French wealth tax, Q&A May 2004
Conversation between David Anderson, tax solicitor at Sykes Anderson LLP, and UK-domiciled client.
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 dont understand the concept of a tax on wealth.A. Thats probably because we dont 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 €720,000, 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 Im 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. Im 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, its lucky that my €1m villa doesnt 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 dont 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 dont.
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 wont have to declare them as I wont 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 €720,000 (back to the St Tropez villa) theres 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 £325,000 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 (keep an eye on www.sykesanderson.com for the exact date and also to see the text of the Treaty). 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 arent to be taxed on them.
Q. Do I have to file a return if I dont have (French) assets worth over €720,000 ?
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. Dont forget this is an annual tax, payable annually on the basis of the same assets if you continue to own them. We can advise on whether avoidance is worthwhile.
Sykes Anderson has experience in advising on the wealth tax and how to avoid it.