A wealth of knowledge
Changes to French wealth tax were introduced for 2018 but what exactly do they mean and how might they affect you? Debbie Bradbury explains all
The changes to wealth tax explained and how they might affect you
Previously (2017), wealth tax was levied on households where the net value of their assets exceeded €1.3 million on 1 January of each year. There was a distinction between residents and non-residents in as much as nonresidents’ wealth tax was calculated purely on the value of any French real estate and its contents, whereas residents’ wealth tax was calculated on all worldly assets, including real estate, furniture, vehicles, boats, planes, jewellery, precious stones, gold, coins, horses, capital and investments.
There was a 30% allowance applied to the value of the primary residence, and new residents had a five-year period where only their French assets were taken into account for the calculation of wealth tax. Professional assets, antiques, works of art, collections and certain annuities were exempt from wealth tax (as was ownership of property without life interest, called nue-propriété).
The following debts were deducted from the gross value of the assets in the calculation of wealth tax:
• taxe foncière and taxe d’habitation payable in the year of declaration
• outstanding mortgage capital as at 1 January of each year
FOR RESIDENTS, IN ADDITION TO THE ABOVE:
• income tax and social charges still due in the year of declaration
• inheritance taxes
• maintenance payments in hand for the year fixed by a court judgement
• deposits received from a tenant during the term of a lease
The calculation of the wealth tax was based on a progressive scale ( see below). From January 2018 the old wealth tax (ISF – Impôt sur la Fortune) has been changed to real estate wealth tax (IFI – Impôt sur la Fortune Immobilière) and the evaluation of net assets no longer includes non-real estate assets.
All the other rules surrounding the old wealth tax indicated above, remain the same:
• the same progressive scale of wealth tax
• the 30% allowance applied to the value of the primary residence
• the exemption for professional assets and the other exceptional/ collectable assets
• the five-year rule exempting new residents from wealth tax on foreign assets
However, with regards to deductible debts, these have been restricted, as follows:
• purely debts related to the real estate assets (property taxes) are now deductible
• and with regards to deduction of outstanding mortgage capital, only certain types of mortgages are acceptable as a deduction (any loan linked to the taxpayer or their family is no longer acceptable), and interestonly mortgages are no longer treated as having the same capital outstanding each year (a pro-rata calculation is made as if this were a repayment mortgage).
HOW IS WEALTH TAX CALCULATED?
If net assets are valued at less than €1.3 million, there is no wealth tax to pay. However, if net assets are valued at in excess of €1.3 million, wealth tax is due on everything over and above €800,000 on a progressive scale according to the following table:
From January 2018 the old wealth tax (ISF – Impôt sur la Fortune) has been changed to real estate wealth tax (IFI – Impôt sur la Fortune Immobilière) and the evaluation of net assets no longer includes non-real estate assets
It should be noted that a reduction is applied where the net value of assets just exceeds the threshold (between €1.3 million and €1.4 million). Reductions may also be possible for residents in the case of charitable donations.
Previously, there were also reductions for investments in small French start-up businesses but this has been scrapped from January 2018.
Wealth tax is also capped according to the accumulation of income tax and wealth tax.
HOW IS WEALTH TAX DECLARED AND WHEN IS THE PAYMENT DUE?
There is no longer a distinction according to value of property and all real estate assets, if they exceed €1.3 million, must be declared within the income tax return on a special annex. This is a new rule and we have yet to see what information will be required. What it does mean is that the tax does not need to be paid in advance; the bill will be sent out at the same time as the income tax bill once the returns have been processed.
CONSEQUENCES OF NOT COMPLETING A WEALTH TAX DECLARATION
The wealth tax declaration, like the income tax declaration, is a sworn statement/‘declaration of honour’, meaning that it is up to the property owners to make a declaration if they consider their assets to be valued in excess of the wealth tax threshold. Should no declaration be made and should the tax authorities be aware of the assets, they could oblige the owners to justify the value of their assets and demand payment of back-tax over a minimum of six years. It is therefore important to keep up to date with market values and to be able to provide proof of real estate asset values in case of inspection.
WHY DID MACRON CHANGE TO A REAL ESTATE WEALTH TAX?
Emmanuel Macron believes that the quality of investment in France is poor and feels that taxpayers have been put off by the complex taxation of financial investments, both with regard to income tax and social taxes, along with the additional taxation of wealth.
The Macron government wanted to motivate taxpayers to invest in French investments, in a general bid to increase private investment and innovation in
France. In addition to taking these capital assets out of the wealth tax declaration, he has also implemented a flat tax rate on capital investment income of 30% (to include a fixed rate of income tax at 12.8% and fixed social taxes of 17.2% – increased from their previous rate of 15.5%).
These changes will affect a large number of households whose assets are made up not only of property, but also of financial investments. By taking out the financial investment element of the assets and maintaining the 30% tax-free allowance on the primary residence, some households will see a considerable reduction in their wealth tax bill and others will no longer be liable for wealth tax at all, as their real estate assets may themselves now fall outside of the €1.3 million threshold!
Of course, some are already saying that this new measure particularly helps a certain category of taxpayers who are considered to be well off. But Macron’s budget also concentrated on the more modest taxpayers, phasing out taxe d’habitation for up to 80% of French households over the next two years and reducing social charges on salaries, so he has also tried to give incentives for the creation of new jobs, reducing the number of people who will need benefits, thus helping households of all means.
The implementation of these new rules could mean that it may be a good opportunity to look at reorganising assets in a more tax-efficient manner.
Debbie Bradbury is coordinator of English-speaking clients at accountancy firm SAREG sareg.com
* The information provided in this article comes from the French legislation voted in the 2018 French Finance Law (December 2017), for which the definitive legal texts still need to be published.