Do you know what taxes to pay, and where? Rob Kay unravels the knotty issue of residential status
Cover story Expert Rob Kay explains the important issue of tax residency
If you are tax resident in France, then you are liable to pay French tax on your worldwide income, gains and wealth, and are subject to the French succession (inheritance) tax rules. It is your responsibility to make yourself known to the French tax authorities and to fully declare your income and assets accordingly.
Note in particular that an individual does not have a choice; you either are, or are not, French tax resident under the rules.
An individual is deemed to be a tax resident of France if at least one of the four following tests is fulfilled:
France is your main residence or home (your foyer). This embraces ideas of
Where are you resident for tax purposes? The answer may not be as simple as you think. If you live in the UK and just visit a holiday home in France a few weeks a year, you are most likely to be resident in the UK for tax purposes. If you, your spouse and any dependent children live in France full-time and only visit the UK for brief holidays, you are most likely French resident.
But for those who fall in between, and spend time in and/or have property in both countries, it can be complicated. Many people do get caught out.
It is important to establish your tax residence, to ensure you pay tax in the right country. If you mistakenly assess your residence or pay tax in the wrong place you could end up paying more tax than you should. Correcting past mistakes may prove costly and stressful when the tax authorities catch up with you, and you could find yourself subject to a tax investigation.
You also cannot put effective tax planning in place until you are sure of what taxes you should be paying in which country, so seek professional advice early on. If you have not yet moved to France, take advice before you do, since that can result in you paying less tax than if you leave it until you are resident in France.
FRENCH TAX RESIDENCY RULES
permanence and stability, and is the rule the French authorities most rely on. The foyer is the place where your close family (spouse and minor children) habitually live. Even if you spend most of your time abroad, if your foyer is in France you will be considered French tax resident.
France is your principal place of abode, your lieu de séjour principal. This usually means you spend more than 183 days in France per calendar year. However, if you spend less than 183 days in France, but more days than in any other country, you may still be deemed to have your lieu de séjour principal in France. This test is only applied if a foyer cannot be determined.
Your principal activity is in France. For example, your occupation is in France (whether salaried or not) or your main income arises in France, unless you can show it is incidental.
France is the country of your most substantial assets (centre of economic interests). This means if France is the place of principal investments, or where assets are administered, or where your business affairs are based, or where a larger part of your income is drawn from.
If the French tax authorities question your tax residence, and claim you are resident there when you believe you are not, then it is up to them to prove their case and bring factual evidence to support it.
You are tax resident from the day after you arrive in France, if you arrived with an intention to reside there indefinitely.
France takes a ‘split-year’ approach for tax in relation to residence and non-residence. In your tax year of arrival, only the worldwide income received after the date of arrival is liable to French income tax (excepting French-sourced income, which is always taxable). In the year of departure, the reverse of this is true.
There is obviously an opportunity to save considerable amounts of French tax by disposing of assets before you arrive in France, but ensure that you take specialist advice to make sure you get it right.
UK TAX RESIDENCY RULES
In the UK, the Statutory Residence Test determines whether you are liable for UK income tax and capital gains tax on your worldwide income.
To assess your residence status, you need to work through three tests in order. The time period referred to is always a UK tax year: from 6 April to 5 April.
Under the automatic overseas test, you are treated as not resident if you meet any of the following conditions:
You spend less than 46 days in the UK and were not resident the previous three years.
You spend less than 16 days in the UK and were resident in any of the three previous UK tax years.
You work overseas full-time, subject to certain conditions.
Under the automatic residence test you are treated as resident if you meet any of the following conditions: You spend 183 days or more in the UK. Your only or main home is in the UK. The home must be available for use for at least 91 days and actually used at least 30 separate days.
You work full-time in the UK for 365 days, subject to certain conditions.
Where your residence status is not determined under the first two tests, the ‘sufficient ties’ test determines whether you are resident in the UK based on a combination of the number of days and ‘ties’ you have to the UK. The ‘ties’ are: family; available accommodation; substantive work; more than 90 days in the previous two years, and more time in the UK than any other country. There are specific definitions for each tie.
Be aware that this is a very brief summary of complex legislation, so you need to take professional advice.
DOUBLE TAX TREATY
You can be resident in both the UK and France simultaneously. In this case, ‘tie breaker’ rules in the UK/France double tax treaty will determine where you are resident for tax purposes.
These consider where you have a permanent home available to you, where your centre of vital interest is located, and where you have an habitual abode. If these are indeterminate, it comes down to nationality. If the issue is still not solved after the nationality test, the authorities of both countries will try to find an agreement.
Many people avoid becoming resident in France because they believe they would pay too much tax as a result. However, if you are retired and take specialist, personalised advice, you may find that you can use compliant tax-efficient arrangements in France to considerably lower your tax liabilities. You may even find that you could pay less tax in France than you do in the UK. www.blevinsfranks.com Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
You can be resident in both the UK and France simultaneously. In this case, the double tax treaty will determine where you are resident for tax purposes