Once you have agreed to buy the house, you should change your money. You are tied to a purchase in euros and, until you change your money (or reserve your rate), you will not know how many UK pounds that is going to cost you.

C. French inheritance, searches and surveys

Compromis signed, deposit paid, euros secured: what now? The searches begin on the property: ownership, land boundaries and rights of way.

Surveys are not always done in France. Unlike the UK, even banks lending on property often only drive by the property to check it's there! There are surveyors in France and you can have a full UK-type survey done but many buyers in France do not take this option. Many will have a registered builder's opinion on the property. You should discuss the options with your agent when first deciding to buy the property.

You will need to take advice on your inheritance provision. The inheritance of your property is subject to French law and the provision made has to be included in the house-buying contract.

D. The final signing

It is important to make sure you transfer the balance of your payment to the notaire's account in plenty of time for the signing date. This date should have been agreed with the seller, via your agent or adviser and it is important you meet the deadline. Missing the completion date can mean you lose the house and the deposit! This may also involve your mortgage lender who, where relevant, must ensure the completion monies are in the notaire's account in plenty of time. No transaction will complete until all monies have been cleared in the notaire's account.

The signing in France is definitely an occasion to attend. Held in the notaire's office, the formality of the day perfectly underlines the significance of the transaction, the handing over of a property from one family to another.

If you are not able to be in France for the signing, you can arrange a power of attorney for it to be signed in your absence.

Your agent should arrange for you to view the property on the day of the signing. Effectively, the final contract (projet) has a clause saying 'sold as seen on signing date', so it's important you know what state it is in! Money cleared, contract read, understood and signed: the property is yours!

TAX

A.   French tax residence

You will become a tax resident of France if at least one of the four following tests is satisfied:

1. France is your main residence or home (foyer fiscal). If your spouse and children live in France you will be considered French tax resident even if you work abroad.
2. OR France is your sejour principal. This usually means more than 183 days in France per calendar year. However, an individual who spent only four months in France, with the other eight months spread among six countries, was deemed to have their sejour principal in France. Usually, the French tax authorities will accept an individual as being non-French resident if you have spent more days in one single other country than France.
3. OR Your principal activity is in France, e.g. occupation is in France (whether salaried or not), or your main income arises in France (whether salaried or not).
4. OR 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 from where a larger part of income is drawn.

To put it another way, in order to show that you are not resident in France then you must prove that:

1. Your principal residence is located outside of France
2. AND You spend less than 183 days per year in France
3. AND Your main income is not in FranceOR
4. Whilst a resident in France, under French law, you have been specifically deemed to be a French non-resident as you are a resident in another country with a Double Tax Treaty, and under the specific provisions of the Treaty you are correctly deemed to be a non-French tax resident.

If you are tax resident in France, then you will become liable to pay tax on your worldwide income, capital gains and wealth and it is your responsibility to make yourself known to the French tax authorities and make a full declaration. If you become French tax resident it has effect from the day after you arrive.

The French tax year is the calendar year. In France, taxes are declared a year in arrears. Thus income earned in 2002 is declared on your tax return due by March 15, 2003.

For tax purposes France consists of mainland France, various small islands in French coastal waters (but excluding the Channel Islands), Corsica, and those overseas territories known as Departments Outre Mer(DOM) - but not the Territoires Outre Mer (TOM) - and for French nationals, the Principality of Monaco. It includes territorial coastal waters in a band 12 nautical miles wide.

The UK-France Double Tax Treaty

You can be resident under the rules of both the UK and France simultaneously. However, the UK-France double tax treaty must then deem you to be resident in only one country.

The UK-France Double Tax Treaty has a “tie-breaker” clause that comes into operation if you are resident both in the UK under the UK rules and in France under their rules. The purpose is to determine in which country you will be regarded as resident for the purpose of taxes covered by the agreement – it cannot be both.

The agreement works as follows:

• If you are resident in both countries according to each country’s domestic rules, you are deemed to be resident in the country in which you have a permanent home available to you.
• If you have permanent homes available in both countries, you are deemed to be a resident in the country that is your centre of vital interests, i.e., the country with which your personal and economic relations are the closest.
• If this test is indeterminate, you are deemed to be resident in the country in which you have an habitual abode, but if you have one in both countries, you are deemed to be resident in the country of which you are a national. UK nationals will at this point be regarded as UK residents.

Husband and wife have different tax residences

When one spouse is living in a home in France, but the other is living mainly elsewhere, the question of whether the spouse living outside France is treated as a French resident depends:

1. on the application of any relevant double tax treaty and, failing that, on
2. whether the couple are ‘living together’ (i.e. they have a vie commune).

There are two ways of being married in France. If the couple is married under ‘community’ property rules, it is likely that they will be regarded as living together, so that the absent spouse will be considered to have his or her ‘household’ in France.

However if the couple are married under a ‘separate estates’ regime (as most couples from common law countries such as the UK are) and they are living under separate roofs, the couple may be taxed separately.

If one of the spouses is treated as a non-resident, the couple are exposed to French income tax on:

1. the worldwide income of the resident partner; and
2. the French source income of the non-resident partner.

Carte de Séjour

If you are to stay in France for more than three months in a calendar year, you are required to obtain a Carte de Séjour if a citizen of another EU country.

This does not necessarily mean that you are French tax resident, but the tax authorities will be alerted about your presence.

You will need to present your passport to the local prefecture, and provide evidence of income (which varies by region – but is usually about £6,500 p.a. as a guideline – it tends to be less if you own rather than rent a home in France).

The Carte de Séjour is usually issued for a 5 year period but may be less if, for example, you are a student.

B.   French Income Taxes

There are four forms of tax on income (and capital gains):

1. Income tax at scale rates (on rental income, earnings, pensions, some investment income and most capital gains) up to a top rate of 49.58 per cent (2002 income).

Net income subject to tax (a)Up to €4,191…(b)€4,191 to €8,242…(c)€8,242 to €14,506…(d)€14,506 to €23,489…(e)€23,489 to €38,218…(f)€38,218 to €47,131…(g)Over €47,131

Band (a)€4,191…(b)€4,051…(c)€6,624…(d)€8,983…(e)€14,729…(f)€8,913…(g)N/A
2003 tax rate for 2002 income (per cent)

a)nil…(b)7.05…(c)19.74…(d)29.14…(e)38.54…(f)43.94…(g)49.58

Tax on band (a)nil…(b)€286…(c)€1,237…(d)€2,618…(e)€5,677…(f)€3,916…(g)N/A
Cumulative tax (a)nil…(b)€286…(c)€1,522…(d)€3,854…(e)€8,294…(f)€9,593…(g)N/A

2. Income tax at fixed rates (eg. 15 per cent at source on bond or bank interest; 16 per cent on certain capital gains such as on shares or funds).
3. Social charges which total eight per cent on earnings, or ten per cent on most investment income and 6.7 per cent on pensions. Part of these charges can be deductible in calculating the tax due on income charged at the scale rates.
4. Health contributions which are eight per cent over a threshold.

If your gross income before deductions is less than €8,404 you are effectively exempt from French income tax because of general deductions called the Decote and the Franchise which relieve small liabilities. Depending on other more specific exemptions and allowances the tax-free figure can be even higher in practice.

Income Tax at Scale Rates – Family Parts System

The taxable income to be assessed is the total income of the household. To avoid the higher rates of tax where there are two or more household members, the family is divided into a number of parts (the quotient familial).

The total income is then divided by the number of parts and the income tax scale rates applied to this lower figure. Having computed the income tax due, it is multiplied back up by the number of parts to produce the total liability.

Thus, whilst French income tax rates, at first glance, are higher than in the UK (maximum rate of 40 per cent in the UK, as opposed to France’s almost 50 per cent and at lower thresholds), a married couple''s income would be divided into 2 parts, with an additional half part for each of the first and second children, and a whole part for the third and subsequent children.

For example, if you have a married couple with four children the family would be entitled to 5 parts. This also applies to other categories of dependent persons such as sick or disabled members of the family who are dependent upon the married couple. A single person, without dependents, is entitled to only one part.

Parts
Single, divorced, separated, widow, widower 1

Married 2

Extra parts

Single and invalid +1

Single and one dependent child +1

Single and two dependent children +1

Single and third dependent child +2.5

Extra dependent children +0.5

Married and invalid +1

Married and one dependent child +1

Married and two dependent children +1

Married and third dependent child +2

Shared child (divorce/separation) 0.25 per child(0.5 for third child onwards)

Dependents are children under 21, student children under 25 and invalid children of any age.

Limit of Permitted Adjustment to Household Income

If the effect of using the parts system produces a tax bill which has been reduced by more than _2,051 per extra half part compared to what it would have been without it, then the deal is off and you are not allowed to use the system. You will always receive two parts for a married couple though.

There are also other statutory limitations to the maximum savings achieved under this scheme.

Deductions from Gross Income Before Calculating Tax Due

There are some general deductions from your gross income before tax is calculated. These are:

• Maintenance payments (in cash or kind) to:
• A parent.
• A needy adult child or one who benefits from payments under a court order.
• A minor child of a divorced parent where the child lives with the other parent – made under a court order or voluntarily.
• A wife/husband under a court order.

• A part of the social charges payable on some income.
• Certain losses brought forward and under various tax incentive schemes.
• Certain investments in French cinema.

Deductions from Net Income Before Calculating Tax Due

From the net income of the household, calculated as above, there are various possible deductions:

• If you are an invalid (as defined in France, meaning at least 40 per cent disabled) or,
• If you are 65 or over:
• An allowance of either €809 or €1,618 for 2002 where net household income is no more than €9,960 or €16,090.
• The allowance is doubled if husband and wife are both 65 or over, or invalid.
• If you have a child who is married and either under 21, or under 25 and still a student or in military service, they can be brought back into your family for tax purposes. You can then claim an allowance of about £350 for each of them and their children.

Tax Credits

Various tax credits are available. These are deducted from the tax otherwise payable as calculated above.

The rules are complex. They include credits for:

• Mortgage interest in a small number of cases where mortgages wee taken out before 1st January 1998.
• Renovation of your main home and installation of major or energy-saving equipment.
• Life assurance premiums – in a small number of cases.
• Charitable donations.
• Certain child-minding expenses.
• 50 per cent of the cost of employing a home help – to a maximum credit of _3,700 per annum generally and €6,900 where a member of the household is an invalid
• If you are over 70, 25 per cent of the costs of residential care - to a maximum credit of €575 per annum.
• Allowances for children in school – amounts vary between _60 – _180 per child.

Tax Rebates – the Decote and Franchise

If the tax due, calculated as above, is less than _772 you will receive a credit of the difference between the tax liability and the rebate level – calculated in a rather convoluted way. This is the Décote.

A final tax liability of less than €61 it is not collected – this is the Franchise.

As a result, a tax liability of €297 or below thus ends up wholly relieved and not collected – representing the amount of tax due on €8,404 of income for 2002.

Social Charges

Social charges now raise more tax in France than income tax. Almost all earned income is charged at an additional eight per cent, and unearned income (including capital gains) at ten per cent. This is in addition to the scale rates or fixed rates of income tax described above. There are no allowances or reliefs other a five per cent reduction in pensions and salaries, and a proportion of the social charges can be deducted from income for tax purposes.

The eight per cent rate divides into:

CSG 7.5 per cent Contribution sociale généralisée

CRDS 0.5 per cent Contribution au remboursement de la dette sociale

For pension income the CSG is reduced to 6.2 per cent (so total is 6.2 per cent + 0.5 per cent = 6.7 per cent). They are not payable on UK pensions as long as you are receiving the UK state retirement pension (or certain other long term benefits) and thus covered by the UK Form 121 exemption or, if below retirement age, covered by the Form E106. The Form E106 allows you to avoid paying the social charges for up to an initial 2_ years.

The increase from eight per cent to ten per cent is due to the PS (Prélèvement sociale) of two per cent and applies to rental income, annuities, and capital gains as well as other forms of investment income. The effect is:

Pensions – 6.7 per cent

Earned income – eight per cent

Capital Gains – ten per cent

Rental Income – ten per cent

Annuities – ten per cent

Dividends – ten per cent

Social Charges – Deductions

Where income is assessed to tax at normal scale rates (rather than the fixed rates), part of the CSG paid in respect of the income is deductible from it before the income tax is computed. When the CSG is payable at 7.5 per cent, 5.1 per cent is deductible from the income. When the lower rate of 6.2 per cent is payable, 3.8 per cent is deductible. So CSG on bank interest and capital gains (which are on fixed income tax rates) are not tax deductible.

Social Charges – EU Earnings Outside of France

Note that CSG and CRDS are not payable on salaries or self-employed earnings earned elsewhere in the EU if the earner is registered and covered for health under the foreign social security system in connection with those earnings, or he/she qualifies under the Form E106 system.

Exemptions

Certain savings accounts (eg. Livret A, CODEVI) are exempt from social charges.

Health Contributions – CMU

You may be liable to pay another eight per cent as contribution to the French health system on household income in excess of _6,609 – see separate article.

C.     French capital gains

Capital gains of French residents are mostly taxable at the income tax scale rates except for those taxable at fixed rates such as the 16 per cent rate on shares and securities.

Also, non-residents pay tax at a rate of 33.3 per cent on gains on French property.

There is no tax on capital gains on death or on gifts; instead there would be succession tax (see separate article) on the assets valued as at date of death, or date the gift was made.

From January 1, 2003, sales of French shareholdings of less than €15,000 are exempt from tax on any gains arising from the disposal. In addition, losses can be carried forward ten years (previously only five years).

The taxation of capital gains on the sale of real estate is shown below.

Are you French tax resident?

YES?
Is this your main residence? (see Note 1)

YES?
No tax is payable.

NO?
Have you owned the property for more than 22 years or is it a property outside of France?

Are you French tax resident?

NO?

Do you qualify under Note 2?

YES?

No tax is payable.

NO?

Have you owned the property for more than 22 years or is it a property outside of France?

YES?

No tax is payable.

NO? See Note 3 to calculate the gain. Are you a French resident?

NO?

Gain taxed at 33.3 per cent.

YES?

Gain taxed at normal scale rates (see Note 4)

Note 1

Principle residence relief – you must have occupied the property for at least five years in total (whether continuously or not) or from date of completion until date of sale.

Note 2

A resident of an EU country (e.g. UK) or a country where France has a Double Tax Treaty containing an anti-discrimination clause can be exempt from tax on the gain of one residence in France if:
They do not own their principal residence (e.g. it is rented)

AND

The sale of the French property is at least two years after any sale of a principal residence

AND

They have owned the French property for at least five years

AND

They have been resident in France for at least one year at some time in the past

AND

They have made at least one French income tax return in the last five tax years.

Note 3

The gain is the difference between sale and purchase price (or probate value if inherited).

You may then deduct:

a) Ten per cent of the purchase price for acquisition costs (or more if documented).

b) Fifteen per cent for repairs and improvements (or more if documented).

c) If a long-term gain (more than two years), an allowance for inflation on the purchase price and then a five per cent reduction in the gain for each complete year of ownership after the second year.

d) A general allowance of €915.

e) If the gain results from a taxable sale of a second home, and it has been owned for 5 years, a married couple can deduct €2,287 from the gain plus €305 per child.

Note 4

One-fifth of the gain is added to taxpayer’s income, the normal income tax scale rates are applied, and the increase in tax payable is then multiplied by five.

Using a Fiscal (or Tax) Representative

When you are non-resident you are required by law to make a capital gains declaration and this must be supported by a tax representative accredited by the French Tax Authority.

This is also the case if your SCI is selling a property. The SARF is one such representative (www.sarf.Fr/Anglais.htm) who guarantees the accuracy of the calculation and the payment of the tax, and will deal with any litigation which may arise.

The SARF usually charges one per cent of the sale price, but you are not obliged to appoint them. The non-resident can also appoint the purchaser, an accountant or a Notaire as tax representative if they have been accredited by the French tax authorities. It can take several months for the tax authorities to accredit a French tax resident as a tax representative of a non-resident.

You do not need to appoint a tax representative if

You have owned the property for over 22 years (as there’s no tax to pay).

OR
The global sale price does not exceed €100,000.

D.   French wealth tax

Wealth tax is known as ISF – “Impot de Solidarité sur la Fortune.

Individuals who are resident in France on January 1, and non-residents with assets in France, are taxed on the value of their assets at that date each year.

Residents are liable on their worldwide assets including all residences. Non-residents are only liable to tax on their French assets excluding portfolio investments and cash.

The tax is calculated on the total wealth of the household, including spouse and dependent children.

Taxable assets include real estate, cars, other vehicles, debts due to you, furniture (except antiques), horses, jewellery, shares, bonds, redemption value of any life assurance, endowments etc.

Wealth tax, income tax, tax on capital gains, and social charges cannot exceed 85 per cent of the net taxable income and gains of the household and where it does the wealth tax is accordingly reduced euro for euro (but to no less than 20 per cent of what it would otherwise have been).

Where the wealth exceeds €2,300,00, the wealth tax cannot be reduced to less than 50 per cent of what it would otherwise have been.

Own French Home

Following a decision in the Supreme Appeal Court, the fair market value of an owner occupied residence may be reduced by 20 per cent for wealth tax purposes.

Let properties can be similarly reduced by 10 to 40 per cent depending on the duration and nature of the lease.

Rates

The rates for 2003

Gross Worldwide Assets…Tax

Under €720,000…zero per cent

€720,000 to €1,160,000…0.55 per cent

€1,160,000 to €2,300,000…0.75 per cent

€2,300,000 to €3,600,000…1.0 per cent

€3,600,000 to €6,900,000…1.3 per cent

€6,900,000 to €15,000,000…1.65 per cent

€15,000,000 upwards…1.8 per cent

Exemptions

• Certain business assets are exempt from Wealth Tax including:

Let properties where the owner is registered at the Register du Commerce et des Sociétés (RCS) as a Loueur en Meublé Professionnel (Professional Furnished Landlord),
AND
The gross letting income from the activity exceeds €23,000 per annum, and represents more than 50 per cent of the taxpayer’s “business” earnings.

• Works of art, sculptures, literary, artistic rights (in the hands of the original author/artists) and historical collections and vehicles are exempt.
• Deductible liabilities include tax liabilities, property and occupier rates, mortgage, credit card debts and any outstanding bills at January 1.

Example:

For a family with a collective net fortune worth €4,420,000, the Wealth Tax payable would be €34,630 in 2002.

Filing Returns

French nationals who are tax resident, have until June 15 each year to file the report and pay the tax. Other EU nationals, e.g. UK nationals, have until July 16 to file the report. All others have until September 1.

Offshore Assets

From January 1, 1999, shares and interests in offshore companies and trusts owned by French residents are now liable to wealth tax.

This does not apply to irrevocable Discretionary trust or where a non-resident of France has a life interest.

E.   French succession tax on gifts and inheritances

French succession tax is the equivalent of the UK’s inheritance tax. It is a tax on both lifetime gifts and inheritances. The main differences are:

INHERITANCE TAX: UK

a)No tax between husband and wife as long as survivor is UK domiciled.
b)The first £255,000 is always tax free regardless of who the assets are passed to e.g. your children.
c)If you give assets away and survive seven years, there’s no UK IHT (called a “PET”– Potentially Exempt Transfer). There’s no limit in value of gifts.

SUCCESSION TAX – FRANCE

a)There is tax between husband and wife and it starts at assets over €76,000
b)Each child receives €46,000 tax free after which it is taxable.
c)No exemption: if you give away more than the above allowances, there’s French succession tax payable immediately. Every ten years, the allowances (€76,000 for a spouse and €46,000 for each child) are renewed.

Gifts Tax Exemption

The tax only applies to gifts if they are made by formal deed or with judicial recognition. A lifetime gift made simply by manual transfer is not therefore normally taxable (unless it is revealed to the tax administration), although such gifts are brought into account when inheritance tax is calculated where the donee is among the legatees of the estate and the gift was made less than 10 years before.

Gifts Tax Scope

(a) The gift is taxable if the donor is resident in France.

(b) Since 1st January 1999, a gift is also taxable if the recipient is resident in France and has been so resident for at least 6 of the 10 tax years prior to the year in which the gift is received.

(c) A gift from one non-resident to another non-resident is taxable if the gift is French real estate.

Rates and Allowances: Gifts on Death

The allowances are:

Interspouse transfer: €76,000

To children (each child): €46,000

To parents (each parent): €46,000

To children on your divorce (up to age 18): € 2,748 per annum, per child

To unmarried brother or sister over 50 or invalid and who has lived with deceased for at least the last

five years: €15,267

To a disabled person – additional to above: €45,800

To any other person: € 1,526

The allowances renew every 10 years.

There are varying tax rates, between five and 60 per cent, depending on the amount of inheritance

and the relationship.

Rates for so-called “strangers” – including unmarried partners – is a flat 60 per cent with no exemption. So transfers between unmarried couples are very heavily taxed.

Unmarried couples can reduce the tax rates from 60 per cent to 0 per cent, 40 per cent and 50 per cent by entering into a PACS agreement (see separate article). You can only enter into a PACS agreement if French tax resident.

If you have shares in a business, the value is reduced by 50 per cent in calculating the tax due. The deceased must have held the shares for more than 3 years, the investors must keep these for 8 years and at least one heir must either work full time in the business or exercise the function of a Director.

If quoted company, the deceased must own 25 per cent, and 34 per cent of the equity if unquoted.


Community Marriage Contract

For jointly owned assets, if you change your marriage contract to ‘Communaute’ (the UK marriage contract is considered as ‘Separation de biens’ under French law) then:

(a) The surviving spouse automatically inherits, and the asset does not have to pass to the children of the deceased (which would happen under separation).

(b) There’s no French succession tax on these assets (but there would be if the contract remained as ‘Separation’, or on any assets not in joint name).

You cannot have a community marriage contract if there is a child by another relationship unless the other spouse legally adopts that child.

Gifts or Inheritances from Overseas

From January 1, 1999, gifts or inheritances received from persons not domiciled in France are liable to succession tax in France. The gift does not have to take place in France.

Neither does the donor or deceased have to be resident France. Distributions and advances of capital to French residents are now affected.

However this only applies where the heir, donee or legatee has been tax resident in France for six of the ten years preceding the year during which he received assets.

In addition, if