French wealth tax: is it only for the wealthy?
When I am asked to advise on the tax consequences of owning French assets, clients expect me to cover income tax, capital gains tax and inheritance tax. Very few are also aware of wealth tax. And, when they are aware of it, they assume that they are not affected – surely wealth tax is only for the very wealthy?
The Impôt de Solidarité sur la Fortune (ISF) was first introduced in France in 1981 and, after a short repeal, reintroduced in 1989 in its current form.
France is an exception amongst OECD countries as very few others have maintained a wealth tax system with such an extensive scope of application.
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ISF doesn’t apply to French tax residents only. A non-French resident is also subject to wealth tax, albeit on a restricted base.
This article aims at giving you the basic knowledge of when and how ISF is likely to apply.
- If your client is a French tax resident, he is liable to ISF on his worldwide estate
ISF taxes the net capital value of the taxpayer’s worldwide estate.
It is a snap-shot of the market value of net assets on 1st January of each calendar year (the French tax year is the calendar year). The taxpayer is required to assess and justify the declared value of his estate. The French tax authorities can challenge the values declared, hence the importance of regularly monitoring assets values and considering the merits of using professional surveyors and accountants to confirm valuations.
The current ISF threshold is €1.3 million. It means that if your client’s net worldwide estate on 1st January of the year exceeds €1.3 million, he must report his assets on his French income tax return and pay the corresponding wealth tax. If the net estate exceeds €2.57million, a specific ISF return is to be filed annually.
The current nil rate band allowance is €800,000. Any taxable estate exceeding €800,000 is subject to progressive tax rates ranging from 0.5% for an estate between €800,000 and €1.3 million and up to 1.5% for estates exceeding €10,000,000.
All types of asset are taxed, whether movable or immovable, tangible or intangible and wherever situated. Foreign assets such UK properties, UK shares portfolio and UK based investments, are also taxed on their market value as at 1st January.
Like French income tax, wealth tax applies to the assets own by the household. Therefore, spouses will be required to declare their assets together as well as the assets of their minor children. Cohabitees, whether in a civil partnership or not, are also taxed together.
French law provides some targeted exemptions, such as antiquities, pieces of art, and woodlands (up to 75% of their value). French or UK occupational pension plans are also exempt. However, a SIPP is taxable.
One important exemption covers assets regarded as professional assets, such as the individual’s personal business or a shareholding in a company in which the taxpayer carries out some substantial management duties and which represent at least 25% of the company’s voting rights.
These exemptions apply regardless of the situs of the assets.
To encourage wealthy foreign individuals to settle in France, the French legislature introduced a temporary exemption of all foreign assets held by new French tax residents for a period of 5 consecutive calendar years after the date of arrival. Therefore, a UK national who takes permanent residence in France will be subject to ISF on his French assets alone for a period of 5 consecutive calendar years. From the 6th year following his arrival, his worldwide assets will all become reportable and taxable.
- If your client is a UK tax resident, his French assets are still liable to ISF
ISF will apply, primarily, to any property or land situated in France. Your client’s French movable assets such as furniture, jewellery, French registered cars and yachts will also be taxed.
The tax threshold and tax rates are the same as those applicable to French tax residents. Therefore, a UK resident who, on 1st January, owns French immovable assets of a net market value of at least €1.3 million will be liable for ISF.
However, to encourage foreign individuals to invest in France, most financial investments held in France by non-residents benefit from an ISF exemption. The main exempt financial assets are French bank and saving accounts, French government bonds, current accounts held in French companies, shares in French registered companies, as well as life-insurance and capitalisation contracts held in France.
Any shareholding which allows the shareholder to influence the management of the company (generally considered to be a 10% shareholder) remains subject to ISF.
To avoid French property owners escaping ISF by transferring their immovable assets to a company (hence holding exempt shares instead of taxable immovable assets), French law provides that shares held in a French property holding company (e.g. SCI) remain taxable for the portion of the shares’ value representing the French immovable assets.
This clawback rule extends to shares in foreign companies holding French properties, in which the individual, together with his close relatives (spouse, children and parents), holds 50% or more of the share capital. Consequently, a French property held by a UK registered company remains subject to ISF in the hands of the company’s main shareholders proportionate to the shares’ value corresponding to the French property.
Imagine Mr Smith, married with young children, who is about to start a new employment in a multinational company based in Paris. He and his family arrive in Paris on 15th February 2017 and Mr Smith starts his new full-time employment immediately. He and his wife jointly own various assets in the UK of a total value of about €950,000 comprising:
– A UK property estimated at €750,000;
– various UK investments (savings accounts, small UK shares portfolio) of about €200,000.
In anticipation of their change of residence, Mr and Mrs Smith purchased a duplex apartment in Paris at the end of 2016, becoming their home on arrival. The apartment was purchased for €850,000. They also have French savings accounts of about €50,000.
Mr and Mrs Smith will be regarded as French tax residents from 15th February 2017 for income tax purposes. However, they are not present in France on 1st January 2017 and, for ISF purposes, will not be French residents in 2017. As non-residents, their UK assets will not be subject to wealth tax. Likewise, their French financial investments will be exempt. For 2017, only their French property will be in the scope of ISF. As the property’s value is below the ISF threshold, Mr and Mrs Smith are not liable to wealth tax. They are also dispensed from any reporting obligations.
From 2018, Mr and Mrs Smith will be French tax residents for ISF. Nevertheless, they will benefit from the temporary exemption of their non-French assets for a period of 5 consecutive tax years. Between 2018 and 2022 only their French assets will be subject to wealth tax. They do not have any ISF to pay since the value of their French estate is below the threshold.
In 2023, Mr and Mrs Smith become long-term French residents and lose the benefit of the temporary exemption of their UK assets. Since their worldwide estate exceeds €1.3 million, they must report their worldwide assets to the French tax authorities and they will be liable for wealth tax. Their Paris apartment will benefit from a partial exemption (30%) as the property is their main residence on 1st January 2023, so that their taxable estate will be assessed at around €1.6 million. Under the current tax rates and disregarding any capping rules potentially applicable, the corresponding wealth tax will be about €4,600 per annum.
With a little bit of planning, Mr and Mrs Smith could have avoided paying the ISF for a few more years. ISF applies to the net value of assets, hence net of allowable liabilities. If Mr and Mrs Smith had taken out a mortgage to buy their French property, any capital outstanding on the loan as at 1st January of each year would have been an allowable deduction. Further, if it was an interest-only mortgage, they would have avoided paying ISF until the loan capital is repaid, which could be many years.
- Assets held in trust
Trusts had long been regarded as tax evasion vehicles by the French legislature, allowing wealthy individuals to hide assets which would otherwise be subject to wealth tax if held directly or via legal entities recognised under French law.
The tax treatment of trusts has been considerably amended in 2011, with the introduction of new legal rules. One of the main purposes of the legislation is to list, monitor and tax all trusts having a connection with France.
As far as ISF is concerned, all French assets held in a trust are now to be reported and taxed in the hands of the settlor of a trust. If the settlor has died, the assets are taxable in the hands of the beneficiaries of the trust as “deemed settlors”. This rule applies independently of the type of trust concerned and even if the trust assets are not distributed immediately after the settlor’s death.
In other words, French law looks through the trust to ascertain who is to be taxed. .
If the settlor of the trust is a French resident, he will be taxed on the trust’s worldwide assets.
The settlor is subject to the usual rules of taxation and benefits from all existing exemptions, such as the exemption of French financial investments held by non-French resident or the 5 years’ temporary exemption applicable to newly arrived French residents.
If you have clients who either hold French assets, directly, indirectly (including via a trust), or intend to move to France or already live there, they must consider whether wealth tax is applicable.
- Calculate the value of your client’s French assets – an updated valuation may be required;
- Ascertain how the assets are held – directly or via a company or a trust;
- Assess any potential liability and reporting obligations;
- If your client is a French resident, assess the overall value of his worldwide estate, and whether any permanent/temporary exemptions could apply;
- If your client is buying a French property, consider how the purchase is being funded, and the likely impact for wealth tax purposes.
- Contact a French tax specialist for detailed advice.
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