Nobody enjoys paying tax, but when you live in France with its generous social security, egalitarian lifestyle and sense of fairness, at least you can feel a bit better about it.
Unless you are the subject of a ‘contrôle fiscal’.
French tax agents have the right to enter your property, install themselves in front of your laptop, and demand every bank statement you have had for the past ten years if they suspect you have been withholding tax that was due.
It used to be the case that the ‘fisc’ relied on tip-offs from disgruntled neighbours to catch tax-dodgers, but their job is made so much easier these days because everything is computerised and traceable. However, a lifestyle that doesn’t tally with what you earn will still raise a red flag with the taxman. So if you live in a modest village house but drive a shiny red Ferrari, questions are likely to be asked.
The best policy by far is to get a good accountant, understand the tax savings you are legally entitled to make and pay the rest with good grace. But for those who are inclined to let things slip, our Financial Advisor, Simon Verity, has some words of warning.
When you sell a house in France, the notary will automatically deduct the relevant amount of stamp duty, but it is very easy for the tax inspector to look at what the house sold for and compare that to the amount you declared it to be worth in your previous tax returns. He may jump on any discrepancy and can go back five years or more. Whilst the old wealth tax (Impôt de Solidarité sur la Fortune) no longer exists in France, property tax (Impôt sur la Fortune Immobilière) certainly does.
The obligation lies with you to declare the fair value of your property in an annual tax return if those assets exceed the upper limit. Nonetheless, you could conceivably find yourself in a situation where a potential buyer offers you way more than the market value, as has happened frequently during Covid with city dwellers desperate to own a place in the country.
Meanwhile, if a house in your locality sells for more than the property wealth tax limit, a quick tour of Google Maps looking at similar properties in the area would be a simple way for the tax man to ascertain if there are other likely candidates for property wealth tax who have not correctly declared.
Our advice: Get an expert French estate agent to officially evaluate your property. That way you are covered for what you declare it to be worth.
While your principal residence in France is subject to a 30% reduction when it comes to wealth tax, many people are unaware that any other physical properties you own anywhere in the world must also be taken into account. This includes investment funds that have property in their portfolio. Ignorance about the content of your managed funds is not a valid excuse in the eyes of the tax controller.
Our advice: Make sure you are aware of how property tax works. If your married or PACS household’s total property wealth (including anything you may own overseas and any part of an investment) is under 1.3 million euros, you pay nothing. But as soon as you go over the 1.3 million limit, the tax goes back to 800k. So if your property portfolio is worth 1,300,001 euros, you will pay tax on every euro from 800k onwards.
Foreign bank accounts
Whether it is active or not, you are obliged by the French tax office to declare every bank account you hold worldwide. The fine for not declaring an account could be as much as 1500 euros per account per year. Multiple accounts held at the same bank have to be declared separately, so if you hold both a current account and an ISA with Barclays in the UK, you must declare both accounts or risk two 1500 euro fines.
There is also a big misunderstanding among many people that you only need to declare those accounts the first year you put in a French tax declaration. That is not true and you could find yourself paying the 1500 fine multiple times if you don’t adhere to the rules.
Our advice: Close all the accounts outside France that you do not use, but by all means keep one open if you go back there to visit or might want to live there again.
In the eyes of the taxman, a sudden acceleration in income from one tax year to the next is a warning sign. There may be a very valid reason for the increase in revenue but French tax returns are done online and there is no space on the digital form to offer an explanation. For example, a mum with young children might be working on a consultancy basis in the afternoon while the kids are at the crèche but goes back to work full-time once they start school. Very easy to explain if you get a call from the tax office to ask for details. It’s nothing personal – they are just doing their job of recuperating any additional tax that’s due.
Tax-free gifts are permitted in France but you need to be careful not to exceed the upper limit. Gifts totalling 100,000 euros can be awarded to each of your children within a 15 year period, as well as 31,865 euros in cash as long as the donor is under 80 and the recipient over 18. The gift can include part of the value of your property, and you can continue to benefit from living there under the user-fruit agreement.
It is worth pointing out that if the donor dies before the 15-year waiting period, the gift will fall back into the estate and be taxed as usual. The advantage of still being alive after 15 years is that the allowance resets and you can technically do it all again.
Our advice: Although not all gifts have to be certified by a Notary, it’s always a good idea to use one so both you and the beneficiary have proof of the legality of that gift. If you are donating property, a Notary is a legal requirement.
You don’t have a choice about where you pay tax
Many people wrongly assume that because they pay tax on their pensions in the UK, they have fulfilled their tax obligations. That is simply not true. The residency rules for taxation are very clear. In most cases, if France is your only residence and you spend most of your time here, you are obliged to pay French tax and run the risk of a serious and very costly ‘contrôle fiscal’ for not doing so. The tax office can freeze your assets, comb through your bank accounts for the past ten years and even suspend your business if they believe you have been acting fraudulently.
Our advice: If you are not paying tax in France and are paying it elsewhere, take advice to make sure that you are doing it correctly.
Trusts outside of France
The concept of a Trust does not really exist here and any connection you have to a Trust outside of France has to be declared on a central register. That applies whether you are a beneficiary, donor or trustee. It can cost up to 1500 euros to be listed on the Central Register of Trusts via an accountant and it must be renewed every year. The value of your Trust can be taxed up to 1.5% and this is also payable every year. Fines for non-compliance are steep.
Our advice: If you are a tax resident in France, it is worth considering whether the financial planning you set up before you moved here is still efficient. Take advice on your Trust arrangements and make them transparent to the French tax authorities.
In conclusion, the best way to avoid a tax control in France is to make sure you are fully tax compliant whilst making the most of the tax breaks that are available to you.
If you would like to talk to our qualified Financial Advisor, Simon, for further information and advice, you can book a free initial 15-minute call using the button below: