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Please note that taxation and
national insurance is a complex subject and you should not
take or refrain from taking any step without full independent
advice on the particular facts of your case. The content
of this article is of a general nature and no liability
is accepted in connection with it.
Please note: “real property” connotes land,
buildings etc – broadly whatever is immovable and fixed
to the ground.
Q. I don’t understand the concept of a tax on “wealth”.
A. That’s probably because we don’t have such a
tax in the UK. It was first established in France on 1 January
1989 under the title of “Impôt de solidarité
sur la fortune”.
Q. How does it work ?
A. Very simply. If you are tax resident in France, you
have to submit an annual declaration of your worldwide assets
and their value, as at 1 January each year. If their value
exceeds €732,000, a graduated tax is payable, annually.
The first band is 0.55%, the top band 1.8%. There is no
upper limit.
Q. Does it cover all assets ?
A. No. The tax is very unpopular in France but rather
than abolish it (it brought in €2.5bn in 2002, and
as house prices rise but the lower threshold does not,
this is set to increase) manifold exceptions have been
instituted over the years. So, for example, business property
and antiques over 100 years old are in principle excluded,
and the value of one’s principal residence is reduced
by 20% for the purpose of this tax.
Q. How is it calculated ?
A. On the basis of households, which means married couples
and minor children file one common return.
Q. I only own a holiday home in France so presumably I’m
not tax resident there.
A. Probably not, but you have to be careful. There are
two main tests of French residence. You become French tax
resident either if you spend more than 183 days there in
any calendar year or immediately on arrival if you have
the intention of setting up home. So you may become tax
resident inadvertently.
Q. I’m definitely not French resident; do I still
have to worry about it ?
A. Yes, but the only assets you have to worry about are
those situated in France – for example, real property
or bank deposits. This includes shares in companies which
own French real property, to the extent that their value
is due to that property.
Q. So would my €1m villa in St Tropez make me liable
?
A. Yes. Even if you live in the UK, even if you own it
through a UK or French company, and even if when you bought
it, it was worth far less.
Q. Well, it’s lucky that my €1m villa doesn’t
actually exist. But I am thinking of moving to my genuine
€500,000 house in France. Does this mean that all of
my assets will inevitably come within the wealth tax net
as soon as I become resident ?
A. No. Firstly, the tax is assessed at 1 January each year.
If you win the lottery on 2 January, you don’t have
to worry about wealth tax that year. Secondly, you are only
taxed on assets you own.
Q. But I do own all of my assets.
A. Not necessarily. English law recognises the concept
of trusts, where the legal ownership and the beneficial
ownership are split. The trustee owns the asset – he
is, for example, cited on the Land Register as the owner
– but the beneficiary also has an interest in it. French
law does not usually recognise a trust – it says either
you own it or you don’t.
Q. I see. So if I put assets into trust in a tax haven
before I move to France, when it comes to wealth tax I won’t
have to declare them as I won’t “own” them
?
A. Depending on your circumstances this may be possible.
The French tax authorities usually regard property in trust
as being owned outright by the trustees and ignore any beneficial
owners.
Q. So should I own my French real property on trust as
well ?
A. For various reasons, no. Not least because the trust
will have to pay tax on deemed income. It is best used for
non-French situated assets.
Q. So if my property is worth over €732,000 (back
to the St Tropez villa) there’s nothing I can do ?
A. Not necessarily. You may be able to create a mortgage
if you do not already have one. This is deductible from
the property value for the purposes of wealth tax. You must
take advice on how to do this.
Q. Are there any tax consequences in moving UK property
into an offshore discretionary trust while I am UK resident
?
A. Yes. This is normally taxed immediately at 20% (the
Inheritance Tax lifetime rate) to the extent that it exceeds
the nil-rate band, currently £275,000
for tax year 05/06. However, if
you become UK non-resident before you move the property
offshore, and then do not return to the UK for a certain
time, you may be able to move the asset offshore tax free.
Taking a so-called tax holiday of this sort would only
be worthwhile for certain people, and it must be done
carefully. We can advise on this.
Q. What is the future for wealth tax ?
A. It looks like it will be around for a while yet. Even
though it is unpopular as a “tax on a tax” it
is a significant source of revenue. Furthermore, it is catching
more people as the threshold has hardly risen since 1998.
Q. Does the France-UK Double Tax Treaty help me ?
A. Yes. Usually, the Double Tax Treaty ensures that you
do not have to pay tax on the same income, capital gain,
etc. in both the UK and France. If both countries seek to
tax you, you usually get a credit in one against the equivalent
tax levied in the other. However, with wealth tax the UK
cannot give you a credit, since there is no such tax in
the UK.
Q. That sounds like a “no” to me.
A. Well, the wealth tax, as I said, is relatively new,
having been established in 1989. This means that the present
Double Tax Treaty does not address it. However, a new Double
Tax Treaty is due to come into force in 2005 or 2006 . This states that a UK national
French tax resident is only assessed to wealth tax on his
French property for the first five calendar years following
his becoming resident but please remember that it is not
yet in force.
Q. What are the formalities ?
A. You have to file a return annually by 15 June if you
are French resident, or by15 July if you are UK resident.
The tax is payable immediately.
Q. Who values my property ?
A. You do. You have to submit a declaration of all of your
relevant assets. This is another reason why many like to
place their assets outside of the ambit of the tax –
they do not want the French authorities to know what they
own. If the French authorities feel you have undervalued
your property, or omitted certain property, whether in good
or bad faith, they can challenge your valuation. Special
tax inspectors are deputed to review wealth tax returns.
Incidentally, it is unclear whether UK nationals taking
advantage of the five-year break will still have to declare
non-French assets, even if they aren’t to be taxed
on them.
Q. Do I have to file a return if I don’t have (French)
assets worth over €732,000 ?
A. No. But if you are close to the threshold you should,
because you may have undervalued your assets. Be aware that
the French authorities keep their ears close to the ground,
and are likely to catch you, even if you are non-French
resident. For example, the state has sight of real property
purchase contracts, which record the value of your real
property in black and white.
Q. Last question. Is it worth making the effort to avoid
this tax ?
A. Yes and no, depending on your assets, your intentions,
the cost of setting up avoidance and your attitude to form-filling.
Don’t forget this is an annual tax, payable annually
on the basis of the same assets if you continue to own them.
French tax residents are liable to wealth tax on their worldwide assets including all property. It will be based on your household’s wealth (including spouse and children) as at 1 January each year. Unmarried couples living together are treated as one household for this purpose.
The list of taxable assets includes the following:
• Real estate
• Furniture
• Cars and other vehicles
• Horses
• Jewellery
• Shares and bonds
• Redemption value of any life assurances
• Endowments
• Debts owed to you
There are, fortunately, exceptions, including:
• Some corporate shareholdings. The value of the shares is exempt, but with provisions. Property investment companies are specifically excluded from this exemption.
• Assets necessary to a business conducted by its owner or spouse
• Pictures, tapestries, statues, sculptures etc
• Antiques
• Literary and artistic rights in the hands of the artist
• Funds in a pension fund and annuities constituted in respect of an employment or business (subject to certain conditions)
• The value of life insurance contracts is not generally assessable unless redeemable (eg, investment bonds). For policies taken out after 19 November 1991, the value of premiums paid since the holder reached age 70 is added to his wealth
• Portfolio investments such as bonds, cash deposits and shareholdings of less than 10% in French companies) held by non-residents
• Woodlands and agricultural land also have some exceptions
Property valuations
The market value of your real estate is used for wealth tax purposes. There is no legal definition, but market value it is often referred to as the “price it could be expected to fetch on the open market”. The method most commonly used to work this out is the “comparison method”, where you compare similar properties in your area.
Another method would be to value your property according to the level of income generated if you rent it out. For example, if the annual rental income is €30,000 and the rate of return is 6%, your property would be valued at €500,000. You could also readjust the purchase cost (or former market value) by applying a co-efficient to reflect the increase in the property market.
If the property is your principal residence its value can be reduced by an abatement of up to 20% to reflect the fact that it is occupied by a “sitting tenant” and there can be reductions for let properties.
Wealth tax reductions
If your net wealth is less than €2,300,000, the total wealth tax plus income tax, capital gains tax and social charges cannot exceed 85% of your income. If you are worth more than €2.3,000,000, the reduction is limited to 50% of the full wealth tax.
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