the State of residence of the vendor.
- I rent my French holiday home – how will the new rules affect me?
French advice: As indicated above, an additional 15.5% tax in the form of the “social contributions” will apply to French source real property income paid to UK resident landlords.
UK advice: As regards properties which are rented out, the income of which is now subject to a higher rate of tax in France, a tax credit should be available to reduce your UK tax liabilities and therefore avoid double taxation. Furthermore, if the property qualifies as a “furnished holiday letting” (FHL) then expenses can be deducted from gross rent to reduce UK liabilities further. FHLs are furnished lets which are carried out on a commercial basis (although a formal lease is not a requirement) where the property is available for letting for 210 days of the year and actually let for 105 days of the year with no single letting lasting for longer than 155 days. In some circumstances a grace period is permissible if the target days are not attained.
- When I sell my holiday home will I have to pay tax in both countries and what will the rate be?
French advice: If there is liability for French capital gains tax the rate will now be 34.5% if the vendor is a UK resident (19% plus the “social contributions” of 15.5% extended since January 1, 2012 to nonresident vendors). There are various exemptions or reliefs, notably as a function of how long the property has been held. The time required for total exemption has now been extended to 30 years.
UK advice: If the property qualifies as a “furnished holiday letting” then you can choose to have the gains taxed at the lower “entrepreneur’s relief” rate of 10% (over and above any available personal annual exemption – £10,600 for the 2012/13 tax year). The double tax treaty should avoid any duplication of tax, although overall the higher rate of the two countries is usually the effective rate of tax.
- Will I have to pay inheritance tax in both countries too?
French advice: French inheritance tax will be payable in respect of French property, irrespective of the place of residence of the beneficiary. The rate will vary depending on the relationship between the deceased and the heir and the value of the estate, rates varying from 5% to 45% when in direct line from parents to children (the 45% rate applying to that band in excess of 1,805,677 €). There is an exemption of the first 100,000 € per child. The rate in the case of unrelated third party beneficiaries is 60%. It should be noted that there is a double tax treaty between France and the UK which seeks to avoid or alleviate double taxation in the case of estate taxes.
UK advice: Where holiday homes in the EEA are let out on a commercial basis and have been owned for two years then business property relief should be available to provide a full exemption from UK inheritance tax on the death of the owner. See below for further commentary on a recent EU regulation on the simplification of cross-border estates.
- I have a UK Will, do I need a French Will as well? Can I leave my French home to whomever I like?
French advice: Please see commentary above. If the French property is held directly (rather than via an SCI or other form of entity) the reserved heirs (children) will have a mandatory claim over part of the French estate.
UK advice: Ordinarily we advise that local Wills are drawn up to deal with the devolution of real estate in a foreign jurisdiction on the death of the owner. It will therefore be important to ensure that any French Will put in place does not revoke any existing Will in relation to the rest of your estate. French and UK legal advice should be obtained.
European advice: In June this year the EU adopted a regulation aiming to simplify the process of administering cross-border estates within the EU (principally holiday homes and bank accounts). It comes into force on 17 August 2015 and automatically applies a default position of the succession laws of the country in which the deceased habitually resided as regards all their European assets in the absence of any preference explicitly made in the deceased’s Will; even if that individual resided outside the EU. In the meantime, the old rules apply save for the ability to nominate a choice of law in one’s Will since the regulation was adopted in June. The regulation has also introduced a European Certificate of Succession to act as formal proof of inheritance for heirs and executors. Denmark, the UK and Ireland have currently opted out of the regime, but the regulation will apply as regards assets located in the other member states. The new EU regulation does not affect the rights of the individual member states to apply their own inheritance or estate taxes to the assets situated in their jurisdiction in which case either a treaty or unilateral credit should be available to avoid double taxation.