TAX FOR RETIREES IN FRANCE

A COMPARISON WITH THE UK POSITION

For many people, retiring to France is a dream that thousands before have made come true. However, it is all too sad to see that those wishing to while away their golden years in a country notorious for its superb quality of life are often put off by the idea that France is a high tax jurisdiction. British retirees fear that declaring themselves as French residents will mean that they will be subject to high French taxes and thus either choose to stay put or think (wrongly) that they can continue to declare themselves UK residents while living in France. Incidentally, it should be pointed out that France's high social contributions are the reason behind the country's high standard of living!

We would like to show that the above perception is wrong, and that there can be many financial benefits (not drawbacks) for retirees to choose France, rather than the UK, as their principal residence.

Taking for example a retired couple with a private pension, and a capital gains liability of Euro 5,000, it can been seen that transferring to the French system and declaring oneself as a French resident can be a good course of action from a taxation perspective.

In France, residents are subject to tax on their worldwide income. That means a pension being drawn out of the UK must be declared in France (the country of residence).

In the UK there are just three tax rates, whereas France has seven. The highest UK tax rate is currently 40%, while in France the top rate is 49.8%. However, providing annual income does not exceed
Euro 70,000, a retired couple will be better off becoming resident in France.

And of course there are always the extra tax deductions that France offers over the UK system. For example, the initial 20% which is deducted for the first Euro 11,900 earned. In addition to which there is a further deduction of 10%, which is capped at Euro 3,214 per household for pension income.

Another peculiarity of the French tax system is the way in which income tax is calculated, namely by the use of "parts". Tax is calculated depending on how many "parts" the family is made up of. Put more simply, a "part" is a family member. To illustrate:

- Single, divorced or widowed persons equal one part,
- Married persons constitute two parts;
- And in the case where there are still children living at home, every child or dependant person is equivalent to 0.5 part (or 1 part after the third child or dependant person).

So for a couple with 2 children, the income will be divided by three. For a couple it will be two. The tax rate will be based on the part and then multiplied up by the number of "parts", therefore the rate will be lower. This method is not used in UK tax calculations. It can therefore be seen that a retired couple with an average income can have much to gain by living in France.

Residents in France are subject to capital gains tax, as is also the case in the UK.

Since 1st January 2000, capital gains upon the sale of shares in France are taxed at a sole tax rate. It is important to note that gains under a threshold of Euro 7,650 (for 2002) and Euro 15,000 (for 2003) are not taxed. Capital gains are taxed at a rate of 26% (16% and 10% for social contributions).

UK capital gains tax is also calculated differently. CGT is levied at the same rate as income tax rates, however some exemptions and reliefs apply, and in order to find out more about these deductions, it is best to consult a UK tax expert. However, when it comes to initial exemptions, in the UK, the first Euro 7,500 earned is free from tax in the case of an individual, and Euro 3,750 in some other cases. The allowance is therefore a little more attractive in France.

Another way to reduce the tax burden in France is through the use of French-approved life insurance policies. There are tax benefits to be gained if these insurance policies are used correctly and planned ahead of a permanent move to France.

With these policies, any capital invested can be withdrawn tax-free, while interest earned on the investment can remain within the policy.

The retired couple in our example could choose to invest Euro 200,000 in such a policy, which would net roughly 5% annually. This gain will be exempt of tax, while the couple could skim off Euro 10,000 in capital, again free from any tax liability. In addition, after 8 years, the couple could earn a loyalty bonus which could be paid back into the policy.

There are inheritance benefits linked to these policies. If descendants are identified as beneficiaries to the policy, no inheritance tax is payable up to Euro 152,000 per person and they can be totally inheritance tax free; if taken out before coming to France. French Estate duty when due is normally levied on a policy at 20%.

Retiring to France with a substantial income of up to Euro 70,000 annually,
t is a very viable option financially.

It must also be noted that while tax planning is an important factor to bear in mind when choosing to retire to France, it is not necessarily over-complicated or punishing from a financial and fiscal point of view.

Anyone considering relocating to France from the UK needs to consult a specialist dealing in property and taxation issues to ensure that the right taxes are being paid in the right country and that there are no surprises in the purchasing process. With the help of an experienced professional, any move to France should be free from headaches and unexpected expense

Article 3