For many years wealth tax cast a shadow over France, scaring off wealthy non-residents from even considering becoming French resident. We still see people going to extremes to avoid wealth tax, setting up trusts (which do not work in France and can give rise to serious problems) and setting up foreign companies to own their assets, or indeed a combination of the two. These tend to land people in hot water. So how scary is this tax and what do we need to know before attempting to take any action?
Wealth Tax is Now a Property Wealth Tax
The first point to note (and surprisingly, many people are still not aware of this) is that since the beginning of 2018, wealth tax has been transformed to only a property wealth tax, known as impôt sur la fortune immobilière (IFI).
Early in his mandate, president Macron abolished wealth tax and replaced it with a real estate wealth tax. This means that today, in Europe, only Norway and Spain have an actual wealth tax. France joins Italy, with a partial wealth tax.
Some find it unfair that property has been specifically targeted in this way. I would counter that whilst, clearly, nobody likes to pay tax, arguably France’s property wealth tax is one of the fairest taxes there is. A fair tax! I hear some scream. Well, let me state my case.
Most importantly, this tax only affects those with net property assets valued over €1,300,000. Secondly, as we will see later in this article, the tax rates should be perfectly manageable for the great majority of those liable. Finally, this is a tax that people can effectively choose to pay, or not. If you do not wish to pay this tax, the solution is simple; one would elect to sell property, so as to have net property assets valued under €1,300,000.
Do You Need to Pay Property Wealth Tax?
It is true that with real estate prices continuing to rise around the world, including in France, more people are being obliged to consider this conundrum. To pay, or not to pay; this is the question.
To shed additional light on the dilemma, the simplest solution is to look at one or two examples. At Kentingtons we often find that hard facts can help to break down myths and preconceptions.
To start with, there are two important IFI allowances to be aware of:
- A 30% allowance is given against the value of your main residence.
- Property situated outside France is exempt for the first five years of residency.
This second point means those moving from another country to France, have plenty of time to plan ahead; although of course if/when selling, one also needs to consider any eventual capital gains tax, be that in the country of origin, or in France, or in some cases in both countries. Timing can be crucial; hence it is worthwhile planning ahead.
Let us now consider the hypothetical example of Mr & Mrs. Brown. Their main home is valued at €1,000,000 and they have a second home valued at €480,000. With the 30% allowance on their main home, their net estate is valued at €1,180,000, meaning there is no property wealth tax to pay.
As you can see, one does indeed need to be wealthy in order be liable to this tax!
Let us consider one more scenario. Mr and Mrs. Jones. Their main home is valued at €1,000,000 (€700,000 after the 30% allowance). They have a second home valued at €650,000, as well as a rental property valued at €350,000, on which there is an outstanding mortgage of €150,000.
It is beyond this article to illustrate the full calculation, but on this basic basis the IFI to pay would be €4,220. This represents less than 0.23% of the real net value of the property estate; hence my earlier claim that IFI should be perfectly manageable for the great majority of those liable.
Finally, if I may, I would like to conclude on an even more positive note.
Within an overall annual limit of €50,000, one can deduct 75% of the payments made for the benefit of certain charitable organisations. Hence, Mr and Mrs. Jones may decide to donate €5,627 to charity, and thereby pay no IFI at all!
You see; for the vast majority, there really is nothing to be scared of.
This article was first published in the Connexion November 2021