There are many people either moving to or living in France, who have Individual Savings Accounts (ISAs) in the UK and ask us what they should be doing with them. Some people have been saving in them since their inception in 1999 and have a substantial amount of money saved. As you may well know, as a non-resident of the UK, you can no longer add to an ISA, but merely hold it.
Can a French Resident Continue to Hold or Invest in a UK ISA?
In short, the answer is yes, a French resident can continue to hold an ISA. However, there are some very important considerations and restrictions, especially concerning tax implications and the ability to invest further in the ISA.
Firstly, if you already have a UK ISA and then move to France, you can maintain your ISA and benefit from UK tax relief on money and investments held in it. However, according to the UK government’s guidelines, you cannot make new contributions to the ISA after the tax year in which you move abroad, unless you are a Crown employee working overseas or their spouse or civil partner. This restriction is crucial for maintaining the tax-free status of the ISA in the UK.
Secondly, for those seeking to open a new ISA after becoming a French resident, it’s important to note that ISA providers will not accept applications from non-UK residents. This makes it challenging for French residents to invest in a new UK ISA.
What are the Tax Implications?
For a French resident who holds a UK Individual Savings Account (ISA), understanding the tax implications is very important. While UK ISAs offer tax-free benefits in the UK, their status changes significantly when it comes to French tax laws.
In the UK, ISAs are a popular saving and investment vehicle due to their tax-efficient nature. Any income or gains generated within a UK ISA, whether it’s from cash savings, stocks, or shares, are not subject to UK tax. This allows for a significant tax advantage for UK residents. However, it is a UK tax status and thus the French will not recognise it.
When you become a resident of France, your worldwide income, including income and gains from a UK ISA, becomes subject to French taxation. Because it is not recognised in France, any income or gains from cash and share ISAs are fully taxable in France. The tax rate applied can be quite substantial. France imposes a flat tax rate of 30% on most investment income, inclusive of social charges. However, for low-income households, there’s an option to pay tax at normal scale rates instead.
It’s important to note that France’s tax system treats UK ISAs as foreign financial assets. Therefore, all income and gains from these accounts must be declared on your annual French tax return, regardless of any returns (so the mere fact that you have it). Failing to do so could result in penalties, given the global automatic exchange of information under the Common Reporting Standard, which enables the French tax authorities to be informed about your UK investments.
So what are the complications of keeping ISAs as a French resident?
Reporting, reporting, reporting!
An ISA is a UK product, designed for UK residents, that has no UK tax. As such, there is zero tax reporting! The problem is that your French tax office simply does not care and needs it! You can ask for reporting of gains and income from your ISA provider, however, they simply will not have a system in place to offer it! Why should they?
Moreover, the manager of any funds inside an ISA may behave differently. They don’t care about buying funds that are not tax-friendly, even in the UK, let alone France. They will switch around buying and selling with total impunity, not caring if there is distribution or accumulation funds. It’s all the same if it is tax-free.
This means that you may have an ISA with a huge amount of transactions and you have no reporting to deal with it, and an unsympathetic, even suspicious, French tax man.
Get your calculator out, you are going to have to take the figures that you do have and manually make up your own reports … fun! If you are lucky the French tax man may even accept your DIY calculation attempts!
Is this really how you saw your new life in France?
So what are your options?
Reducing the tax burden from ISA’s for those living in France involves strategic planning, given the differing tax treatments in the UK and France.
For those who are leaving the UK permanently, there is, generally, no sense in keeping ISAs. They are a UK-only tax status, offering no benefits in your new home country. It is best to close them before any move to France, to take advantage of their zero-tax status, as UK residents.
Even for those people who are moving temporarily, however, expecting to stay for a prolonged period, might consider at least cutting down their ISA investments. Once they have moved, any income and gains will be fully taxable in France.
For those staying for less than 5 years, it may be worth keeping them, as otherwise, it would mean starting over again, once back in the UK. Clearly, it might be a headache if the French tax office starts getting their teeth into them.
Also, some people change their minds and stay in France, giving rise to long-term tax issues as French residents, or just biting the bullet and closing them as French residents and being highly taxed.
Here are some strategies to consider for making UK ISA holdings more tax-efficient for French residents:
Consider Transferring to French Tax-Efficient Investments: One of the most effective ways to reduce the tax burden is to transfer the investments from a UK ISA to French tax-efficient vehicles like an Assurance Vie (Life Insurance). Assurance Vie offers tax benefits similar to UK ISAs and can be a tax-efficient way to hold and grow investments. Gains within an Assurance Vie are not taxed annually but are taxed only upon withdrawal, and even then, only the gain element is taxed. This could potentially lower the tax rate significantly, especially if the withdrawals are spread over several years.
Utilize French tax-efficient savings accounts: Exploring other French tax-efficient savings accounts such as the Plan d’Epargne en Actions (PEA) or Livret A could be beneficial. These accounts offer favourable tax treatments on investment gains and might suit your investment needs similar to an ISA.
Strategic Withdrawals and Timing: Carefully plan the timing of withdrawals from your ISA after moving to France. By aligning withdrawals with years where your overall tax rate might be lower, you can potentially reduce the tax impact.
Diversify Investment Portfolio: Diversifying your investment portfolio to include French tax-efficient investments can spread out your tax liabilities and possibly offer more favourable tax treatment on some of your investments.
Seek Professional Advice: Tax laws can be complex and vary based on individual circumstances. It’s advisable to consult with financial advisors who have expertise in both UK and French tax systems. They can provide tailored advice and strategies for your specific situation.
You should also keep abreast of any changes in tax treaties between the UK and France and how they might affect your investments. Tax laws are subject to change, and staying informed will help in making timely adjustments to your investment strategy.
Generally speaking, when in Rome, do as the Romans do. Therefore, it is best not to have UK investments, designed for UK residents, but French-friendly investments that match your new life in France.
In conclusion, while there’s no one-size-fits-all solution, these strategies can help in reducing the tax burden from UK ISAs for residents in France. Personal circumstances and goals should dictate the best approach, and professional advice is key to navigating these complex tax landscapes effectively.