Offshore Disclosures Facility
By Peter Brooke
This article is published on: 25th May 2015
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.
Residency and Tax Residency in Italy
By Gareth Horsfall
This article is published on: 24th March 2015
2012 was a turning point in Italian politics and the way that we, as expats, live and could continue to live in Italy. It was the start of the New Norm (as I like to call it).
It started with the moment when Berlusconi was ousted as Premier and was swiftly followed by the non-elected Mario Monti. What was once accepted as the norm suddenly went under the spotlight. This was seen most dramatically in new tax legislation imposed on domestic and foreign assets and incomes and the sudden drive to track down and prosecute tax offenders.
There was no longer the option to live between two residencies, but the subject became much more matter of fact (see rules below for details)
It made a lot of expats question what their Italian residency meant since residency, by definition, means you are subject to Italian tax law. For some the additional financial burden was unaffordable. For the majority it was period of consolidation, understanding their tax reporting liabilities and looking at ways that they could plan more effectively to live in the country in which they wished to remain.
It is at this point that you may need to ask yourself the question:
What are the rules determined by Italian authorities in relation to being a resident or not?
Well, the law is clear, as follows:
An individual is considered resident for tax purposes if, for most of the calendar year (i.e. 183 days) he/she is:
* registered with the Registry of the Resident Population (Anagrafe)
* or has his/her residence or his/her domicile in the territory of the Italian state, as defined by Section 43 of the Italian Civil code.
According to Section 43 of the Italian Civil Code:
* The place of residence is taken to be the place where the individual has habitual abode.
* The place of domicile is taken to be individual’s principal place of business and interests.
In fact, residency has never been a choice. It has always been a matter of fact and a tax agency would always see it that way. If you spend the majority of time in Italy then you will be deemed tax resident as defined by the rules above.
Obvious problems occur when well-meaning estate agents suggest that you purchase your house in Italy as a resident to pay the lower VAT rate of 2% on the value of the property, versus 9% as a non-resident. But this in itself then determines that a tax return is required. If you then decide that non residency is preferable there is the question of having to pay back the difference.
The key, as always, is in the planning.
If you are a holiday home owner then you should rarely take residency if your clear intention is to maintain your principal residence elsewhere.
But if you want to enjoy Italy all year round and pay the lower rate of VAT on the property purchase, benefit from the good health care system, be able to buy a car here (non-residents cannot purchase a car legally in Italy), and benefit from lower utility rates then residence is required and certain legal obligations apply.
As I always say, you will pay more tax by living in Italy versus other Northern European countries and the USA. How can we expect to pay the same for all this sunshine?!! But a rural life, for example, should see your costs fall and maybe, like me, you are searching for the lifestyle that Italy offers.
Despite all this and having lived in Italy for years, I can tell you that there are tax-reduction and financial planning strategies that can lighten the burden somewhat. I should know! I was the naive foreigner who moved to Italy looking for ‘La Dolce Vita’ and didn’t pay much attention to the complicated financial and legal systems here. I failed to plan adequately and have had to pay the tax man for it. But failure to plan sharpened my senses and I now aim to help others not to fall into the same traps.
Income Tax Rates in Italy
By Gareth Horsfall
This article is published on: 23rd March 2015
You may wonder what is so significant about the number 28000 in Italy. Well, I will enlighten you in a moment.
The majority of expats I meet who decide to relocate to Italy are either Northern European or from Anglo Saxon’ countries (certainly those of you reading this E-zine) searching for some hot weather or wishing to sample the Mediterranean lifestyle. Whatever the motivations, it doesn’t really matter! Money-matters are the purpose of this E-zine.
It is often the case (but not always) that countries in the North of Europe and the USA have financial systems which encourage saving in tax-incentivised pensions, in savings or in retirement plans. Equally they often have preferential tax rates to encourage businesses/entrepreneurs to prosper in their early years when revenues are lower. The simple idea being that if you are incentivised to make provision for yourself and/or invest back into your business, then you will be less of a burden on the state in the future. Selling a business can also act as a kind of pseudo retirement plan in itself. This means that you lock a large part of your life savings into schemes/businesses which will provide you with an income later on in life. This would seem to be a sensible strategy for both government and individuals.
The problem we have is that when you move to Italy, there are few incentives to prepare for your future in the same way. In fact, the Government takes control of the majority of your life savings (either through INPS or other mandatory pension contributions) under which you have little or no control. In addition, there are few non-taxable income allowances which have the effect of reducing disposable income for individuals and reducing capital available for reinvestment just when a business needs it the most (more on tax rates in a moment).
My interpretation of this mechanism (I am sure there are much more complex political and social issues at hand here but I am merely trying to simplify elements of the system which affect you and I) is that by locking future savings into Government controlled systems, ie. INPS, the Government can charge income tax on these monies as “earned income” in the future and hence the Government provides itself with a guaranteed income stream on which it can calculate future spending plans (dubiously…. one might add)!
Which brings me on to income tax rates in Italy and the significance of 28000…
For expats in Italy, income tax is mainly applied to the following incomes:
- Gross income from employment
- Gross Pension income in Italy and from overseas
- Net rental income from overseas property
- 72% of dividends from Ltd. Company ownership
Now, in my experience, a lot of expats living in Italy have a property in their home country which they are renting out, have income from pensions or employment in their country of origin and, in some cases (but not many), are taking dividends from a Limited company which they may own abroad.
The financial planning issue here is that when all of these are added together they can often start to breach the higher levels of income tax (IRPEF) in Italy. The rates being as follow:
| EUR | 0 – 15,000 | 23% |
| EUR | 15,001 – 28,000 | 27% |
| EUR | 28,001 – 55,000 | 38% |
And so on…
And here lies the significance of 28000 in Italy.
The average income tax rate on income below €28,000 per annum GROSS is approximately 25%. This would seem reasonable but there are no non-taxable income tax allowances and so therefore tax starts from Euro Number 1. Once you start to breach the 28,000 EUR GROSS band and enter the more punishing 38% income tax band (if you add on regional taxes and others), then you are realistically into 40-42% on income over EUR 28,000 p.a.
So what is the solution?
Well, once again it all comes down to the planning.
The first and most obvious solution is to spread your income. Where possible, spread your income as a couple – for example, putting houses into joint names and spreading the income tax burden. By spreading the income you are moving a part of it into a partner’s tax bracket. If one of you has a lower taxable income than the other, then it makes sense to utilise some of the lower earning partner’s income tax bands.
Also, think about how you might be able to release money from pensions. As a resident in the UK, you can withdraw 25% of a pension plan tax free. It makes sense to do that before you move. That same withdrawal as a tax resident in Italy would be considered taxable income and added to your other incomes in that year.
In the UK (from April 2015) and in the USA you may be able to cash in some or all of your retirement plan. This particular scenario might be more complicated if there is a tax charge involved, but if you are serious about planning to reduce tax liabilities in Italy, then taking a lower tax charge in your home country before you move might be better than being subject to higher ongoing income tax rates in Italy (This would need serious consideration before a decision were made, but it could be a possibility).
And lastly, move as much of your money to unearned income sources, ie. income from directly held investments/savings. In this way you are subject to a flat tax of only 26% on the capital gains and/or the income from those investments.
As a general rule if you can split a couples’ income, generate income from investments (not from retirement plans), and some from property rental you can bring your overall tax rate down to approximately 26-30%. A level which I think is more acceptable to most (a lot depends on your income requirements as well).
Of course, I have simplified the situation here and everyone’s circumstances are different, but the methodology is the same. How can you take advantage of the lowest tax rates possible by restructuring and spreading your finances to make them more effective in Italy?
Which brings me nicely back to my initial point: The magic number is EUR28,000.
Italy does not, presently, seem to incentivise its residents to invest in long term retirement savings plans (in fact, in the Legge di Stabilita 2015 they are discussing taxing them even more!) and so a move to Italy breaks with Anglo Saxon/Northern European mentality, when thinking about how to plan for the future. Some of the best laid long-term plans can be scuppered when those decisions include a move to another country with a financial system based on totally different principles and systems.
If you plan on waiting for tax reductions or the EU to force changes, you could be waiting a long time. Planning your way around the system/s seems to be the optimum choice rather than waiting for the Government to do anything about it for you.
If you are already a resident in Italy and want to plan more effectively or are considering moving and wondering how you might plan things before you arrive, you can contact me directly on Tel: +39 333 649 2356, or please use the form below.
Are you thinking of moving to France?
By Amanda Johnson
This article is published on: 10th March 2015
Question:
I am planning to move permanently to France but am not sure where to go for information on the differences in regulations regarding tax, inheritance and pensions between France and my current country of residence?
Answer:
Whilst there are a number of forums and websites offering opinion and suggestions regarding the differences in French taxation from where you currently live, it is worth considering the following points before you make any decisions:
What experience does the person/site/forum have in this field?
- Ensuring that the information you want is accurate, relevant to the country you will be living in and free of any personal bias and opinion, is vital in enabling you to make the right choices going forward.
Is the information you will receive regulated in the country you will be living?
- Rules and regulations in the country you are leaving will most likely be different to France. Making sure the recommendations you receive are based on what is best for you as a French resident is very important.
Has the person providing you the information personal experience of your questions?
- It is always a comfort to speak to someone who has ‘walked the walk’ and not just a casual or second hand grasp of your questions. Personal experiences can often assist people getting used to new legislations and bureaucracy.
Whether you want to register for our newsletter, attend one of our road shows, Le Tour de Finance or speak to me directly, please call or email me on the contacts below & I will be glad to help you. We do not charge for reviews, reports or recommendations we provide.
Can You Avoid Spanish Inheritance Tax?
By John Hayward
This article is published on: 27th February 2015
Savings with UK banks and investment companies could form part of a Spanish Inheritance Tax (IHT) calculation.
If you have money in a Spanish bank, the Spanish tax authorities know about it. If you have money in a UK bank, they probably know about this too due to information passed over by the UK tax authorities. Of course, if you have over €50,000 in a UK bank account you will have reported this to Spain within your Modelo 720 form.
For a Spanish tax resident inheritor, Spanish IHT is due on worldwide assets. Therefore, a Spanish resident wife, inheriting from her husband, could pay tax based on their Spanish property and other Spanish assets PLUS tax on the overseas assets.
The English Will does NOT stop the Spanish tax authorities claiming Spanish IHT (Succession Tax) on overseas assets. The Will governs the distribution of the estate, not its taxation directly.
We can help mitigate, delay and even sometimes completely avoid Spanish IHT by placing money in a Spanish compliant insurance bond based outside Spain. Suitably arranged, the bond could save many thousands of euros in inheritance tax.
Financial seminar for expats in Catalonia
By Chris Burke
This article is published on: 25th February 2015
The Spectrum IFA Group’s Chris Burke spoke at a recent financial seminar alongside Spanish Lawyer, Nuria Clavera Plana, in Llafranc. The event was attended by 30 people and was followed by a Q&A session and a chance to meet the speakers over coffee.
Chris’s presentation covered:
- Currency forecast, thoughts and ideas to implement for 2015.
- UK Government Pensioner Bonds – 2.8%-4% per annum for anyone holding a UK bank account and debit card.
- UK Pension & QROPS changes – Is your pension being managed effectively and is it in the right place?
- Spanish Life Assurance Bonds/Investment – potentially Tax efficient, historically good returns (Prudential) and potentially succession planning friendly.
Chris ran through the concept of ‘the magic bank account’ for over 65’s in the UK, and many people were surprised to find out that you do not have to live in the UK to benefit from these – you just need a UK bank account and debit card and can achieve between 2.8% to 4% per annum with the savings also government backed. He discussed predictions and thoughts on currency, which highlighted last year’s most successful currency forecaster, stating that the Euro/Dollar will be at parity at 1-1 by the end of 2015. Still just as unnerving for those living in Spain, was the prediction that the Euro would reach 1.42 by the end of 2015 against the pound, particularly if the EU have to keep printing money to solve the crisis.
The new rules on UK pensions and QROPS were also highlighted. QROPS is a UK pension that has been moved overseas to benefit from EU rules (please note your pension should be evaluated by a qualified pension evaluator before you consider doing this) and although the new UK rules give much more flexibility, everyone acknowledged that hefty tax could have to be paid to access these. Qrops still has benefits over and above leaving your pension in the UK depending upon your situation, and from April 2015 should have nearly all of the benefits a UK pension will be entitled to, and potentially more.
Tax efficiency was perhaps the most popular subject Chris presented on, with most people interested in saving money on taxes both on their savings and with succession planning. In fact, passing on their money tax efficiently was the main interest over coffee after the presentations.
Presentation From Nuria Clavera Plana (Lawyer):
- New income tax for Catalonia 2015 and what are the exemptions.
- New Capital gains Tax for 2015 in Catalonia.
- What assets need reporting.
- Pension income from sources outside of Spain Amnesty.
Nuria as ever gave a very interesting presentation on what you now have to pay in taxes throughout Catalonia, the reasons why and how this works. By far the most popular conversation was the changes to Inheritance tax rules now in Catalonia, which in essence are the same now for Spanish Nationals and Foreigners residing here. This incorporates a big reduction in tax compared to before. It was also surprisingly good news for those leaving behind assets up to €1,000,000 with potentially limited tax to pay.
There were many questions surrounding what does and doesn’t need reporting for the Modelo 720 overseas asset declaration, ranging from classic cars to items not reported before. This topic always throws up major questions as always!
This year in Spain it is now a requirement to report any overseas pension income you are receiving up until the 30th June 2015. This generally would not have been taxed in most cases in the respective overseas countries due to the amount in question. However this should be reported in Spain and could therefore be subject to Spanish tax laws. It was discussed that this new law has been brought in mainly to find those Spanish Nationals who have been receiving pensions from working abroad previously and have not been declaring them or paying the relevant tax.
Nuria as ever gave everyone detailed analysis on these changes, so everyone left the event with a better knowledge of their own personal situation.
If you would like more information on this or any other questions you may have regarding Tax advice, please do not hesitate to contact Nuria on nuriaclavera@icab.cat or Telephone 972305454.
Chris and Nuria would like to thank all the attendees for asking such pertinent questions and joining in, making the event such a success.
Chris will also be presenting at future seminars in the coming months. Please feel free to contact him on chris.burke@spectrum-ifa.com or telephone him on 936652828 if you would like to know more about these, or wish to discuss any of the above details.
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Tax and residency in Italy
By Gareth Horsfall
This article is published on: 12th January 2015
No 1. Expat tax Grief
Not a week goes by these days, where I am not contacted by someone who has a question about their residency in Italy, and what that means for them fiscally. Either by people who are about to move to Italy or others who have already been living here for some time and want to become ‘in regola’.
The conversation then naturally flows into the minutiae of exactly what are the taxes that need to be paid in Italy.
So, I would write and explain those pesky taxes that apply to expats who have income being paid and/or assets held in other countries. It may act as a good guide for those who are thinking about, or in the process of, doing something about their Italian tax returns for 2014.
Where to start?
Well, firstly I start by confirming that, as a resident in Italy, you are subject to taxation on your worldwide assets and income (with some exceptions). That means that if you are a resident in Italy then you are required to declare your assets and income, wherever they might be located or generated in the world.
TAX ON INCOME
If you are in receipt of a pension income, for example, and it is being paid from a private pension provider overseas or a state pension, then that income has to be declared on your Italian tax return (nb. different rules apply to Government service pensions, where tax is generally deducted at source in the country of origin and there is no further requirement to report the income in Italy). If tax is deducted at source in the country of origin, the income must still be declared again in Italy. A tax credit will be given for the amount of tax paid in the country of origin (assuming that country has a double taxation agreement with Italy), but any difference between the tax rates in the country of origin and Italy will have to be paid.
It is a similar picture for income, generated from employment. This is a slightly more complicated issue that depends on many factors and, therefore, I shall not dwell on it here. If you have any questions in this area you can contact me on the details at the bottom of this page.
INVESTMENT INCOME AND CAPITAL GAINS
This is one area where Italy excels above other countries, in that its system of calculation is very simple. As of 1st July 2014, interest from savings, income from investments in the form of dividends and other income payments are taxed at a flat 26%. Capital gains tax is the same rate of 26%.
** Interest from Italian Government Bonds and Government Bonds from ‘white list’ countries is still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means it is more convenient, from a tax position, to invest in Government Bonds in Pakistan or Kazakhstan, than it is to buy corporate Bonds from Italian corporate giants ENI or Unicredit. **
PROPERTY OVERSEAS
Property which is located overseas is taxed in 2 ways. Firstly, there is the tax on the income and, secondly, a tax on the value of the property itself.
1. Income from property overseas.
Unlike rental property located in Italy, which is taxed at the rate of approx 23% depending on what kind of rental you operate, overseas income from property is added to your other income for the year and taxed at your highest rate of income tax.
There is one advantage to this, in that tax in the country of origin has to be applied to the income in the first instance. Therefore, the net income (after expenses) in the country of origin is added to your other income in Italy for the year. This can be quite useful if the property/ies are investment properties, the expenses are high, the country of origin allows multiple deductions and the net income position is low. However, as I have written before, if you are reliant on the income to live on, then a high net income position (before declaration in Italy) can result in a much lower net amount (after Italian tax) depending on the amount of other income you receive each year. Once your total income for the year moves above €28,000 you enter into the punishing 38% tax bracket in Italy.
This can prove to be a tax INEFFICIENT income-stream for those hoping to live in Italy by relying on income from property overseas.
2. The other tax is on the value of the property itself, which is 0.76% of the value.
However, value must be defined in this instance. For EU based properties, the value is the Italian cadastral equivalent. In the UK (the area I am most familiar with), that would be the council tax value NOT the market value. You will find that the market value will, in most cases, be more than the cadastral equivalent value.
In properties located outside the EU, the value for tax purposes is defined as the market value of the property ONLY where evidence cannot be provided of the purchase value of the property, in which case this would be used instead.
TAXES ON ASSETS
It would not be right that other assets escaped Scot free!
BANK ACCOUNTS AND DEPOSITS
A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. However, from 2014 every deposit account that you own overseas with an ‘average’ balance of €5,000 in it, each calendar year, is taxed at the rate of 0.2% of the average balance throughout the year. This includes fixed deposits, short term cash deposits, CD’s etc. The charge is the equivalent of the ‘imposta da bollo’ which is applied to all Italian deposit accounts each year.
Lastly, we have the charge on other foreign-owned assets (IVAFE). This covers shares, bonds, funds, portfolio assets or most other types of assets that you may hold. The tax on these is 0.2% per annum, (from Jan 1st 2014) based on the valuation as of 31st December each year.
This guide is only meant to be a broad outline of the taxes that affect most expats. It is not a full tax list and does not take into account personal circumstances. It is intended to be a guideline to help you make the right decisions.
My experience over the last 4 years has been, in most cases, that expats will end up paying more by being resident in Italy (which most seem to accept as OK, for the lifestyle they can lead) but, there are often a number of financial planning opportunities, to protect, reduce, and avoid certain taxes, that few take advantage of.
If we haven’t discussed these already or if you would like an initial chat to discover whether any of those opportunities are open to you then please feel free to contact me. There are no fees for enquiries and consultations.
French Tax Changes 2015
By Spectrum IFA
This article is published on: 5th January 2015
During December, the following legislation has entered into force:
- the Loi de Finances 2015;
- the Loi de Finances Rectificative 2014(I); and
- the Loi de Financement de la Sécurité Sociale 2015.
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 €9,690 | 0% |
| €9,691 to €26,764 | 14% |
| €26,765 to €71,754 | 30% |
| €71,755 to €151,956 | 41% |
| €150,957 and over | 45% |
The above will apply in 2015 in respect of the taxation of 2014 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 | 0.50% |
| €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)
There are no changes in respect of the taxation of capital gains arising from financial assets. Therefore, gains arising from the disposal of financial assets will continue to be added to other taxable income and then taxed in accordance with the new 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 2015 in respect of the taxation of gains made in 2014.
CAPITAL GAINS TAX – Property (Plus Value Immobilières)
With effect from 1st September 2014, the taper relief applicable to gains arising from the sale of building land has been brought in line with that applicable to other property gains, 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 exceptional reduction of 30% of the taxable capital gain, arising from the sale of building land only, has also been introduced, subject to the following double condition that:
- a compromis de vente has been signed between 1st September 2014 and 31st December 2015; and
- the completion of the sale of the land must take place by 31st December of the second year following the signing of the compromis de vente.
The exceptional reduction applies for both the capital gains tax and the social contributions liabilities. However, it is not available for land transferred between spouses and PACS partners, nor to ascendants or descendants.
It should also be remembered that there is still an additional tax applicable for property sales, 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. However, at some point during 2015, the European Court of Justice (ECJ) will most likely rule on the outcome of the European Commission’s infringement procedures against France, regarding the application of social contributions on income and gains arising in France for non-residents. Following the delivery of the legal opinion of France’s Advocat General to the ECJ, it is widely expected that non-residents will become exempt from social charges on gains and income arising from French property.
One other point worth mentioning concerns the rate of capital gains tax for non-residents. To date, this has been at the rate of 19% for residents of EU/EEA countries and at 33.33% for non-residents of other countries, except for those of ‘non-cooperative territories’, who have been liable to a 75% capital gains tax rate.
In October 2014, the French Conseil d’Etat, which is the highest court in France for tax matters, decided that the higher rate of capital gains tax for non-residents is illegal, in certain circumstances. The basis for its decision was that it considered this to be a disincentive for non-residents from outside of the EU/EAA to purchase property in France. As such, the court considered this was a restriction on the free movement of capital and thus, contrary to EU law.
Arising out of this decision, the government proposed to harmonise the capital gains tax rate at 19%, but not for those residents of ‘non-cooperative’ States, for whom it decided that the 75% rate should be maintained. However, when considering the proposed legislative changes, the Constitutional Council ruled that a capital gains tax rate of 75% is excessive, when taken into account with the social contributions of 15.5% and so ruled that this is contrary to France’s Constitution.
The Constitutional Council’s decision is somewhat of a surprise, since the 75% tax rate plus social contributions has already been the practice. One assumes, therefore, that as and when France is instructed not to apply social contributions to gains arising for non-residents, then the 75% capital gains tax rate will no longer be considered unconstitutional!
Finally, one other good point for some non-residents is that for those who are resident in the EU (and in some cases in the EEA), it will no longer be necessary to appoint a tax representative in France to deal with the calculation of the capital gains tax, when the property is sold.
GIFT TAX (Droits de Mutation à Titre Gratuit)
In order to promote the release of building land and revive housing construction, a temporary exemption from gift tax has been introduced for donations made in the following situations:
- for full transfers of building land (i.e. the donor cannot retain life use), for which the acte authentique is signed between 1st January and 31st December 2015, on the condition that the recipient builds a new property destined for housing, within four years of the date of receiving the gift.
- for full transfers of new residential properties, for which a building permit is granted between 1st September 2014 and 31st December 2016, on the condition that the deed evidencing the gift must be signed no later than three years of the date of the building permit and that the building has never been used or occupied at the time the gift is made.
In both of the above situations, the following exonerations from gift tax will be given, limited to the declared value of the asset:
- €100,000 for transfers between descendants or ascendants in direct line, or between spouses and PACS partners;
- €45,000 between siblings; and
- €35,000 between any other person
It is also indicated that the total of the donations made by the same donor cannot exceed €100,000. However, what is not clear from the drafting of the legislation is whether or not this limit applies separately for each of the above situations or if this limit is applied globally. Therefore, we will have to wait for further precision on this.
Other Changes:
- Charitable Donations & Bequests:
France exempts from inheritance duties donations and bequests made to certain charities that are registered in France. However, charities established in other States of the EU are generally subject to a 60% tax (after an allowance of €1,594) on the value of the gift or bequest received.
The European Commission considers the above to be an unjustified obstacle to the free movement of capital and so referred France to the European Court of Justice (ECJ) in July 2014. Anticipating a condemnation by the ECJ to be almost inevitable, France has changed its law so that there is no discrimination between the charities registered in France and those in the rest of the EU/EEA.
- Additional Tax on Second Homes:
With the objective of reducing the housing shortage in areas where there is a marked imbalance between supply and demand, provision has been made within the law for an additional tax on ‘second homes’, i.e. for furnished properties not designated as a principal residence.
The decision as to whether or not the tax will be applied will be made by the municipal council of the municipality concerned. The rate has been fixed as 20% of the municipality’s share of the taxe d’habitation and the revenue from the additional tax will be allocated to the municipality.
Tax relief should be given from the additional tax in the following situations:
- by those who need a second dwelling near to their place of work because their principal residence is too far away; and
- if the owner is living permanently in a nursing home or other care facility and the property was their former principal residence.
Others may also receive the tax relief where they can no longer designate the property as their principal residence for circumstances outside of their control.
EU Directive on Administrative Cooperation in the Field of Direct Taxation:
Although not directly related to France’s tax changes, it is worth mentioning that with effect from 1st January 2015, under the terms of the above EU Directive, there will be automatic exchange of information between the tax authorities of Member States for five additional categories of income and capital. These include income from employment, director’s fees, life insurance products, pensions and ownership of and income from immoveable property. The Directive also provides for a possible extension of this list to dividends, capital gains and royalties.
2nd January 2015
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.
Looking forward to 2015
By Spectrum IFA
This article is published on: 9th December 2014
The end of the year is always a good time for reflection and this year we have had much to think about for our clients. However, as well as managing current financial risks for our clients, we are also forward looking. So I thought it would be a good time to do a quick review of some of the things that are on the horizon for 2015.
The UK Pensions Reform is big and we now have a reasonable amount of certainty of the changes taking place in April and it is unlikely that there will be any more changes of substance between now and then. The reform brings more flexibility, which is good, but the reality is that for many, the taxation outcome will be a deterrent against fully cashing in pension pots. This is likely to be even more so in France, where it is not just the personal tax and possible social contributions that are an issue, but also whatever you have left of the pot will then be taken into account in valuing your assets for wealth tax, as well as being potentially liable for French inheritance taxes.
The EU Succession Rules will come into effect in August. While the EU thinking behind this is good, i.e. to come up with a common EU-wide system to deal with cross-border succession, the practical effects will still have issues. The biggest issue for French residents is, of course, French inheritance taxes. Therefore, it may not necessarily be the case that the already tried and tested French ways of protecting the survivor and keeping the potential inheritance taxes low for your beneficiaries should be given up in favour of selecting the inheritance rules of your country of nationality. More information on the ‘French way’ can be found in my article at https://spectrum-ifa.com/inheritance-planning-in-france/ and on the EU Succession Regulations at https://spectrum-ifa.com/eu-succession-regulations-the-perfect-solution/
There is the UK General Election in May and who knows whether or not that will actually be followed at some point by a referendum on the UK’s membership of the EU. Nor do we know what the outcome of such a referendum would be and so there is really no point in speculating, at this stage.
For UK non-residents, we are expecting the introduction of UK capital gains tax on gains arising from UK property sales from April, subject to there not being any changes in the next budget. We had also expected that non-residents would lose their UK personal allowance entitlement for income arising in the UK, but we now know that this will not happen next year. The Autumn Statement confirmed that it is a complicated issue and if there are to be any changes in the future, these will not take place before 2017. Of course, there could be a change in government and so it might be back on the agenda sooner!
We will also have the usual round of French tax changes, although this year the expected changes are much less extensive than in previous years. The French budget is still winding its way through the parliamentary process and I will provide an update on this next month.
Turning to investment markets, my personal opinion is that the main factor that will have an impact in 2015 is central bank monetary policy. Whether this results in tighter or looser policy from one country to another, remains to be seen. What is clear is that the prospect of deflation in the Eurozone remains a real threat and not only needs to be stopped, but also needs to be turned around with the aim of eventually reaching the target of being at or just below 2%. Other central banks around the world have a similar target and in areas where recovery is clearly underway, the rate of price inflation and wage inflation also needs to increase before we are likely to see the start or interest rate movements in the right direction.
Last but not least, with effect from 1st January 2015, under the terms of the EU Directive on administrative cooperation in the field of direct taxation, there will be automatic exchange of information between the tax authorities of Member States for five categories of income and capital. These include income from employment, director’s fees, life insurance products, pensions and ownership of and income from immoveable property. The Directive also provides for a possible extension of this list to dividends, capital gains and royalties.
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 on the mitigation of taxes.
If you are affected by any of the above and would like to have a confidential discussion about your situation or any other aspect of financial planning, please contact me using the details or form below.