FT: How to pay tax in French without tears

How to pay tax in French without tears

By Isabel Berwick

Financial Times
Published: February 4 2006 02:00 | Last updated: February 4 2006 02:00

Parts of rural France are now more like Fulham, so it's no surprise
that the French tax authorities have opened an English-speaking tax
office in the heart of the Brit-magnet Dordogne region. It's an
acknowledgement that many French-dwelling UK citizens don't (or can't)
get to grips with a tax system that's very different from our own.

The first problem for individuals who spend a lot of time in France is
in deciding whether or not they are classified as French resident. All
other tax matters flow from this crucial matter of status.

According to Justin Rix, senior tax manager at Grant Thornton, it's
possible to be resident in both countries because the UK and France use
different systems for working out residence status. "In the UK you are
classed as resident if you are here for more than 90 days a year, but
in France it is less clear-cut. It is driven by your facts and
circumstances, such as where your family and economic ties are."

In cases where there's doubt, a treaty provision between France and the
UK comes into force. It is based on the French way of working out a
case using individual facts and circumstances.

Once deemed French resident, UK citizens become liable for tax on
worldwide income. And that's when the really knotty French tax problems
arise.

Anne Frede is a Paris-based tax lawyer at Amyot, Juridique & Fiscal,
which is Grant Thornton's partner firm in France. She highlights the
biggest pitfall: "Wealth Tax is a real issue for people here."

The UK doesn't have a Wealth Tax, so many new French residents don't
know it exists. The tax is levied on worldwide assets in excess of
=80750,000 (=A3510,000) in value. Frede says: "The tax is on net market
value, less borrowing, and you must consider real estate, investments,
furniture, cars, everything.

"It's progressive, and starts at 0.55 per cent going up to 1.8 per cent
for assets over =8015.53m. You need to file and pay the Wealth Tax
before June 16 and many foreigners don't realise and miss this payment.
There is a 10 per cent penalty for late payment and late interest of
04 per cent a month."

French tax law doesn't recognise the "tax- free" entitlements we have
in the UK, so tax-protected Isa and Pep investments, for example, would
also be subject to wealth tax. And people who retire to France and take
their pensions there will have to pay French tax on the income.

Trusts don't exist in France and are viewed with suspicion by the
authorities. "If you receive income from a trust it will be subject to
tax," warns Frede.

The personal tax-free allowance does exist in France, but only for
income from employment. Frede says: "Children living in France might be
taxable on any income sent from their grandparents in the UK."

The hefty size of French social security payments, taken directly from
pay packets, often surprises UK citizens. Frede says: "We usually say
it is about 20 per cent for employees, 42-45 per cent for employers.
These are capped payments and cover state pension, healthcare, and
unemployment benefits."

Income tax is not deducted at source as it is in the UK - everyone has
to fill in a self-assessment style form and pay the tax.

The most stressful French pitfall for many families, whether French
resident or not, comes after a death. French "forced heirship" rules
dictate that property in France must pass to any children. A man who
dies leaving three children, for example, would have to leave them
three-quarters of the property. The remaining quarter could be retained
by the surviving spouse.

Leonie Kerswill at PWC says: "Very often we see cases where a couple in
a second marriage moves to France. The children from the husband's
first marriage have grown up, and may not get on with the new wife.
Then he dies, and the widow finds the children from his first marriage
have a share in his house." Cue family rift.

To get around the problem, many people buy French homes through a
company set-up, which sidesteps the heirship issue - but lands the
family in a tax nightmare back home.

There are ways around this - and any other - issues where France and
the UK collide. The key is to pay for advice to help you sort them out
before you end up paying a big price in taxes, penalties and stress.