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What changes in 2019 regarding French taxes and social charges on income, investments and assurance-vie, and how will the new PAYE system affect you?

Anyone who has been living in France a while knows how frequently tax rules can change, and how significantly too. In the last 10 years we have seen wealth tax reformed to make it less of a burden, then that reform reversed, then a complete overhaul to create a new tax. We lost a fixed rate of tax on investment income, then a few years later a new one was introduced…

All this can create headaches for effective tax planning. You need to carry out regular reviews to make sure your tax planning is up to date and you are taking advantage of the tax mitigation opportunities the French tax regime has to offer.

2019 budget

A new President usually means tax reforms, and we had that with the 2018 finance bill. The 2019 budget, however, is one of those rare occasions where very little changes. The one big change in 2019 is the introduction of a pay-as-you-earn (PAYE) system in France (see below), but that was part of the previous budget.

On the other hand, the Social Security budget for 2019 did introduce significant and potentially beneficial changes.

Income tax

There are no changes to income tax rates, though the bands have increased very slightly with inflation. The 0% rate will cover income up to €9,964 and the highest 45% rate income over €156,244. This is for your 2019 tax return, so income received in 2018.

Investment income

2018 saw the introduction of the Prélèvement Forfaitaire Unique, or ‘flat tax’ as it is commonly known. This applies to interest, dividends and capital gains on the sale of shares and securities. It does not apply to rental income.

The rate is 30%, which includes income tax and social charges, and it remains unchanged for 2019.

Lower income households can opt to use the scale rates of income tax instead (plus social charges), though that this would have to apply to all your income.

Assurance-vie

There are no changes to assurance-vie this year (though some policies will benefit from the social charges reform, see below). This is great news for savers and investors who are looking for an arrangement that provides both tax-efficient income and estate planning advantages.
 
The 30% flat tax applies to policies set up after 26th September 2017. If you have an older one you can choose whether to pay income tax at the progressive rates or the previous flat tax system, whichever is more beneficial. In both cases social charges are paid in addition.

The allowance for policies held for more than eight years stays in place for all policies (€4,600 for individuals and €9,200 for married/PACS couples).

Social charges

The main social charges rates remain the same as last year:

  • 9.7% for employment income
  • 9.1% for pensions
  • 17.2% for investment (including rental) income.

 

However, those whose pension income is less than €2,000 per month (or €3,000 for a couple) now pay a lower rate of 7.4% on this income. As always, if you hold Form S1 or are not part of the French health care system you do not have to pay social charges on pension income.

The second key reform introduced by the Social Security budget for 2019 income is that, if you covered by the health system of another EU/EEA country – so if you hold Form S1 or are non-resident – you no longer have to pay the full 17.2% social charges on investment income and capital gains, and instead now pay a new lower flat rate of 7.5%. This is very good news for those affected.

Read more about social charges in 2019

Wealth tax

2018 also heralded a big reform for wealth tax. Instead of covering most of your worldwide assets, it now only applies to real estate assets. Savings and investments (including assurance-vie policies) are no longer subject to this tax.

Again, there are no changes for 2019. The current threshold of €1,300,000 remains in place. Tax rates start at 0.5% for assets between €800,000 and €1,300,000, rising progressively to 1.5% for assets over €10,000,000.

This may change next year. Following the December unrests in France, including the Gilets Jaunes (yellow jackets) demonstrations, a committee has been set up to review whether the old-style wealth tax should be re-introduced from 2020.

The 2018 reform put property at a significant disadvantage to capital investments, particularly when you consider that rental income does not benefit from the 30% flat tax either. If you are wondering where to invest, weigh up the tax considerations carefully. If you already own more than one property, it may be worth downsizing your property portfolio

Succession tax

The succession tax regime remains unchanged this year. If you have not reviewed your estate planning for a while, though, it is always worth doing so to ensure you are taking advantage of all the opportunities to lower this tax for your family and heirs – particularly where heirs will face the higher tax rates.

PAYE finally comes to France

After being in the pipeline for a number of years, the new PAYE system start in 2019. So from 1st January, French tax residents will be subject to a monthly withholding tax on their income.

Note, however, that the French system is different from what you may be used to, for example in the UK. The amount of PAYE deducted each month in 2019 will be calculated on your 2017 income, as declared in May 2018. Any balance of tax must be settled by the end of year.

Income subject to PAYE applies to (but is not limited to):

  • employment income
  • retirement income (pensions, lifetime annuities) including UK pensions
  • other overseas income which is taxable in France
  • rental income, including from French properties earned by UK residents.

 

Investment income - interest, dividends, capital gains and gains from life insurance policies/non-French assurance-vie – is excluded from PAYE. It also does not apply to non-French income that receives a tax credit in France under a double tax treaty (eg, UK rental income earned by a French resident).

For French source income, monthly PAYE will be collected by the paying agent. For all your other income, you will need to set up monthly or quarterly direct debits to pay it yourself.

No-one ever said French tax was easy. Last year’s reforms were very welcome, and many people who have savings and investments will see a difference in their tax bills this year. This year’s reduced social charges, for those eligible, will also help. But this does not lessen the need for a good understanding of the complex regime and considered tax planning. With different assets being taxed quite differently now, it is worth taking a step back and asking your local Blevins Franks tax and wealth management adviser to review your investment assets. We will make sure your tax planning arrangements are up to date and specifically structured around your family situation and your objectives.

Contact us for a tax and wealth management review


The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.