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Taxation of UK rental income in Italy

By Gareth Horsfall - Topics: Exchange of Information, Income Tax, Italy, Property, Tax, taxation of rental property, UK property
This article is published on: 19th March 2017

19.03.17

Since the recent exchange of information between HMRC and the Italian tax authorities on UK rental property owners, I have been asked the question whether rental income (when taxed principally in the UK) will be taxed again in Italy as an Italian resident.

Rental income from properties is dealt with according to the law of the state where the property is situated. This means that you can deduct your expenses in the UK, in entirety and in line with UK law, and then the NET income is declared to HMRC in the UK.

When it comes to the Italian tax declaration the NET UK rental income needs to be declared, along with the tax paid in the UK.

This income is put together with any other income you may have for the year, to be declared in Italy,and a credit is given for the tax already paid in the UK, and the tax is calculated on the normal IRPEF rates (income tax rates in Italy).

In short the NET UK rental income position is what needs to be declared in Italy.

Given the recent clampdown on people who are not declaring their UK rental income in Italy, as Italian residents, this information should help to ease any thoughts of having to pay tax twice.

Of course, all this applies to properties held in other countries as well and not just the UK.

The bottom line is get your affairs ‘in regola’ because it is unlikely to cost you any more than it would in the UK, and you can sleep easy knowing you have done the right thing.

The ABCs of Spanish taxation when investing in real estate in Spain

By Jonathan Goodman - Topics: Barcelona, Income Tax, Property, Spain, Tax, tax tips
This article is published on: 8th March 2017

08.03.17

For a long time, Spain has been considered a country of interest for real estate investors. It is a Western European country with many types of attractive properties available: residential, retail, offices, logistics, industrial, and more. And all this in a place that enjoys a stable legal system, over forty million consumers, and a great climate.

The Spanish tax system, however, is one of the most complex in the world. This being the case, it is essential to know the taxation associated to each of your investments in order to avoid surprises. We have written this guide as a quick introduction for first time investors. Nevertheless, you must consider it just an introduction since every property has its own peculiarities. We would be happy to help you make your investments a success.

This article was written by AvaLaw and first appeared on www.avalaw.es

Are you thinking of selling your UK property or have you sold one recently?

By Sue Regan - Topics: CGT, France, Income Tax, Residency, tax advice, tax tips, UK property, Uncategorised
This article is published on: 13th January 2017

13.01.17

I decided on the topic for this month’s article after having had a couple of very similar conversations recently with expats relating to the sale of property in the UK. In each case they were badly let down by their UK Solicitors who failed to inform them of a change in UK legislation that was introduced in April 2015. As a result, they received unexpected and not insignificant late payment penalties from HMRC for failure to complete a form following the sale of their UK property which could have been avoided if they had been made aware of this change in the law.

Recap of the new legislation

Prior to 6th April 2015 overseas investors and British expats were not required to pay Capital Gains Tax (CGT) on the sale of residential property in the UK, providing that they had been non-resident for 5 years. New legislation was introduced on 6th April 2015 that removed this tax benefit.

The rate of CGT for non-residents on disposals of residential property is the same as UK residents and depends on the amount of taxable UK income the individual has i.e. 18% for basic rate band and 28% above it, and it is only the gain made since the 6th April 2015 that is subject to CGT for non-UK residents.

Reporting the gain

When you sell your property, you need to fill out a Non-Resident Capital Gains Tax (NRCGT) return online and inform HMRC within 30 days of completing the sale, regardless of whether you’ve made a profit or not. This applies whether or not you currently file UK tax returns. You can find the form and more information on the HMRC website at hmrc.gov.uk

Paying the tax

If you have a requirement to complete a UK tax return then payment of any CGT liability can be made within normal self-assessment deadlines. However those who do not ordinarily file a UK tax return will be required to pay the liability within 30 days of completion. Once you have submitted the form notifying HMRC that the disposal has taken place, a reference number will be issued in order to make payment.

As a French resident you also have to declare any gain to the French tax authority. The Double Taxation Treaty between the UK and France means that you will not be taxed twice on the same gain, as you will be given a tax credit for any UK CGT paid (limited to the amount of French CGT). The French CGT rate is 19% and any taxable gain is reduced by taper-relief over 22 years of ownership. You will also be liable to French Social Charges on the gain, at the rate of 15.5%, and the gain for this purpose is tapered over 30 years (rather than 22 years).

At Spectrum we do not consider ourselves to be Tax Experts and we strongly recommend that you seek professional advice from your Accountant or a Notaire in this regard.

There is little that can be done to mitigate the French tax liability on the sale of property that is not your principal residence. So it is important to shelter the sale proceeds and other financial assets wherever possible to avoid future unnecessary taxes. One easy way to do this is by investing in a life assurance policy, which in France is known as a Contrat d’Assurance Vie, and is the favoured vehicle used by millions of French investors. Whilst funds remain within the policy they grow free of Income Tax and Capital Gains Tax. In addition, this type of investment is highly efficient for Inheritance planning as it is considered to be outside of your standard estate for inheritance purposes, and you are free to name whoever and as many beneficiaries as you wish. There are very generous allowances for beneficiaries of contracts for amounts invested before the age of 70. Spectrum will typically use international Assurance Vie policies that fully comply with French rules and are treated in the same way as French policies by the fiscal authorities.

International Assurance Vie policies are proving highly popular in light of Loi Sapin II, which has now been enacted into law. More details about the possible detrimental effects of the ‘Sapin Law’ on French Assurance Vie contracts, in certain situations, can be found on our website at www.spectrum-ifa.com/fonds-en-euros-assurances-vie-policies/. Thus, when also faced with the prospect of very low investments returns on Fonds en Euros – in which the majority of monies in French Assurance Vie contracts are invested – it is very prudent to consider the alternative of an international Assurance Vie contract, particularly as you would still benefit from all the same personal tax and inheritance advantages that apply to French contracts.

French Tax Changes 2017

By Spectrum IFA - Topics: Estate Planning, Exchange of Information, France, Income Tax, Inheritance Tax, Offshore Disclosures Facility, Tax, Uncategorised, wealth management, Wills
This article is published on: 3rd January 2017

03.01.17

During December, the following legislation has entered into force:

  • the Loi de Finances 2017
  • the Loi de Finances Rectificative 2016(I); and
  • the Loi de Financement de la Sécurité Sociale 2017

Shown below is a summary of our understanding of the principle changes.

INCOME TAX (Impôt sur le Revenu)

The barème scale, which is applicable to the taxation of income and gains from financial assets, has been revised as follows:

Income Tax Rate
Up to €9,710 0%
€9,711 to €26,818 14%
€26,819 to €71,898 30%
€71,899 to €152,260 41%
€152,261 and over 45%

The above will apply in 2017 in respect of the taxation of 2016 income and gains from financial assets.

Tax Reduction

A tax reduction of 20% will be granted when the income being accessed for taxation is less than €18,500 for single taxpayers, or €37,000 for a couple subject to joint taxation. These thresholds are increased by €3,700 for each additional dependant half-part in the household.

For single taxpayers with income between €18,500 and €20,500, and couples with income between €37,000 and €41,000 (plus in both cases any threshold increase for dependants), a tax reduction will still be granted, although this will be scaled down.

Prélèvement à la source de l’impôt sur le revenu

Currently, taxpayers complete an income tax declaration in May each year, in respect of income received in the previous year. From the beginning of the year, on-account payments of income tax are made, but pending the assessment of the declaration, these are based on the level of income received two years previously. In August, notifications of the actual income tax liability for the previous year are sent out and taxpayers are sent a bill for any underpayment or income tax for the previous year, or in rare situations, there may be a rebate due, typically in the situation where income has reduced, perhaps due to retirement or long-term disability.
Hence, at any time, there is a lag between the tax payments being made in respect of the income being assessed. Therefore, with the aim of closing this gap, France will move to a more modern system of collection of income tax, by taxing income as it arises. This reform will apply to the majority of regular income (including salaries, pensions, self-employed income and unfurnished property rental income), which will become subject to ‘on account’ withholding rates of tax from 1st January 2018.

Where the income is received from a third-party located in France, the organisation paying the income will deduct the tax at source, using the tax rate notified by the French tax authority. The advantage for the taxpayer is that the income tax deduction should more closely reflect the current income tax liability, based on the actual income being paid at the time of the tax deduction.

For income received from a source outside of France, the taxpayer will be required to make on-account monthly tax payments. The on-account amount payable will be set according to the taxpayer’s income in the previous year. However, if there is a strong variation in the current year’s income (compared to the previous year), it will be possible to request an interim adjustment to more accurately reflect the income actually being received, at the time of the payment of the tax.

Transitional payment arrangements will be put in place, as follows:

    • in 2017, taxpayers will pay tax on their 2016 income
    • in 2018, they will pay tax on their 2018 income, in 2019, they will pay tax on their 2019 income, and so on
    • in the second half of 2017, any third party in France making payments will be notified of the levy rate to be applied, which will be determined from 2016 revenues reported by the taxpayer in May 2017
    • from 1st January 2018, the levy rate will be applied to the income payments being made – and
    • the levy rate will then be amended in September each year to take into account any changes, following the income tax declaration made in the previous May

Taxpayers will still be required to make annual income tax declarations. However, what is clear from the transitional arrangements is that the income of 2017 that falls within the review will not actually be taxed; this is to avoid double taxation in 2018 (i.e. of the combination of 2017 and 2018 income). Therefore, to avoid any abuse of the reform, special provisions have been introduced so that taxpayers – who are able to do so – cannot artificially increase their income for the 2017 year.

Furthermore, exceptional non-recurring income received is excluded from the scope of the reform in 2017; this includes capital gains on financial assets and real estate, interest, dividends, stock options, bonus shares and pension taken in the form of cash (prestations de retraite servies sous forme de capital). Therefore, taxpayers will not be able to take advantage of the 2017 year to avoid paying tax on these types of income.

At the same time, the benefits of tax reductions and credits for 2017 will be maintained and allocated in full at the time of tax balancing in the summer of 2018, although for home care and child care, an advance partial tax credit is expected from February 2018. Charitable donations made in 2017, which are eligible for an income tax reduction, will also be taken into account in the balancing of August 2018.

WEALTH TAX (Impôt de Solidarité sur la Fortune)

There are no changes to wealth tax. Therefore, taxpayers with net assets of at least €1.3 million will continue to be subject to wealth tax on assets exceeding €800,000, as follows:

Fraction of Taxable Assets Tax Rate
Up to €800,000 0%
€800,001 to €1,300,000 0.50%
€1,300,001 to €2,570,000 0.70%
€2,570,001 to € 5,000,000 1%
€5,000,001 to €10,000,000 1.25%
Greater than €10,000,000 1.5%

 

CAPITAL GAINS TAX – Financial Assets (Plus Value Mobilières)

Gains arising from the disposal of financial assets continue to be added to other taxable income and then taxed in accordance with the progressive rates of tax outlined in the barème scale above.

However, the system of ‘taper relief’ still applies for the capital gains tax (but not for social contributions), in recognition of the period of ownership of any company shares, as follows:

  • 50% for a holding period from two years to less than eight years; and
  • 65% for a holding period of at least eight years

This relief also applies to gains arising from the sale of shares in ‘collective investments’, for example, investment funds and unit trusts, providing that at least 75% of the fund is invested in shares of companies.

In order to encourage investment in new small and medium enterprises, the higher allowances against capital gains for investments in such companies are also still provided, as follows:

  • 50% for a holding period from one year to less than four years;
  • 65% for a holding period from four years to less than eight years; and
  • 85% for a holding period of at least eight years

The above provisions apply in 2017 in respect of the taxation of gains made in 2016.

CAPITAL GAINS TAX – Property (Plus Value Immobilières)

Capital gains arising on the sale of a maison secondaire and on building land continue to be taxed at a fixed rate of 19%. However, a system of taper relief applies, as follows:

  • 6% for each year of ownership from the sixth year to the twenty-first year, inclusive; and;
  • 4% for the twenty-second year.

Thus, the gain will become free of capital gains tax after twenty-two years of ownership.

However, for social contributions (which remain at 15.5%), a different scale of taper relief applies, as follows:

  • 1.65% for each year of ownership from the sixth year to the twenty-first year, inclusive;
  • 1.6% for the twenty-second year; and
  • 9% for each year of ownership beyond the twenty-second year.

Thus, the gain will become free of social contributions after thirty years of ownership.

An additional tax continues to apply for a maison secondaire (but not on building land), when the gain exceeds €50,000, as follows:

Amount of Gain Tax Rate
€50,001 – €100,000 2%
€100,001 – €150,000 3%
€150,001 to €200,000 4%
€200,001 to €250,000 5%
€250,001 and over 6%

Where the gain is within the first €10,000 of the lower level of the band, a smoothing mechanism applies to reduce the amount of the tax liability.

The above taxes are also payable by non-residents selling a property or building land in France.

SOCIAL CHARGES (Prélèvements Sociaux)

As has been widely publicised, on 26th February 2015, the European Court of Justice (ECJ) ruled that France could not apply social charges to ‘income from capital’, if the taxpayer is insured by another Member State of the EU/EEA or Switzerland. Income from capital includes investment income on financial assets and property rental income, as well as capital gains on financial assets and real estate.

Fundamental to this decision was the fact that the ECJ determined that France’s social charges had sufficient links with the financing of the country’s social security system and benefits. EU Regulations generally provide that people can only be insured by one Member State. Therefore, if the person is insured by another Member State, they cannot also be insured by France and thus, should not have to pay French social charges on income from capital.

On 27th July 2015, the Conseil d’Etat, which is France’s highest court, accepted the ECJ ruling, which paved the way for those people affected to reclaim social charges that had been paid in 2013, 2014 and 2015. This applied to all residents of any EU/EEA State and Switzerland, who had paid social charges on French property rental income and capital gains, but excluded residents outside of these territories.

However, to circumvent the ECJ ruling, France amended its Social Security Code. In doing so, it removed the direct link of social charges to specific social security benefits that fall under EU Regulations. The changes took effect from 1st January 2016.

Hence, if you are resident in France, social charges are applied to your worldwide investment income and gains. The current rate is 15.5% and the charges are also payable by non-residents on French property rental income and capital gains.

Whilst the French Constitutional Council validated the changes in the French Social Security law, it remains highly questionable under EU law. One hopes, therefore, that this may be censored again by the ECJ, at some point.

EXCHANGE OF INFORMATION UNDER COMMON REPORTING STANDARD:

As of December 2016, there are now already over 1,300 bilateral exchange relationships activated, with respect to more than 50 jurisdictions. Many jurisdictions have already been collecting information throughout 2016, which will be shared with other jurisdictions by September 2017.

However, there are many more jurisdictions that are committed to the OECD’s Common Reporting Standard (CRS) and so it is anticipated that more information exchange agreements will be activated during 2017.

In the EU, the CRS has been brought into effect through the EU Directive on Administrative Cooperation in the Field of Taxation, which was adopted in December 2014. The scope of information exchange is very broad, including investment income (e.g. bank interest and dividends), pensions, property rental income, capital gains from financial assets and real estate, life assurance products, employment income, directors’ fees, as well as account balances of financial assets.

No-one is exempt and therefore, it is essential that when French income tax returns are completed, taxpayers declare all income and gains – even if this is taxable in another country by virtue of a Double Taxation Treaty with France.

It is also obligatory to declare the existence of bank accounts and life assurance policies held outside of France. The penalties for not doing so are €1,500 per account or contract, which increases to €10,000 if this is held in an ‘uncooperative State’ that has not concluded an agreement with France to provide administrative assistance to exchange tax information. Furthermore, if the total value of the accounts and contracts not declared is at least €50,000, then the fine is increased to 5% of the value of the account/contract as at 31st December, if this is greater than €1,500 (€10,000 if in an uncooperative State).

2nd January 2017

This outline is provided for information purposes only. It does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of any potential changes in French tax legislation.

Working in Gibraltar but living in Spain

By Pauline Bowden - Topics: Gibraltar, Income Tax, Residency, Social Charges, Spain, tax advice, tax tips, Uncategorised
This article is published on: 3rd June 2016

03.06.16

Thousands of people cross the border from Spain to Gibraltar every day to go to work. Many of these people feel that they are in a kind of “Limboland” because they are not fully part of either state’s systems. Even though they pay tax and social security to the Gibraltar government, they are not entitled to free education for their children, nor automatic free health care. If they do not pay tax and social security in Spain, they are not always entitled to the facilities in that country either.

Contrary to popular belief, the two countries do co-operate in many areas. Social security and health care are areas of great co-operation between the two. They also have a reciprocal arrangement for income tax.

Each individual working and paying social security in Gibraltar can elect for those payments to be transferred to their local social security office in Spain. It is a fairly easy procedure, in that you go to the social security office in Gibraltar and ask to fill in the form to transfer your social security payment to the seguridad social of your area of residence. The Spanish office then send confirmation of receipt of payments and issue you with a Spanish social security card.
You are then entitled to Spanish state health care, unemployment benefit, sick pay etc, and once enough contributions have been made, the Spanish state pension.

Many people worry that if they do this, then they would not be entitled to any health care in Gibraltar should they have an accident or fall ill while at work or visiting Gibraltar. Gibraltar is part of the European Union’s health care system and once you have your Spanish social security card, you can go to your local officina de seguridad social and ask for a “Tarjeta Sanitaria Europea” which is produced on the spot once a check is made to ensure that your social security payments are up to date in Spain. This card is valid in all EU countries and Switzerland (including Gibraltar).

To be fully legal, if you live in Spain for more than 183 days in any one year, you should also make a tax return in Spain. Unless you are a high rate tax payer in Gibraltar then you should have no more tax to pay. All it will cost you is the Gestor’s fee for submitting your annual tax return.

French Tax Return dates 2016

By Spectrum IFA - Topics: France, Income Tax, Uncategorised
This article is published on: 11th April 2016

11.04.16

The time is approaching for French residents to make their 2016 income tax declarations and there is an important change in procedure.

If your revenue fiscal de reference (taxable income) was at least €40,000 in 2014 (i.e. as declared in 2015), then you are now obliged to make an on-line declaration. The only exception to this is if your principal residence does not have an internet connection, in which case, you can still submit a paper declaration. By 2019, only on-line declarations will be possible and between now and then, the ceiling of the income limit for paper declarations will reduce each year.

On-line declarations can be made from 13th April 2016 up to the following deadlines:

• 24th May 2016 for departments 01 to 19;
• 31st May 2016 for departments 20 to 49; and
• 7th June 2016 for all other departments and non-residents.

Paper declarations, where permitted, must be submitted by 18th May 2016.

For those of you who came to live in France during 2015, then you will need to make your first French tax declaration and declare all your worldwide income and gains, but only for the period since becoming resident in 2015. To do this, you will need to collect the necessary forms from your local tax office.

Income and gains that might be tax-free in another country, for example, UK ISAs, premium bond winnings and Pension Commencement Lump Sums, must be declared, as all are taxable in France. Even for income that is taxable in another country, for example a UK government type of pension (i.e. civil service, military, police and teachers pensions, but not State pensions) and/or UK property rental income, the amount must still be reported in France and it will be taken into account in calculating your French income tax. You will then be given a tax reduction to take into account the fact that the income is taxable elsewhere.

If you have been living in France for less than 183 days in 2015, you may be thinking that you do not need to register in the French tax system. This is a myth because the time that you spend in France is not the only factor that is taken into account in determining whether or not you are resident in France. For more on this, please see my article at:

French Residency – Dispelling the Myths

If you do not register in the French tax system and you should have done, you risk a financial penalty. Never mind what that nice lady in the tax office says about you not needing to register if you have been here for less than a year – you will be liable for the fine, not her!

Are you convinced now to register in the system? If you’re still not sure, call me and with just a few questions, I will be able to tell you.

It is also obligatory to declare the existence of bank accounts and life assurance policies held outside of France, regardless of whether these accounts pay interest or if there is a zero balance in the account. The penalties for not doing so are €1,500 per account or contract, which increases to €10,000 if this is held in an uncooperative State that has not concluded an agreement with France to provide administrative assistance to exchange tax information. Furthermore, if the total value of the accounts and contracts not declared is at least €50,000, then the fine is increased to 5% of the value of the account/contract as at 31st December, if this is greater than €1,500 (€10,000 if in an uncooperative State).

No-one should ever try to second guess the Fisc or think that they can out-manoeuvre this government department. I hear some interesting stories of people being contacted and questioned about why they are not registered in the French tax system. You would be amazed at what is used to check – telephone bills, utility bills, etc., etc. How long will it be before our use of cash machines and our bank and credit card transactions in shops might be used to verify how much time we spend in France? Scary thought and actually they probably don’t need to go that far, as we can be tracked through our mobile phones and probably also our internet use.

On a final note, if anyone finds that they need to complete the pink 2047 form, this means that you have foreign income and/or gains to declare. If this is for any reason other than pension income and earnings, then perhaps you may benefit from a brief discussion to see if your financial situation can be improved by investing in something that is more tax-efficient for French residency.

If you would like to have a confidential discussion with one of our financial advisers, you can contact us by e-mail at limoux@spectrum-ifa.com or by telephone on 04 68 31 14 10. Alternatively, drop-by to our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.

The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter at
www.spectrum-ifa.com/spectrum-ifa-client-charter/.

French Tax Changes 2016

By Spectrum IFA - Topics: France, Income Tax, Social Charges, Tax, Uncategorised
This article is published on: 12th January 2016

12.01.16

During December, the following legislation has entered into force:

  • the Loi de Finances 2016;
  • the Loi de Finances Rectificative 2015(I); and
  • the Loi de Financement de la Sécurité Sociale 2016

Shown below is a summary of our understanding of the principle changes.

INCOME TAX (Impôt sur le Revenu)

The barème scale, which is applicable to the taxation of income and gains from financial assets, has been revised as follows:

     Income      Tax Rate
     Up to €9,700      0%
     €9,701 – €26,791      14%
     €26,792 – €71,826      30%
     €71,827 – €152,108      41%
     €152,109 – plus      45%

The above will apply in 2016 in respect of the taxation of 2015 income and gains from financial assets.

WEALTH TAX (Impôt de Solidarité sur la Fortune)

There are no changes to wealth tax. Therefore, taxpayers with net assets of at least €1.3 million will continue to be subject to wealth tax on assets exceeding €800,000, as follows:

     Fraction of taxable Assets      Tax Rate
     Up to €800,000      0%
     €800,001 to €1,300,000      0.5%
     €1,300,001 to €2,570,000      0.7%
     €2,570,001 to € 5,000,000      1%
     €5,000,001 to €10,000,000      1.25%
     Greater than €10,000,000      1.50%

 

CAPITAL GAINS TAX – Financial Assets (Plus Value Mobilières)

Gains arising from the disposal of financial assets continue to be added to other taxable income and then taxed in accordance with the progressive rates of tax outlined in the barème scale above.

However, the system of ‘taper relief’ still applies for the capital gains tax (but not for social contributions), in recognition of the period of ownership of any company shares, as follows:

  • 50% for a holding period from two years to less than eight years; and
  • 65% for a holding period of at least eight years.

This relief also applies to gains arising from the sale of shares in ‘collective investments’, for example, investment funds and unit trusts, providing that at least 75% of the fund is invested in shares of companies.

In order to encourage investment in new small and medium enterprises, the higher allowances against capital gains for investments in such companies are also still provided, as follows:

  • 50% for a holding period from one year to less than four years;
  • 65% for a holding period from four years to less than eight years; and
  • 85% for a holding period of at least eight years.

The above provisions apply in 2016 in respect of the taxation of gains made in 2015.

CAPITAL GAINS TAX – Property (Plus Value Immobilières)

Capital gains arising on the sale of a maison secondaire and on building land continue to be taxed at a fixed rate of 19%. However, a system of taper relief applies, as follows:

  • 6% for each year of ownership from the sixth year to the twenty-first year, inclusive; and;
  • 4% for the twenty-second year.

Thus, the gain will become free of capital gains tax after twenty-two years of ownership.

However, for social contributions (which remain at 15.5%), a different scale of taper relief applies, as follows:

  • 1.65% for each year of ownership from the sixth year to the twenty-first year, inclusive;
  • 1.6% for the twenty-second year; and
  • 9% for each year of ownership beyond the twenty-second year.

Thus, the gain will become free of social contributions after thirty years of ownership.

An additional tax continues to apply for a maison secondaire (but not on building land), when the gain exceeds €50,000, as follows:

     Amount of Gain      Tax Rate
     €50,001 – €100,000      2%
     €100,001 – €150,000      3%
     €150,001 to €200,000      4%
     €200,001 to €250,000      5%
     €250,001 and over      6%

Where the gain is within the first €10,000 of the lower level of the band, a smoothing mechanism applies to reduce the amount of the tax liability.

The above taxes are also payable by non-residents selling a property or building land in France.

SOCIAL CHARGES (Prélèvements Sociaux)

To date, social charges have been levied to fund certain social security benefits in France, as well as the compulsory sickness insurance schemes.

Hence, if you are resident in France, these are charged on your worldwide investment income and gains, even though this does not give any automatic right to French social security benefits and health cover. The current rate is 15.5% and the charges are also payable by non-residents on French property rental income and capital gains.

As has been widely publicised, on 26th February 2015, the European Court of Justice (ECJ) ruled that France could not apply social charges to ‘income from capital’, if the taxpayer is insured by another Member State of the EU/EEA. Income from capital includes investment income on financial assets and property rental income, as well as capital gains on financial assets and real estate.

Fundamental to this decision was the fact that the ECJ determined that France’s social charges have sufficient links with the financing of the country’s social security system and benefits. EU Regulations generally provide that people can only be insured by one Member State. Therefore, if the person is insured by another Member State, they cannot also be insured by France and thus, should not have to pay French social charges on income from capital.

In the main, the ECJ ruling affects people who have retired to France and hold a Certificate S1 that has been issued by another Member State, as well as those people who work in another Member State, but live in France.

On 27th July 2015, the Conseil d’Etat, which is France’s highest court, accepted the ECJ ruling, which paved the way for those people affected to reclaim social charges that had been paid in 2013, 2014 and 2015. Happily, this also included residents of any EU/EEA State who had paid social charges on French property rental income and capital gains.

In order to circumvent the ECJ ruling, France has amended its Social Security Code. In doing so, it has removed the direct link of social charges to specific social security benefits that fall under EU Regulations. The changes take effect from 1st January 2016, which means that social charges continue to be applicable at the rate of 15.5% on income from capital.

EXCHANGE OF INFORMATION UNDER COMMON REPORTING STANDARD:

2016 brings a new era in global automatic exchange of information between tax authorities.

Close to 60 countries are ‘early adopters’ of the OECD’s Common Reporting Standard (CRS), including all EU States (except Austria) and the popular offshore jurisdictions of the Isle of Man, Guernsey, Jersey & Gibraltar. As such, these early adopters start collecting information from 1st January 2016 to share by the end of September 2017.

Other countries, including Austria, Switzerland, Monaco, Australia, New Zealand and Canada have committed to start sharing data in 2018.

In the EU, the CRS has been brought into effect through the EU Directive on Administrative Cooperation in the Field of Taxation, which was adopted in December 2014. The scope of information exchange is very broad, including investment income (e.g. bank interest and dividends), pensions, property rental income, capital gains from financial assets and real estate, life assurance products, employment income, directors’ fees, as well as account balances of financial assets.

No-one is exempt and therefore, it is essential that when French income tax returns are completed, taxpayers declare all income and gains – even if this is taxable in another country by virtue of a Double Taxation Treaty with France.

It is also obligatory to declare the existence of bank accounts and life assurance policies held outside of France. The penalties for not doing so are €1,500 per account or contract, which increases to €10,000 if this is held in an ‘uncooperative State that has not concluded an agreement with France to provide administrative assistance to exchange tax information. Furthermore, if the total value of the accounts and contracts not declared is at least €50,000, then the fine is increased to 5% of the value of the account/contract as at 31st December, if this is greater than €1,500 (€10,000 if in an uncooperative State).

11th January 2016

This outline is provided for information purposes only. It does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of any potential changes in French tax legislation.

Recent financial updates affecting expats in France

By Spectrum IFA - Topics: France, Income Tax, Inheritance Tax, Pensions, Residency, Social Charges, Succession Planning, Uncategorised
This article is published on: 15th September 2015

15.09.15

There are lots of things happening at the moment in the financial world that affect us as expats living in France. So this month, I am providing a summary of various topics.

Social Charges

This has to be one of the hottest topics around the expat dinner table, at the moment! It all started with the European Court of Justice (ECJ) ruling in February that France should not apply social charges on ‘income from capital’ for French residents who are insured under the social security scheme of another EU/EEA State. For those who want more on the detail of the ECJ ruling, this can be found in my previous article on this subject at www.spectrum-ifa.com/french-social-charges-on-worldwide-investment-income/.

However, despite the fact that the ECJ had made its decision, we still had to wait for France to accept the ruling. Happily, this came through on 27th July 2015, from the Conseil d’Etat, which is France’s highest court. This means that people affected by the ruling can now claim back social charges paid in 2013 and 2014, on investment income and gains. The claim should be made by 31st December 2015, otherwise you will lose the right to get back those paid in 2013.

As concerns social charges due for 2015, the good news is that I have already seen evidence from some clients’ tax bills that the social charges have not been applied. On the other hand, we all know that one tax office can do something completely different than another and so some of you may find that you have a bill for social charges! If so and you don’t think that you are liable, you should contact your tax office to dispute the bill.

The main group of people who will benefit from the ECJ ruling is those who hold a Certificate S1 for their health cover. Beyond this, those working in another EU/EEA State, but living in France will also benefit. However, a grey area concerns early retirees, who do not have a Certificate S1 and instead have private medical cover because the text of the ECJ judgement actually refers to being insured by another State’s social security system. So we will have to wait for the next round of Social Security legislation, which will be debated during the final quarter of this year, to see how they will be affected.

French Tax Changes

The debate on the draft finance bill for 2016 is scheduled to commence on 13th October.

As documents are published, we will carry out our own analysis. So keep an eye on the French pages on our own website at www.spectrum-ifa.com/financial-advisor-france/ for information. Alternatively, you can contact me directly for information.

EU Succession Regulations

These Regulations have now been in effect since 17th August 2015 and more information can be found in my previous articles at:

www.spectrum-ifa.com/the-eu-succession-regulations/

www.spectrum-ifa.com/eu-succession-regulations-the-perfect-solution/

So if you have not made a French will, as a French resident, the default position is that the succession rules of France will apply to your entire worldwide estate. In effect, this should include any UK property that you own, but since the UK has opted out of the Regulations, it is unlikely that an English court will easily accept a French court deciding that the UK property should pass to the ‘protected heirs’, instead of to the surviving spouse, if that is what you specified in a UK will! So we cannot be clear about what will happen in practice.

There are lots of other complicated situations that may arise and at the very least people should take the opportunity to revisit wills and succession planning. If you would like to have a confidential discussion about your situation, please contact me.

Pensions

The major reform in UK pensions that has taken place this year has generated lots of enquiries from people who are looking to cash-in their pension pots. Many people are not aware of the severe tax implications of doing this and thankfully, we are often able to find alternative solutions for them to meet their objectives.

We all wish to have a financially secure retirement and careful planning is an essential part of achieving this objective. At Spectrum, we can provide you with the necessary advice to reach your goal.

Investment Markets & Interest Rates

Volatility has been felt in investment markets over the last month, mainly as a result of actions taken in China relating to interest rates and currency devaluation. What has also been demonstrated is the fact that the global recovery is still fragile. This has caused central bankers to rethink interest rate policy and anticipated increases in US and UK interest rates may be pushed further back.

At Spectrum, we have a range of solutions to suit all levels of attitude to investment risk and if you would like to have a review of your financial situation, please contact me.

 

Client Seminars

All of the above subjects are being covered at our Autumn Seminars taking place across France – “Le Tour de Finance Bringing Experts to Expats”. The date for the local seminar is Friday, 9th October 2015 at the Domaine Gayda, 11300 Brugairolles and there are a limited number of places remaining. If you would like to come to the event, please contact me as soon as possible to make your reservation.

If you are further away, we have other events are taking place earlier during that week at:

  • Endreol (Provence) on 7th October
  • Aix-en-Provence on 8th October
  • Avrillé 49240 (Loire) on 11th November
  • Dinard, Ille-et-Vilain, (Brittany) on 12th November (the 100th Le Tour de Finance event)

If you are not able to come to one of our seminars, but you would anyway like to have a confidential discussion about any aspect of financial planning, please contact me either by e-mail at daphne.foulkes@spectrum-ifa.com or by telephone on 04 68 20 30 17.

The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or the mitigation of taxes.

The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter at The Spectrum IFA Group Client Charter

Offshore Disclosures Facility

By Peter Brooke - Topics: Income Tax, International Bank Accounts, Offshore Disclosures Facility, Residency, Tax, Uncategorised
This article is published on: 25th May 2015

25.05.15

This month I had the opportunity to sit down with Patrick Maflin from Marine Accounts for a Q&A session on the Offshore Disclosures Facility.

Patrick, Firstly what is the Offshore Disclosures Facility?
The Offshore Disclosures facility is an amnesty for UK citizens who have undeclared offshore earnings. It is directly aimed at targeting offshore tax evasion. The G20 have now opted similar schemes such as the Offshore Disclosures Program (ODP) in the US & Project Let’s Do It in Australia.

What is offshore evasion?
Offshore evasion is using another jurisdiction’s systems with the objective of evading UK tax. This includes moving, not declaring or hiding (via complex offshore structures) any income, gains or assets out of the site of HMRC.

When does the amnesty end & what happens if I do not declare?
The UK disclosure facility ends on 30th September 2016. Individuals who choose not to declare their earnings can face fines of up to 200% of the tax evaded and possible imprisonment as it is now a criminal offence. Project Let’s Do It in Australia came to an end in December 2014 and the IRS have not stated when ODP will end.

How can I declare my earnings through the facility and what are the benefits?
UK seafarers can declare their earnings under the Seafarers Earnings Deduction (SED) providing that they spend more than 183 days out of the UK and work onboard a ship. If you declare now before becoming subject to investigation you will not face fines and will not have to pay tax on your earnings. However if you owe tax through work days in the UK or not qualifying for the SED exemption you will only pay 10% on top of your tax bill as opposed to 200%.

What happens if HMRC contact me first?
If they do contact you first you are faced with possibility of a tax investigation into your financial affairs and will not qualify for any penalties at the lowest rates and will have to pay the taxes you owe for up to 20 years. You could also face criminal prosecution.

What if I move my funds to the Cayman Islands, surely it is safe there?
The UK signed ten more automatic exchange agreements in 2014 including many of the classic ‘offshore centres’. The new global standard developed by the OECD has been endorsed by the G20 and now 44 jurisdictions in total. This will lead to greater tax transparency and the ability for governments to clamp down on those who evade tax.

What exactly will the new global exchange mean? What type of information will the G20 access?
The 44 jurisdictions are going to share if you have a bank, investment or custodial account and will be able to see your name, address, account number, balance and income.

When I browse the yachting forums I still see crew asking where the best place is to open an account to avoid paying tax! What do you think of this?
It surprises me that people choose to openly broadcast that they are looking to avoid paying tax and that they believe that today with the open exchange of information that this is still possible and the right course of action.

HMRC contacted over 20,000 people in 2013 about their offshore assets. In 2014 offshore banks in the 44 jurisdictions started collecting information about UK & US residents. This information will reach HMRC by the start of 2016.

Are Offshore accounts still permitted under the Offshore Disclosures Facility?
Of course, there is nothing wrong with having offshore accounts & investments as long as you declare the income and gains on your tax return. This is not designed to stop people banking offshore, but to allow individuals to bring their tax affairs up to date if they have worldwide undeclared income. The principle benefits of using an offshore account is currency flexibility.

This article is for information only and should not be considered as advice.

French social charges on worldwide investment income

By Spectrum IFA - Topics: France, Income Tax, Livret A, Residency, Saving, Uncategorised
This article is published on: 1st April 2015

01.04.15

On 26th February 2015, the European Court of Justice (ECJ) made a very important ruling concerning the application of French social charges (prélèvement sociaux). These charges are levied to fund certain social security benefits in France, as well as the compulsory sickness insurance schemes.

If you are resident in France, you are required to pay the social charges on all your worldwide investment income and gains and the current rate is 15.5%. However, the payment of these social charges does not actually give you any automatic right to French social security benefits and health cover.

In fact, many early retirees have been refused health cover when their Certificate S1, issued by the UK, has expired, if they have not been resident in France for at least five years. Since having adequate health cover is a condition of French residency, such people have either had to work in France – perhaps even setting up their own business – or they have been obliged to take out private health cover.

It is clear that France considers social charges on investment income and gains as an additional tax, rather than a social security contribution, since the payment does not provide any automatic rights to social security benefits and health cover. However, it is the French Code de Sécurité Sociale, rather than the Code Générale des Impôts, which lays down the conditions under which these social charges are payable in France.

Thankfully, the ECJ has reached a different conclusion. In its determination, the ECJ decided that France’s social charges have a sufficient link with the financing of the country’s social security system and benefits. In addition, there should be no distinction made between those charges payable on earnings and those payable on investment income and gains.

EU Regulation 1408/71 deals with the application of social security schemes to people moving within the European Union. The Regulation provides that people should be subject to the social security legislation of only one Member State (except for very limited situations). To have anything different could lead to unequal treatment between Members States and their citizens, which would be contrary to EU principles.

Therefore, for any French resident who is the holder of a Certificate S1 that has been issued by another Member State, this means that he/she is subject to the social security legislation of the issuing State. As such, the ECJ has ruled that France cannot impose an obligation on the person to pay social charges to France, as this would result in them being subject to the social security legislation of more than one Member State. The ECJ has also ruled that this principle applies whether or not the insured person actually pays social security contributions on the income/gains concerned in the Member State that insures the person.

Since 2012, non-residents have also had to pay the social charges on any French property rental income and on any gains arising when they have sold the French property. There is general opinion now that the ECJ ruling should also bring this to an end, at least for residents who are insured in another EU State.

EU legislation overrides the internal legislation of Member States. Notwithstanding this, we will still need to wait for the French government’s response to this ECJ ruling. Arising out of this, if France accepts the ruling, it will need to amend its own internal codes to ensure compliance with the ruling.

In the meantime, taxpayers can make an application for a refund of social charges paid in 2013 and 2014, by filing a claim with their local tax office before 31st December 2015. In addition, taxpayers may also wish to refer to the ECJ ruling when submitting their French tax returns for this year, if they believe that they are affected.

On the subject of French tax returns, these are due by 19th May 2015, if submitting a paper return or if submitting on-line by 26th May 2015 for departments 01 to 19, by 2nd June 2015 for departments 20 to 49 and by 9th June 2015 for other departments. According to the ECB website, the average exchange rate of Sterling to Euros for 2014 is 0.80612.

For those of you who came to live in France during 2014, then you will need to make your first French tax declaration and declare all your worldwide income and gains. This includes income and gains that might be tax-free in another country, for example, UK ISAs, premium bond winnings and Pension Commencement Lump Sums, which are all taxable in France.

Even if the income is taxable in another country, for example a UK government pension and/or UK property rental income, the amount must still be reported in France and it will be taken into account in calculating your French income tax. You will then be given a tax reduction to take into account the fact that the income is taxable elsewhere.

It is also very important to declare the existence of all foreign bank accounts (whatever the amount in the account) and life assurance policies taken out with companies outside of France. Failure to do so can result in a penalty of €1,500 for each undisclosed bank account. However, if the total value of all unreported accounts is €50,000 or more, then the penalty is increased to 5% of the total value of the accounts, if this results in a greater amount. The same penalties also apply for undeclared foreign life assurance contracts.

Pensions – I cannot pass by without saying something on this. I have personally become so fed up with all of the UK changes that I have now taken the decision to transfer all of my own UK pension benefits into a QROPS. I have chosen the well-regulated jurisdiction of Malta and I feel that I am in control of my own retirement planning again. In short, I feel that I will now have a pension for life and not just for Christmas or for the next session of the UK parliament.

With days to go before the reform takes place in the UK, if you are affected, do you understand what this means for you? If not, would you like to have a confidential discussion with me about your situation?

Pensions is one of the major subjects that we are also covering at our client seminars this year, as well as EU Succession Regulations, French taxation, health insurance and currency exchange. We are already taking bookings for Le Tour de Finance 2015 and this is a perfect opportunity to come along and meet industry experts on a broad range of financial matters that are of interest to expatriates. The local events are taking place at:

Perpignan – 19th May

Bize-Minervois – 20th May

Montagnac – 21st May

Le Tour de Finance is an increasingly popular event and early booking is recommended. So if you would like to attend one of these events, please contact me to reserve your places.

Whether or not you are able to come to one of our events, if you would like to have a confidential discussion about pensions, investments and/or inheritance planning, using tax-efficient solutions, please contact me either by telephone on 04 68 20 30 17 or by e-mail at daphne.foulkes@spectrum-ifa.com.