France and UK New Double Tax Treaty Comes Into Force

We are delighted to publish the first in a series of authoritative articles from international experts in expatriate tax planning, wealth management and pension planning, Blevins Franks

The Double Tax Treaty between France and the UK has entered into force for French residents. It became effective on 18 December 2009 and contains some significant tax changes, including an exchange of information article, which will affect British expatriates living in France.

The treaty was signed on 19 June 2008 by UK Chancellor of the Exchequer Alistair Darling and French Finance Minister Christine Lagarde and then had to be approved by each parliament. The signing followed more than four years of debate after the publication of an earlier draft in January 2004. The new treaty replaces the original one signed in 1968.

The key points affecting expatriates are covered below.

Capital gains tax on UK real estate

In the right circumstances, if a non-UK resident sells a UK property usually no UK capital gains tax is due. This is provided that the property is not used in a UK trade and, in the case of property owned at departure, that the sale is made during a period when the individual is ultimately non-UK resident for a total of at least five complete and consecutive UK tax years.

The lovely town of L'Isle-Sur-La-Sorgue

A loophole in the previous treaty meant that such gains made by residents of France were not taxed in France either (and since capital gains are taxed at a fixed rate they were not even taken into account in France to calculate the effective tax rate on other income). As exempted ‘income’, most French practitioners treated the gains as exempt from French social fund charges too, so they could be wholly tax-free.

Under the new treaty, the UK position is unchanged, but the gain will be taxed in France – at a fixed rate currently of 27.1% (16% tax + 12.1% social charges). A ‘taper relief’ reduces the gain, though, by 10% for every complete year of ownership in excess of five years – down to nil after 15 years.

France will deduct the UK tax paid (if any) from the French tax, but no refund will be available if the UK tax liability is higher than the French one.

As the French exemption on the main home only applies if the property is your actual and habitual main residence on the day of sale, or when put on the market and sale occurs within 12 months, it is possible that the gain on a former UK home will now be taxable in France. There is no ‘time-apportionment’ for periods of occupation as there is in the UK.

Wealth tax five year holiday for UK nationals

The 2008 version of the treaty retains the wealth tax ‘holiday’ for UK nationals moving to France. For the first five full French tax years after becoming a resident of France, a British national’s wealth tax liability will only be based on French assets, all other assets being ignored. From the sixth year of residence onwards, wealth tax will then be payable on worldwide assets as normal.

If, having been French resident, an individual becomes non-resident for a period of at least three years, and then becomes a resident of France again, the five year exemption period will start again.

This new rule provides significant relief against French wealth tax for at least five years for those newly arrived in France. As the taxable date is 1 January each year, the year of arrival is nearly always on a non-resident basis anyway. So, if you are still planning on moving to France you could try to arrive near the beginning of a tax year to stretch out the exemption time period even further.

Although not yet confirmed, it is expected that anyone who arrived in France before the treaty came into effect should still qualify for any balance of the first five years of residence.

Airline Pilots

Under a loophole in the former treaty, pilots who worked for a UK airline but lived in France could largely escape tax on their earnings in both the UK and France. This is because the treaty gave primary taxing rights to the UK – with the income only taken into account in France to calculate the effective rate of tax payable in France on other income, but the UK only taxed the income for the days when flights started and ended in the UK.  Under the new treaty the loophole has been closed. French tax will be payable on the entire earnings, with a credit for any taxes paid in the UK.

UK Companies with French Property Gains

In the right circumstances a company that had no business premises in France could have possibly escaped French tax on gains as exempt business profits. However, this loophole is closed by the new treaty which treats all such profits as taxable whether they are seen as business profits or not.

Social charges

Market day in Pezenas

A significant change in general is that the new treaty now lists the social fund charges as ‘French tax’. They did not exist when the 1968 treaty was drawn up and their nature as a “substantially similar” income tax under the terms of the treaty has never been clear. Although the mechanism has yet to be confirmed, it is expected that straightforward credit can be given in the same way as with the other taxes, and so, for example, the social charges of 12.1% due on UK rental income should in future be able to be covered by UK income tax paid, whereas before the UK tax could have become stranded because of the way in which the income was taxed in France under the previous treaty.

Otherwise many things remain unchanged from the original treaty including the France-UK residency ‘tie breaker’ rules and the taxation of government pensions in the country of origin only.

There are tax-planning opportunities available which can reduce your tax liabilities. Seek advice on your specific circumstances from a professional adviser who specialises in the tax rules in both the UK and France who can suggest appropriate methods which can also mitigate tax for your heirs on your death.

Contact details: For additional information from Blevins Franks, go to http://www.blevinsfranks.com or call them on: 0044 (0)20 7336 1116 or email taxadvisoryservices@blevinsfranks.com

© Stewart Andersen and Stewart Andersen’s Property Blog, 2009. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Stewart Andersen and Stewart Andersen’s Property Blog with appropriate and specific direction to the original content.