My partner and I are moving to France permanently this summer with our two children, and wondered what the implications would be in terms of income tax. We will be renting out our house in the UK and we will both be working in France, so where and how will we have to pay tax? Does the fact that we’re not married make a difference?
As a general principle, your country of residence will subject you to taxation on your worldwide income and assets. This means that once you leave the UK and move to France you will be taxed in France, not in the UK. However, it is important to understand how the double tax treaty affects the tax position.
In France you are taxed on a household basis if you are married or if you enter into a PACS, which is a type of civil partnership available to both mixed- and same-sex couples. If you are not married or ‘PACSed’ you will be taxed on an individual basis.
The tax rates are progressive up to 45% – the top rate is only applicable on income of over €150,000 per person. On top of income tax you will also have to pay social charges which are basically another form of tax. The rate depends on the type of income – for employment income the rate is 8% and for investment income it goes up to 15.5%.
If you work in France you will be subject to both income tax and social security contributions. Your employer is responsible for registering you with the relevant social security organisation. There are generally a lot more deductions available against your income than in the UK. For example, you are entitled to a 10% deduction from your employment income for expenses related to your work (subject to a limit).
Your rental income will remain taxable in the UK under the normal UK rules, i.e you are taxed on the net income after deducting any expenses related to the rental business. In France, UK source rental income is not directly taxable but you have to report the income on your French tax return. You then get a credit equal to the French tax that would be payable on that income.
You will also have to consider how the French inheritance law and tax would apply on your assets. In France your biological children are protected and are entitled to a percentage of the deceased parent’s estate. The rate of inheritance tax depends on the relationship between the deceased person and the beneficiary. The rate of tax payable between unmarried couples or other unrelated individuals is 60%. There are ways of circumventing the law and potentially mitigating the tax liabilities. It is important that you understand how the rules apply in your circumstances since the system is very different from the UK regime.
France also has a type of wealth tax which applies on your worldwide assets after the first five years of residence. Currently the threshold is €1,300,000. There are deductions available, for example you are entitled to a deduction of 30% against the value of your main home.