And Another Debt Crisis

By Spectrum IFA
This article is published on: 1st November 2013

We have been living through the Eurozone sovereign debt crisis and now we have the US debt crisis again. It feels like déjà vu, as it was around this time last year that there was much talk about the US fiscal cliff.

Just hours before the deadline of 17^th October, the US Congress passed a bill to re-open the government and raise the federal debt ceiling – well at least until next year – as new deadline of 7^th February was set. The consequences of not having made this ‘temporary fix’ would have resulted in the US defaulting on its sovereign debt. Default would have been catastrophic for the US and also for the global economy.

The Republicans lost this battle and probably the war against ‘Obamacare’. The reputation of the party is damaged and they will need to work very hard to earn the trust of the American people in time for next year’s mid-term elections.

Naturally, the uncertainty prior to the deadline made the stock markets a little nervous, but there were no big falls. Likewise, when the deal was reached, there was no big rally in markets. Generally, markets only react to the unexpected and I guess that it was unthinkable that the US would default on its debt.

However, the US economy was damaged by the theatrics of the bat and ball game by the politicians. The ratings agency, Standard & Poor’s, estimates that the partial US government shutdown shaved $24bn from the American economy; the US government estimates that this will cost 0.25% of GDP in the fourth quarter of 2013. The US dollar fell and Fitch put the country’s credit rating on negative watch, whilst one of the Chinese ratings agencies downgraded it a notch.

The Fed has since met and has decided that there would be no change to its $85bn per month asset purchasing scheme, a strategy that was put in place in September 2012 in the hope to drive down long-term interest rates and spur growth. The job market remains sluggish and inflation below its 2% target. Most economists think that the uncertainty stemming from the government shutdown will force the Fed to wait until 2014 before beginning its asset purchase tapering. Short-term interest rates were also kept at zero and so no encouragement for savers, a situation that has existed since December 2008.

Turning to the Eurozone, there are slight signs of economic recovery. At the early September press conference of the ECB, President Draghi described the economic recovery as “weak, fragile and uneven”. The benchmark interest rate was kept on hold at 0.5%. Draghi said that rates were likely to remain at this level for an “extended period”. More bad news for savers.

Since that meeting, the unemployment figures for September across the 17 Eurozone countries have been published. Rising by 60,000 to 19.4 million, this is the 29^th consecutive monthly increase in unemployment. At 12.2%, the jobless rate is the highest since monetary union began at the end of the 1990s, according to data from Eurostat, the EU’s statistical agency. Youth unemployment amongst the under-25s is running at 24.1% and alarmingly at over 40% in Italy and 50% in Spain.

The slowdown in inflation is also becoming increasingly concerning. According to Eurostat, the Euro area’s inflation rate has dropped from 1.1% to 0.7%, which is considerably below the ECB’s target of being at or just below 2%. Lower energy bills in the Eurozone is one of the main factors that has pushed down the inflation rate, the complete opposite of what is being experienced in the UK at the moment. The ECB’s prime objective of price stability in the Eurozone is under pressure.

The inflation data has surprised the market and when combined with the strength of the Euro, questions are being asked about the risk of the Eurozone falling into a ‘Japan-like’ deflationary spiral. If the ECB considers that this is a real risk, it may need to act by cutting interest rates again. We will have to wait and see what the ECB does at its November meeting. Whilst it is unlikely that there will be an immediate cut in interest rates, perhaps it may give some signals in its ‘forward guidance policy’.

Closer to home, the French budget – Projet de Loi de Finances 2014 – is progressing through parliament. As expected, amendments have already been proposed and adopted by the National Assembly, including amendments to the government’s proposed reform of the capital gains tax regime relating to property. If the National Assembly’s amendment continues through to the final law, we could see the maximum taper relief applicable to property gains, for the purpose of the social contributions only (currently at the rate of 15.5%), being restricted to 28%, whilst the capital gains tax would be fully tapered out after 22 years of property ownership. The bill is now with the Senate for debate and so maybe they will reject the National Assembly’s proposal for fear that this will continue to stagnate the French property market.

The French footballers have also been in the news, protesting about the proposed total 75% tax rate that their employing clubs will have to pay on their salaries, just as have the farmers protested about the proposed eco-tax. If President Hollande gives in on these policies, the money will have to come from somewhere to balance the books. No doubt savers and people with wealth could be targeted.

With all this short-term ‘disruption’ going on, we have to keep an eye on our long-term goals and objectives. Interest rates are still not going to rise in the near future and could actually fall further at some point. Therefore, the alternative of investing in assets, other than cash, remains viable for income seekers and for those who wish to protect the real value of their capital over the long-term. As we have seen with the US debacle, the markets take these things in their stride.

The mitigation of taxes is also a very important subject that should be planned for and continually reviewed as governments change tax policy and individuals’ situations evolve. Having an adviser that understands how these things work where you live is an essential part of the ability to give professional advice. Sadly, from time to time, I come across a case where the potential client decides to retain their adviser in their former country of residence out of loyalty for past service, even though that adviser does not understand the intricate workings of the French tax personal tax system and the inheritance rules and taxes. Even worse, I come across cases where the adviser fights hard to retain the business, which might be tax-efficient under the country’s rules where the adviser is based, but not in France. Naturally, the client trusts that adviser and only after becoming French resident finds that this is a costly mistake.

If you would like to have a confidential discussion about how the proposed French tax changes may affect you or on any other aspect of financial planning, please contact your local French adviser.

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.

 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

TSG Insurance Services S.A.R.L. Siège Social: 34 Bd des Italiens, 75009 Paris « Société de Courtage d’assurances » R.C.S. Paris B 447 609 108 (2003B04384) Numéro d’immatriculation ORIAS 07 025 332 – www.orias.fr « Conseiller en investissements financiers, référencé sous le numéro E002440 par ANACOFI-CIF, association agréée par l’Autorité des Marchés Financiers»

Proposed French Tax Changes

By Spectrum IFA
This article is published on: 26th September 2013

The Project de Loi de Finances 2014 was published on 25th September 2013. The proposals aim to create economic growth and reduce unemployment.

Shown below is a summary of our understanding of the principle changes that will come into effect, if passed by parliament. Noticeably, there are no proposals to change the wealth tax regime (Impôt de Solidarite sur la Fortune) or social contributions.

INCOME TAX (Impôt sur le Revenu)

The following is proposed:

*The barème scale, which is applicable to the taxation of income, to be revalued as follows

* To increase the décote – which is the tax deduction granted to low taxpaying households – from €480 to €508.

It is proposed that the above provisions will apply in 2014 in respect of the taxation of 2013 income.

Reform of the Plan d’Epargne en Actions (PEA)

The following is proposed:

* To increase the maximum amount that can be invested in a “classic” PEA from €132,000 to €150,000; and

* To encourage more households to invest in small and medium enterprises, it is intended to create the “PEA-PME” into which the maximum amount that can be invested would be €75,000.

CAPITAL GAINS TAX – Financial Assets (Plus Value Mobilières)

As announced by President Hollande earlier this year, it is proposed to reform the taxation of capital gains arising from the sale of securities held by individuals. The proposals aim to encourage investors to take more risk and to save for the long-term.

If passed, gains arising will be taxed at the progressive rates set out in the barème scale above, after the deduction of an allowance, 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.

The above allowances would also apply to gains arising from the sale of shares in ‘collective investments’, including investment funds, providing that at least 75% of the fund is invested in shares of companies.

Furthermore, to encourage investment in new small and medium enterprises, higher allowances against capital gains for investments in such companies will be 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.

It is proposed that the above provisions will apply in 2014 in respect of the taxation of gains made since 1st January 2013.

CAPITAL GAINS TAX – Property (Plus Value Immobilières)

There has already been considerable media reporting on the proposed reform of the capital gains tax regime for property sales, as if this had already been enacted into law. In part, this is understandable since the forms for reporting the property gains – calculated in accordance with the regime proposed below – have been available via the French government tax website since the beginning of September. However, the text of the budget indicated that the reason that this had been done was to encourage immediate activity in the property market – in other words, to discourage people from further delaying property sales until the proposals are actually implemented into law.

One can only guess that the government has a high level of confidence that the proposal will go through. However, only time will tell whether or not this has been a prudent step, i.e. to allow the proposed regime to be applied before actually being enacted into law.

The proposals are shown below, which will benefit the majority of people, but not all. In the event that these are not enacted, we have to assume that any adjustment to the taxes, in respect of properties sold between now and the end of the year, will be addressed at a later date.

FOR SALES OF PROPERTY (i.e. maison secondaire):

If the budget proposals are passed, gains arising after the deduction of an allowance (taper relief), will be taxed at the progressive rates set out in the barème scale above. The taper allowance would be 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 property will become free of capital gains tax after twenty-two years of ownership.

However, for social contributions (currently 15.5%), it is proposed to apply a different scale of taper relief, 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 property gains will become free of social contributions after thirty years of ownership.

Finally, in order to further enhance activity in the property market, it is proposed to allow an exceptional reduction of 25% against the taxable capital gain, for sales completed during the period from 1st September 2013 to 31st August 2014. Thus, this exceptional reduction would reduce both the capital gains tax and the social contributions liabilities.

FOR SALES OF BUILDING LAND:

With effect from 1st January 2014, the capital gain on land sales will be calculated without taking into account the period of ownership (i.e. the taper relief will be abolished).

However, there is no mention in the budget of whether or not the taper relief will still apply to sales whereby a compromise de vente has been signed before 1st January 2014, which was widely expected to be the case.

It is also noticeable that the budget does not make any provision for taxation of the gain at the barème scale rate. Therefore, unless there is an amendment to the text of the proposed law, we have to assume that the gains will remain taxable at the fixed rate of 19% (plus social contributions, currently 15.5%).

The exceptional reduction of 25% of the capital gain will not be applicable to sales of building land.

The bill will now be debated by the National Assembly and the Senate, during the weeks ahead and so it cannot be ruled out that some changes may take place before the final text of the draft law is agreed. The final bill will then be referred to the Constitutional Council for review before entering into law.

26th September 2013

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.

If you would like to discuss how these changes may affect you, please do not hesitate to contact your local Spectrum IFA Group adviser.

TSG Insurance Services S.A.R.L. Siège Social: 34 Bd des Italiens, 75009 Paris « Société de Courtage d’assurances » R.C.S. Paris B 447 609 108 (2003B04384) Numéro d’immatriculation ORIAS 07 025 332 – www.orias.fr « Conseiller en investissements financiers, référencé sous le numéro E002440 par ANACOFI-CIF, association agréée par l’Autorité des Marchés Financiers»