Thursday, October 14, 2010

Should I pay taxes in France or the UK?

A lot of French people live in the UK, up to 200,000 in London alone. And yet when it comes to taxes, information is scarce. If you have assets or revenue outside of the UK, some tax maybe due in France or in the UK depending on the asset class. This article tries to explain the rules, some driven by the tax treaty and some by residency. Indeed, the UK residency concept is more complex than the French one: you can be resident and non-ordinarily resident, or resident, ordinarily resident and non-domiciled. And if non-domiciled, again you have the option of being on a remittance basis or on an arising basis.

Residence and Domicile

Those 2 concepts are different in the UK and independent from one another. If you spend more than 90 days in a fiscal year in the UK you become resident. And if you come to the UK with the intention to stay less than 3 years you can get a status of non-ordinarily resident (NOR). That allows you to only pay tax prorated by the time spent in the UK. You have to be careful however to act in a way consistent with that intent. In other words, if you buy a flat, HMRC would consider that your intent is to stay longer than 3 years and they would invalidate the non-ordinarily status.

Domicile is a different concept. The domicile is driven by that of your father. If you father is not UK domiciled, you can claim to be resident non-domiciled (RND) as well. There are tax implications. Since 2008, when you are non-domiciled you have the option of being non-domiciled on an arising basis or a remittance basis.
  • The remittance basis allows you to only pay taxes on revenue when it is remitted (i.e. transferred) into the UK. In other words, if you have an equity portfolio in Jersey, any revenue from this portfolio will be tax free as long as the revenue stays in Jersey. Since 2008 however, if your foreign income is greater than £2,000, using this status makes you lose your personal allowance (the £6,475 tax exemption), your capital gains allowance (£10,100) and it will cost you £30,000 p.a. if you have been UK resident for more than 7 out of the last 9 years.  
  • The arising basis is similar to the status of domiciled tax payers: you pay tax on revenue as it arises, wherever it arises (including outside the UK). There are subtle differences however, especially when it comes to inheritance, but those are outside the scope of this blog post.
In practice, things can be quite complex. HMRC has published a paper that explains those concepts in details so feel free to refer to it. 

Double taxation and the tax treaty

When you have revenue generated outside the UK, it can be taxed in the country it arises. In order to prevent taxpayers to be taxed twice, many countries sign tax treaties defining which country taxes what. That is the case with France. A new tax treaty was signed in 2008, expanding on the previous one. It came into force on  22/12/2009 and covers income tax, capital gains, inheritance tax, but not donations (and you might be at risk of double taxation here) and not the wealth tax (since it does not exist in the UK). The rule of thumb is that:
  • Revenue from real estate assets is taxed in the country where the asset is located
  • Revenue from securities is taxed in the country of residence
Obviously there are a number of exceptions. For dividends, because they are taxed at source in France (at a rate of 15%), the taxpayer will get a corresponding tax credit in the UK. Also, for substantial disposals (share disposals where the proceeds represent more than 25% of the company), tax is due in France (at a rate of 18%).

It’s also worth noting that when selling a property in France and when you are non French resident, you might be able to escape the capital gain tax altogether (even if owned for less than 15 years) as long as the property is not rented the year you sell it, you have been French resident for 2 years or more during the ownership of the property and it’s either your first or second property in France (art. 150 U 2° du code général des impôts).

The inheritance tax

No tax due in France for assets outside of France. When it comes to shares, location is considered to be where the company is resident.

The wealth tax

The ISF (impôt sur la fortune) is a wealth tax that has no equivalent in the UK and it’s therefore not covered by the tax treaty. If you are non French resident, assets outside of France and financial assets (except for SCIs), even in France, are exempt. The rest will be subject to the ISF if valued at €790,000 or more.

Et l’assurance-vie?

Here again, it’s important to understand the rules as the implications can be significant. An “assurance-vie” is considered as a trust and any withdrawal of more than 5% of the proceeds invested is considered taxable revenue. Even for a non-domiciled person on a remittance basis. It is therefore wise to not withdraw any monies from such a vehicle while in the UK. It is a good idea however to open one while non French resident at it has some significant inheritance tax benefits when you go back to France (cancellation of the 20% tax after €152,000 upon death).

You can also check our post (in French) on steps to take when leaving France. Obviously, it is impossible to describe all possible scenarios in such a short space. We have not even touched on the stock options treatment which affects a number of entrepreneurs. This article is only intended as a quick guide on a very complex subject and you should always consult a tax advisor before taking any financial decision.