Where annual income exceeds €1m (£729m, $1.1m), taxation at a rate of 75% (a combination of income tax and social charges) isn’t exactly proving the doubters wrong.
For the majority of UK expatriates, there are two ways you can considerably reduce the amount of tax you pay in France. Firstly, most expats with savings in France utilise an Assurance-Vie as an investment holding vehicle. This is a French compliant life assurance policy provided by a life insurance company based either in France or elsewhere.
Growth
The funds invested into the policy would commonly be used to acquire an investment portfolio. French taxes on the profit accumulated within the policy are only levied if a withdrawal is made, so whilst all the funds remain invested, they continue to grow in a tax-free environment.
However, when withdrawals are made, they are taxed very favourably.
Only the “growth” element of the amount withdrawn is taxable. So if the policy grew 7% in value, only 7% of the withdrawal is taxable; 93% is deemed capital and therefore tax-free, and is also free of French social charges, which can be 15.5% in their own right. Tax rates which apply to the growth do not have to be the usual progressive income tax rates, but instead the taxpayer can opt for a withholding tax rate of 50.5% growth within the first 4 years, reduced to 30.5% for years 5 to 8, and further reduced to 23% thereafter, including social charges.
If the taxpayer’s marginal rate of income tax is lower than the fixed rates, by not opting for or revoking the election, the usual scale rates will apply, plus social charges of 15.5%.
Regarding the Prélévement Libératoire (withholding tax) system, from the 9th year onwards the first €9,200 for a married couple or €4,600 for a single person/widow(er), of growth withdrawn is tax free.
These tax breaks are exceptionally favourable; as an example if the investment has grown by 40% in 8 years, the effective tax rate on withdrawals would not exceed 8% on any profit withdrawn, whilst no tax applies to monies that remain within the Assurance-Vie contract.
If your Assurance-Vie is outside of France, it will be outside of French wealth tax for a period of five years from your arrival in France.
Considerable succession tax savings can be made if the Assurance-Vie were established with lives assured under 70. From a UK tax perspective, because of the UK/France Tax Treaty regarding taxes on death, if the policy is a non-UK policy, it will not be subject to UK inheritance tax on death of the lives assured.
Assurance
Moving to France for retirement will require an understanding of the impact of UK and French rules on how you take your pension benefits, particularly in light of the recent UK changes, which from 6 April 2015 will enable you to take lump sums from your UK pension fund.
The ability to take pension lump sums as a UK retiree will allow individuals to time their retirement to when it is most beneficial to them.
At a basic level, pensions are taxable in the country where you are resident, not where the pension scheme is located. This is the case for UK Private (SIPPs) and Company schemes, but unfortunately is generally reversed for all forms of UK Government pensions, which remain taxable in the UK. The UK state pension will follow the Private/Company scheme route, if you are resident in the EEA, or a country with a double tax treaty with the UK.
As a French tax resident your worldwide annual pension will be taxable according to the regular French scale income tax rates, with a 10% deduction, set at a minimum of €352 per pensioner, or a maximum of €3,660 per household. French social charges at 7.4% will also apply, though a foreign pension will be exempt if you obtain a Form S1, and have not paid French social security in the past.
Under the DTT pension income should only be taxable in France. It is possible to arrange with the pension or annuity provider to have this paid gross (rather than a net of UK taxes deducted at source). To ensure no UK tax is levied a Form FD5 (France/Individual) should be filed with your local French tax office.
It is now widely accepted in France that lump sums received in commutation of pension rights are subject to 7.5% income tax, and 7.4% social charges, but with a social charge saving if you hold a Form S1.
With the maximum tax rate at 45% in the UK for withdrawing your pension as a lump sum, the 7.5% in France is a significantly more attractive option.
It is crucially important therefore for those considering retiring to France to be aware of how to utilise these potential benefits to make your retirement as comfortable as possible.
