If you have moved from the UK to France, and now reside in the latter country, you will need to be aware of matters concerning taxation – including whether your circumstances necessitate you completing a French tax return, and whether you may also still be liable for tax in the UK.
A common concern for expats is understanding their tax obligations in both countries.
This brings us onto the subject of the double taxation convention that has existed between the UK and France for more than a decade. Navigating double taxation issues and cross-border estate planning can be complicated, especially when dealing with inheritance laws and tax treaties. The UK-France Double Taxation Convention allows for tax relief mechanisms to prevent individuals from being taxed on the same income in both countries. But what do you need to know about this treaty, and what implications will it likely have for you?
Given these complicated concerns, it is essential to seek professional advice to ensure compliance and optimise your tax position.
What is double taxation?
The term ‘double taxation’ refers to the situation of potentially being liable to tax in two countries on the same income. In such cases, income may be taxable in both countries depending on the terms of the double tax treaty. This is obviously undesirable for the person who would be subject to such tax, but it does not automatically follow that being required to pay tax in one country means you will not be liable for tax in another part of the world.
Common circumstances in which someone may be affected by double taxation, include if they are simultaneously residing in two countries, or are resident in a territory that taxes their worldwide income, and they have income and gains from another territory (and the given territory taxes such income on the basis that it is sourced in that territory). The mechanism for avoiding double taxation is typically provided by double tax treaties or unilateral relief, such as credits or exemptions. The terms of the treaty determine which country has taxing rights over specific types of income. In the absence of a treaty, domestic law will govern how tax is applied.
What are double tax treaty agreements?
‘Double taxation agreements’ are arrangements that may be reached between two countries, in order to avoid situations where people are required to pay tax twice on the same income. These agreements provide relief from double taxation by allowing taxpayers to claim foreign tax credit relief or exemptions, reducing or eliminating the risk of being taxed twice on the same income. A double tax agreement overrides domestic law in both countries involved.
The UK has various such double taxation agreements – which are also sometimes referred to as ‘double tax conventions’ or ‘double tax treaties’ – with countries around the world. So, if you are in the process of – for example – relocating from the UK to another country, you are advised to familiarise yourself with the situation on double taxation, including whether any relevant double tax treaty exists, and what it stipulates.
Please note, the application of double tax treaties may depend on specific procedural requirements and the correct claiming of relief, so it is important to understand the relevant provisions and seek professional advice if needed.
Double taxation conventions often set out which country covered by the given agreement has the right to collect tax on different types of income, and the provisions of the treaty apply in respect of the taxes covered by the agreement.
Does the UK have a double tax treaty with France?
The current Double Taxation Convention that applies between the UK and France was signed in London in 2008, by the then-UK Chancellor of the Exchequer Alistair Darling, and the then-Finance Minister in the French Government, Christine Lagarde. It replaced the original treaty signed between the two countries in 1968.
This new treaty took effect in France from 1st January 2010. It was effective in the UK from 1st April 2010 for corporation tax, and from 6th April 2010 for income tax and capital gains tax.
What is covered by the UK/France double taxation treaty?
The text of the most recent double taxation treaty between the UK and France reads that the agreement applies “to persons who are residents of one or both of the Contracting States.”
The following taxes are covered by the convention:
- In the case of the United Kingdom, the income tax, the corporation tax, the capital gains tax, and inheritance taxes, including UK inheritance tax. Different rates may apply to each type of tax, depending on the nature of the income or assets.
- In the case of France, the income tax, the corporate tax, the social contribution on corporation tax, the tax on salaries, social security contributions, and inheritance taxes. As with the UK, various rates are applied to different categories of income, assets, or beneficiaries.
Certain individuals, such as spouses or civil partners, may be exempt from inheritance taxes under the treaty. Beneficiaries may also be entitled to credits for inheritance tax or other taxes paid in the other country, helping to avoid double taxation.
The convention also applies to any “identical or substantially similar taxes” to the aforementioned taxes, which either the UK or France imposes in the future. The relevant authorities in each state are also required to notify the other in the event of any alterations to their taxation system.
What are the most relevant points of the treaty for those moving from the UK to France?
Before April 2015, it was possible to sell UK property as a non-UK resident and be exempt from UK Capital Gains Tax. The Autumn Statement in 2013 confirmed that non-UK residents would be assessable to Capital Gains Tax on gains arising on the disposal of UK residential property, and this indeed came into effect via the 2015 Finance Act on 6th April 2015.
Tax is only assessed on gains from this date, so gains before 6th April 2015 are not considered. The assessable gains are calculated via a time apportionment calculation.
The good news is that the French authorities will offer 100% credit for any tax paid in the UK to any tax that they apply. Moreover, the UK annual Capital Gains Tax allowance is available to non-residents.
This rule change does not create a significant problem, though it may cause further complications for UK property owners, as they would be duty-bound to declare and be assessed in both countries. However, it does mean that planning for French Capital Gains tax remains necessary, since clearly there will be no credit for taxes paid elsewhere.
Also significant about the latest version of the UK-France double taxation agreement is that it retains the property wealth tax “holiday” for UK nationals relocating to France. For a British national’s first five full French tax years after they become a resident of France, their wealth tax liability will only be based on French assets, with all other assets being ignored. From the sixth year of residence, however, the affected individual will need to pay wealth tax on worldwide property as normal. The tax implications of this arrangement are particularly relevant for nationals of both countries, as cross-border estate planning and tax obligations can be complex.
In the event of an individual who has been a French resident becoming non-resident for a period of at least three years, followed by them becoming a resident of France again, the five-year exemption period will begin again.
Overall, understanding the tax implications of the treaty is essential for effective cross-border estate planning, as it affects how national laws interact and determines the ultimate tax liability for UK residents, UK nationals, and other affected individuals.
How can we assist you at Kentingtons?
If your only home is in France or you are spending more time in France than anywhere else (so potentially less than 183 days) – it is crucial that you are well-informed on what difference the double taxation agreement makes to your situation.
For more information on how our team at Kentingtons could help you with highly relevant and informed financial advice for your needs as a British expatriate in France, please feel free to reach out to us via phone or email.