An Expat Guide to Living in France
There are strategies you can employ to potentially lower your tax liability in France, which this text will outline. Understanding the fundamentals of French tax laws is essential to avoid substantial penalties. Additionally, it’s vital to grasp how pensions and QROPS are taxed for expatriates, as this can greatly impact your retirement income. We will be covering the basics from life in France, including French taxation and UK Pension Planning.
Life in France
Asset Reporting
When you become a resident of France, it’s vital to declare your foreign assets. Many expatriates are unaware of the stringent reporting requirements and the severe penalties, including hefty fines or even the possibility of imprisonment, that can result from non-compliance. If you have assets in a jurisdiction that doesn’t automatically share tax information with France, those assets will be blacklisted and taxed as if they were undeclared.
The importance of getting your financial affairs in order is underscored by the fact that France has increased penalties for failing to report trusts since 2013. Originally, the penalty was set at €10,000 or 5% of the trust’s assets, whichever was higher. However, this was doubled in 2013 to €20,000 or 12.5% of the trust’s assets. Failing to declare overseas assets for the purpose of the ISF wealth tax can lead to substantial consequences, making timely reporting essential.
Criteria for French Residency
Keep in mind that the French tax year spans from January 1st to December 31st.
You are considered a tax resident of France if you spend more than 183 days in the country within a calendar year. This status also applies if you work in France or if the majority of your assets are situated there. Additionally, even if you work overseas, you may still be regarded as a French tax resident if your family resides in France.
Your residency status is crucial as it determines your tax obligations, potentially affecting how much tax you will owe. France applies a worldwide taxation principle, meaning that as a tax resident, your global income and assets could be subject to French taxes. Given these complexities, it’s advisable to consult with a specialist in French tax law to ensure you’re fully compliant and to explore any tax planning opportunities that may be available to you.
French Taxation
Tax Rules for Residents
In France, income tax is calculated based on the household’s total earnings rather than on an individual basis. The calculation considers the number of people in the household, where one adult counts as one unit, and each child counts as 0.5 units. For example, if you are married with one child, your household’s income tax would be calculated by dividing the total income by 2.5 (two adults and one child). Generally, the larger the household, the lower the tax liability is likely to be. However, both partners must be married to be treated as a single unit in the tax assessment.
Unlike some other countries, France does not deduct tax directly from your income at the source. Instead, everyone must file an annual tax return. Married couples are required to submit a joint tax return, while unmarried couples must file separately. The deadline for submitting your tax declaration form is May 31st for the previous tax year, although if you file online, the deadline extends to June. Missing this deadline results in a penalty of 10% of your tax liability.
It’s also important to consider that tax rates and regulations may vary depending on your specific circumstances, and staying informed about any changes in French tax laws is crucial for accurate tax planning.
Income Tax
For the year 2023, the French income tax bands are structured as follows:
- 0% for income up to €11,294
- 11% for income exceeding €11,294 and up to €28,797
- 30% for income exceeding €28,797 and up to €82,341
- 41% for income exceeding €82,341 and up to €177,106
- 45% for income above €177,106
Capital Gains Tax
Tax on Real Estate Property
In France, your principal residence is usually exempt from Capital Gains Tax. If you convert a former secondary residence into your primary home, you can avoid Capital Gains Tax on its sale once you have demonstrated fiscal residency from that address by filing at least one tax return. Some notaries might require proof of residency for up to two years.
The tax treaty between the UK and France governs the treatment of capital gains on real estate. French residents who sell property in the UK will face French taxation on the sale, but they can receive a credit for any UK tax already paid. The tax rate in France is 19%, plus additional social charges of 17.2% (or 7.5%, if applicable).
Tax liability on real estate gains decreases over time due to allowances based on the length of ownership. Specifically, the Capital Gains Tax is eliminated after 22 years, while social charges are waived after 30 years.
Additionally, you may be able to reduce your tax bill by deducting allowable expenses or applying a fixed allowance if you meet the relevant criteria.
Tax on Investments
In France, no portion of capital gains from the sale of shares is exempt from tax, making direct ownership of these investments less advantageous compared to other methods.
UK nationals should be aware that ISAs are not exempt from French capital gains tax. Investments within an ISA, including cash savings or shares, are subject to both Capital Gains Tax and social charges in France. This has led to significant reporting issues, as ISA providers often resist supplying tax information for investments that are considered ‘tax-free’ in the UK.
The taxation of shares can be quite complex, with various options depending on the duration of ownership and the level of gains. You may choose a flat tax rate (PFU – Prélèvement Forfaitaire Unique) without any allowances or opt for the marginal tax rate with applicable allowances. The choice between these options requires detailed calculations to determine which will result in the lowest tax liability. This complexity often means either learning intricate tax calculations yourself, making an educated guess, or hiring an accountant to assist.
Social Contributions
France imposes one of the highest social charges in the world. These charges do not provide direct access to social benefits but are used to fund the country’s healthcare system. The rates vary depending on the type of income, including earned income, pensions, capital gains, and other sources.
The French social security system is supported by both social security contributions and social charges, which are a percentage of taxable income. Social charges also apply to various types of income, such as pensions, rental income, interest, and capital gains.
Unlike the progressive French income tax system, social charges are not progressive and are integrated into the overall tax framework.
For 2024, the rates for social charges are:
- CSG (Contribution Sociale Généralisée): 9.2%
- CRDS (Contribution pour le Remboursement de la Dette Sociale): 0.5%
- Prélèvement de Solidarité: 7.5%
The amount of social charges you owe depends on your specific circumstances, including your residency status in France. Residents may face a flat rate of 17.2%, while non-residents could be subject to a minimum rate of 7.5%.
Inheritance & Gift Taxes in France
Inheritance tax in France operates under a rigid system based on the French Civil Code. For many French citizens, this means that the laws automatically cover family inheritance, often eliminating the need for a will. However, for non-residents with assets or family in France, it is prudent to create a will outlining your wishes.
French inheritance law follows a residence-based system, meaning it applies to all residents regardless of nationality. It enforces forced heirship rules, ensuring that direct descendants such as children, grandchildren, and parents receive specific portions of the estate. The distribution rules are:
- One child: 50% of the estate
- Two children: 66.6% of the estate, divided equally
- Three or more children: 75% of the estate, divided among them
If there are no children, the estate is divided with living parents receiving 25% (or 50% if both parents are alive).
In France, both inheritance and gift taxes apply to transfers of assets, similar to the UK system. Gifts made during one’s lifetime are subject to tax unless they fall within certain allowances, which can only be used once every 15 years. Gifts under these allowances are exempt from tax. The current gift tax allowances are:
- Spouse/Partner: €80,724
- Children: €100,000 per child from each parent
- Grandchildren: €31,865 per grandchild from each grandparent
- Siblings: €15,932
- Nieces/Nephews: €7,967
Gifts exceeding these thresholds are taxed at rates starting from 5% for amounts below €8,072, and escalating to 20% for amounts between €15,932 and €552,324.
Exemptions apply to gifts given for weddings or birthdays, provided they are within the donor’s standard of living. Additionally, transfers between married couples are not subject to these taxes.
Transferring Pensions from the UK and Retirement Planning in France
When planning for retirement in France, understanding how to transfer UK pensions and integrate them into your French retirement strategy is crucial. Here’s a comprehensive guide to help you navigate this process.
Types of UK Pensions and Reasons for Transfer
Defined Contribution Pensions:
Defined Contribution (DC) pensions accumulate based on your contributions and investment returns. Here’s why you might consider transferring your DC pension:
- Avoiding Annuity Purchase: Many UK DC pensions require purchasing an annuity, which can be inflexible and offer low returns due to historically low annuity rates. Transferring to a Self-Invested Personal Pension (SIPP) or a Qualifying Recognised Overseas Pension Scheme (QROPS) can provide more flexible options, potentially increasing your income and investment choices.
- Multi-Currency Flexibility: UK pensions are often held in Sterling, which can be problematic due to currency fluctuations. SIPPs and QROPS allow multi-currency holdings, helping you manage currency risk and optimize your income in euros or other currencies.
- Investment Diversification: UK pensions typically limit investments to the UK market. Transferring to a SIPP or QROPS grants access to a broader range of global investments, including thematic ETFs, which can enhance portfolio diversification and returns.
- Improved Death Benefits: DC schemes can complicate death benefits for beneficiaries outside the UK. In contrast, SIPPs and QROPS may offer more favorable terms, such as the option to provide a dependent’s pension or ensure funds remain in the scheme for beneficiary access.
- Consolidation of Pensions: Managing multiple pensions from different providers can be cumbersome. Consolidating your pensions into a single SIPP or QROPS simplifies management and provides streamlined access to your retirement funds, with support from financial advisors.
Defined Benefit Pensions:
Defined Benefit (DB) pensions offer a guaranteed income based on your salary and service length. Consider the following when deciding whether to transfer:
- Flexibility vs. Guarantee: DB pensions offer guaranteed income for life but lack flexibility. Transferring to a SIPP or QROPS allows for greater flexibility in accessing your pension, investing in various regulated assets, and adjusting your income as needed.
- Cash Equivalent Transfer Values (CETVs): CETVs, which represent the amount needed to purchase your guaranteed income today, can fluctuate with interest rates. Lower interest rates may increase CETVs, making transfers potentially more attractive. Evaluate current CETV rates to make an informed decision.
- Reduced Life Expectancy: If you or your family have a lower life expectancy, transferring your DB pension to a SIPP or QROPS might be beneficial. It provides early access to funds and allows you to use or pass on your pension before it is depleted.
- Protection from Pension Protection Fund (PPF): DB schemes that go into liquidation fall under the PPF, which may result in reduced benefits. Transferring to a SIPP or QROPS protects your funds from potential losses and ensures they are safeguarded.
Managing Your UK Pensions in France
When living in France, you have three main options for handling your UK pensions:
- Keep the Existing Pension
- Before Brexit, maintaining your pension in the UK might have been straightforward. However, post-Brexit, accessing UK pensions from France can be challenging, especially for annuity-based schemes. Some UK pensions may restrict access to funds outside the UK or impose high fees. Understanding your current pension’s terms and how it aligns with your needs is crucial. We offer a free initial consultation to help evaluate whether keeping your pension or transferring might be more beneficial.
- Transfer to an Overseas Scheme (QROPS)
- Qualifying Recognised Overseas Pension Schemes (QROPS) are designed to accept UK pension transfers. French residents can transfer their pensions to a QROPS, though recent changes include a 25% tax charge for transfers outside the EEA. Key benefits include:
- Gross payments from UK income taxes.
- Access to a 25% lump sum from age 55.
- Flexibility in withdrawals and investment options.
- No UK inheritance tax.
- Note that if you transfer to a QROPS, you might face additional taxes if the pension exceeds the lifetime allowance or if you move outside the EEA within 5 years.
- Qualifying Recognised Overseas Pension Schemes (QROPS) are designed to accept UK pension transfers. French residents can transfer their pensions to a QROPS, though recent changes include a 25% tax charge for transfers outside the EEA. Key benefits include:
- Transfer to a UK Scheme (SIPP)
- Self-Invested Personal Pensions (SIPPs) are flexible pensions recognized for international transfers. Benefits of transferring to a SIPP include:
- Access to 25% lump sum from age 55.
- No requirement to buy an annuity.
- Wide investment choices and the ability to denominate in any major currency.
- However, UK pensions are taxed as earned income in France, and UK pension death tax applies regardless of your residence.
- Self-Invested Personal Pensions (SIPPs) are flexible pensions recognized for international transfers. Benefits of transferring to a SIPP include:
Comparing QROPS vs. SIPPs
- Taxation: QROPS may incur a 25% tax charge if transferred outside the EEA, while SIPPs do not.
- Lifetime Allowance: SIPPs have a £1,073,100 allowance (adjusted for inflation), whereas QROPS have no such limit.
- Cost: SIPPs are generally cheaper and FCA-regulated, while QROPS are regulated by the MFSA or GFSC.
- Flexibility: Both options allow flexible withdrawals and investment choices, but SIPPs may have more stringent regulations.
Taxation and Social Charges in France
- UK Pensions: Taxed as earned income in France. Non-residents may face UK tax at source, but the Double Taxation Agreement (DTA) allows for an NT tax code to avoid this.
- Options for Taxation:
- Marginal Rate: Taxed according to your income bracket.
- Four-Year Rule: Spreads the lump sum tax over four years.
- Fixed Rate: 7.5% tax rate for the first lump sum withdrawal plus a 7.4% social charge.
- Options for Taxation:
- Social Charges: A 9.1% social charge applies to pensions, reduced to 7.4% for monthly incomes under €2,000. Exemptions may apply if you hold EU Form S1 or are not affiliated with the French healthcare system.
UK State Pensions
- Taxable in the UK but must be reported in France. You receive a credit for French tax and social charges. UK state pensions are exempt from French social charges and increase with UK inflation. You can claim and top up your UK state pension from abroad.
Retirement Planning in France
When planning for retirement in France, consider the following aspects to ensure a secure and comfortable retirement:
- Understanding French Retirement Systems: France has a state pension system based on contributions made during your working life. Additionally, private pensions and supplementary schemes can provide additional income. Familiarize yourself with both systems to plan effectively.
- Tax Implications: French tax laws affect how your pension income is taxed. Ensure you understand the tax treatment of your pensions, both UK and French, and how they interact. Seek professional advice to optimize your tax situation and avoid unexpected liabilities.
- Healthcare Coverage: France provides comprehensive healthcare coverage, funded through social charges. Ensure you understand how your healthcare needs will be met in retirement and any additional private insurance you may require.
- Cost of Living: The cost of living in France can vary significantly by region. Plan your retirement budget according to the area where you intend to live and consider factors such as housing, utilities, and local taxes.
- Estate Planning: French inheritance laws are strict, especially regarding forced heirship. Create a will to ensure your assets are distributed according to your wishes and understand how French inheritance laws will impact your estate.
- Language and Integration: If you are not fluent in French, consider language courses or seek assistance to better integrate into French society. This can enhance your overall retirement experience and ensure you are well-informed about local regulations and services.
For personalized advice on transferring your UK pensions and planning your retirement in France, contact a specialist financial advisor.
