For years, wealth tax has been a cause of concern in France. It has often deterred many wealthy non-residents from considering French residency. We have seen many people resort to some extreme measures such as setting up trusts or foreign companies to avoid this wealth tax. These can often land people in hot water and come with some serious complications. But is this tax truly as daunting as it seems? Let’s take a closer look and try to give you a better understanding of wealth tax in France before attempting to take any action.
Wealth Tax is Now a Property Wealth Tax
An important point that many people are still unaware of is that since the beginning of 2018, wealth tax in France has transformed into a property wealth tax known as “impôt sur la fortune immobilière” (IFI). Early in his mandate, President Macron replaced wealth tax with a real estate wealth tax. This change means that today, in Europe, only Norway and Spain impose an actual wealth tax. France, on the other hand, has a partial wealth tax, joining Italy in its approach.
Is France’s Property Wealth Tax Fair?
While nobody relishes paying taxes, it is worth considering that France’s property wealth tax can be viewed as one of the fairest taxes. Allow me to make my case. Firstly, this tax only affects individuals with net property assets valued over €1,300,000. Secondly, as I will illustrate later, the tax rates are typically manageable for the majority of those liable. Finally, individuals effectively have the option to choose whether or not they wish to pay this tax. If you prefer to avoid it, the solution is simple: you can opt to sell property in order to maintain net property assets valued below €1,300,000.
Do You Need to Pay Property Wealth Tax?
It is true that as real estate prices continue to increase around the world, including in France, that many people are now being compelled to consider this conundrum: to pay or not to pay? So let’s shed a little light on the matter with a few examples to illustrate things. Here, at Kentingtons, we have often found that hard facts can help break down and dispel common myths and preconceptions.
To begin, there are two important IFI allowances to consider:
- A 30% allowance applies to the value of your main residence.
- Property located outside France is exempt from taxation during the first five years of residency.
This second point means that those relocating to France from another country have plenty of time to plan. However, it is important to consider potential capital gains tax implications when selling property, whether in the country of origin, France, or both. Timing plays a crucial role, making it ever more important to plan ahead.
Example Scenario 1 – Mr. & Mrs. Brown
Let us consider the hypothetical case of Mr. and 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 applied to their main home, their net estate value amounts to €1,180,000, thereby exempting them from property wealth tax.
As you can see, one does need to possess significant wealth to be liable for this tax.
Example Scenario 2 – Mr. & Mrs. Jones
Now, let’s look at another scenario involving Mr. and Mrs. Jones. Their main home is valued at €1,000,000 (€700,000 after applying the 30% allowance). Additionally, they own a second home valued at €650,000 and a rental property valued at €350,000, with an outstanding mortgage of €150,000.
While it is beyond the scope of this article to provide a full calculation, based on these figures, the IFI payable would amount to €4,220. This represents less than 0.23% of the real net value of their property estate, supporting my earlier claim that IFI is manageable for the majority of those subject to it.
A Positive Note – Charitable Deductions
Finally, I would like to conclude on a positive note. Within an annual limit of €50,000, individuals can deduct 75% of payments made to eligible charitable organizations. In the case of Mr. and Mrs. Jones, they could decide to donate €5,627 to charity, resulting in no IFI payment at all!
As you can see, for the vast majority, there is truly no reason to be afraid of the property wealth tax in France.
Understanding the intricacies of property wealth tax in France is essential for those residing in or considering a move to France. By recognizing the specific criteria and allowances, as well as considering the potential impact on net property assets, you can make better informed decisions. As always, you are well advisable to seek professional advice and take you time to consider your options to ensure compliance with the latest financial and tax regulations, while at the same time working towards your personal financial goals. Remember, with proper knowledge and planning, the property wealth tax should not be a cause for alarm. If you would like to discuss your own wealth planning options with Kentington’s do not hesitate to give us a call.