Changes to French tax laws could provide a benefit to UK citizens who are resident in the country for more than half the year, and even help with their inheritance tax planning.

Changes to French tax laws could provide a benefit to UK citizens who are resident in the country for more than half the year, and even help with their inheritance tax planning. Nicolas Sarkozy, the French president, has put in place a series of reforms aimed at increasing the ability to pass on wealth from one generation to the next, and outlined his intention to add to these new laws to try and encourage wealthy French residents who have moved abroad to return to their homeland. France’s Wealth Tax has been unpopular for many years, and its “forced succession” laws remain unchanged. But new IHT limits mean that, at last, Brits living there have an option to use more flexible laws to help with their IHT planning. Under the new IHT laws there is no longer any IHT between spouses, and the amount that can be passed to children without being subject to IHT has tripled to €150,000. Anything above, per beneficiary, will be taxed on a sliding scale, with a maximum tax rate of 40 per cent after the gift hits €1.7 million. Given that in the UK the most you can have in your estate before it is taxed at 40 per cent is £300,000, the appeal for those able to have their estates taxed under the new French regime is clear. Marjorie Mansfield, a specialist in French tax at advisors Siddalls, said: “Once somebody becomes “resident” in France, they are subject to French taxation on their worldwide estate, and French forced succession rules on all moveable assets, which would include bank accounts, investments and the like, and all French situated assets. This means that even cash left on deposit in the UK would come under French forced succession rules and French inheritance tax. “The double taxation treaty between the UK and France determines where an individual is resident. It is difficult to change one’s domicile of origin under normal circumstances and moving to France would not be considered sufficient to effect a change of domicile by choice. However, the double taxation treaty between the UK and France actually overrides the UK inheritance law, so that one’s worldwide estate would be subject to French law.” You would be considered to be resident in France if you had your principal home there, or you spend more than 183 days in the tax year there, said Ms Mansfield. However, even though these new rules may be appealing enough to British expats, it is also possible to “shelter unlimited amounts of capital from French inheritance tax if set up prior to French residency, while still having full tax-efficient access”, said Ms Mansfield. She added: “This is a very valuable concession and can also be used to allow assets to go where individuals wish, without having to follow the forced succession and without any inheritance tax. Combined with the increased allowance per child to €150,000, this can allow quite large estates to greatly reduce or even eliminate inheritance tax, if they are French residents. “It is no longer possible to completely shelter investments in the UK from inheritance tax and still have full access and control of these investments. So the potential freedom from inheritance tax under the French system on an unlimited amount of investment capital is going to be both interesting and very attractive to Brits who may wish to move abroad.” The rules will apply to property even if you simply have a holiday home in France, as French property “will generally come under both French law and French taxation, even if just a holiday home”, said Ms Mansfield. She added: “UK property will come under UK law and tax in the first instance, but then it is assessable under the French system as worldwide assets for probate, if you are French resident, so you are not taxed twice.” However, that is not the end of the good news for UK expats in France. In addition to the benefits on IHT, Mr Sarkozy has also offered some additional benefits to property owners in France thanks to changes in the country’s unpopular Wealth Tax. The Wealth Tax has become a wider problem for those in France who are not necessarily considered “wealthy”. Much as the case in Britain, property prices in some areas of France have grown so rapidly that those who are living in relatively modest homes have found themselves subject to this tax, according to Trevor Leggett, executive director of Leggett Immobilier, a French estate agency. He added: “A homeowner living in an area that has been subject to enormous growth may find that their back garden has the potential to become a small housing estate and could be worth in excess of €1 million. This is the case for some inhabitants on the popular Ile de Re, close to La Rochelle. As their property has soared in value, they find themselves liable to Wealth Tax and many have no choice but to sell.” Property is usually an emotional commodity when it is your own home, and being forced to sell just because the price has risen so dramatically seems desperately unfair. Which is why a decision to increase the allowance on the main residence by 30 per cent – which means that now any property worth €1 million, will be treated as if it is worth €700,000, prompting an immediate benefit on the way the Wealth Tax is calculated overall – is so appealing. Mr Leggett added: “It means someone with a budget of €750,000 wanting to buy a principal residence, who has no other assets, will now be able to spend a bit more and remain under the threshold. This will obviously not affect non-residents and only applies to those living or looking to live permanently in France for the moment.” Many Brits who bought houses in the mid-1990s are already feeling the pinch from Wealth Tax, said Mr Leggett, and he has even advised clients to take out a mortgage on a property worth more than €500,000 even if they do not need it, as the tax is only applied to the equity in the property, France’s Wealth Tax has always been controversial, but under new Work, Employment and Buying Power reforms, Mr Sarkozy has made another concession, by implementing tax relief on mortgages to help boost the French economy. This is available for the first five years of your mortgage, said Mr Leggett, which are usually when the interest is most expensive. He added: “We have never seen anything like this before in France, although it does look a little like the UK reforms under Mrs Thatcher. These reforms are great news for British home owners and house buyers in France as they should energise the French housing market, causing property prices to rise and long term investment values to increase. What’s more, unlike so many things in the French system, this new legislation will be very straightforward in its application.” If you have a principal residence in France, you will be able to get tax relief up to 20 per cent of the interest on your loan for the first five years, but there is a ceiling of €3,750 for a single person, and €7,500 for a couple, plus €500 for every dependent you have at home, said Mr Leggett. The limits are doubled for disabled homeowners, and it will also continue to be available if you are forced to move home thanks to a change of career, said Mr Leggett. He added: “In terms of the overall French housing market, these reforms should allow considerable numbers of young people to get on the property ladder. In truth, unlike the UK, the property ladder is an entirely new concept in France and one that is only just starting to be accepted and understood. Eventually, of course, this will affect the lower end of the market, which will in turn push up the rest of the housing market – as we have already seen in Spain. For the moment, tax relief will only apply to new mortgages taken out from now, but plans to cover existing loans are in the pipeline.”