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

Living France - - Contents -

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:

FOR NON-RES­I­DENTS:

• 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.

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