France remains a popular destination for UK holidaymakers and retirees. There are many reasons to fall in love with France, but one advantage is its proximity to Britain, enabling many people to spend time in both countries. Others fully make France their home.
Whichever camp you fall in, this proximity does not mean that maintaining interests in both countries is simple – France and the UK have different tax and succession regimes, for example.
If you spend time in both countries, carefully follow the tax residence rules to establish where to declare worldwide income and assets and pay tax.
Even if France is very much your home, you probably still have cross-border tax considerations, such as UK pensions, investments, property, not to mention heirs in the UK.
Understand how the rules apply to your family, and what steps will establish the best outcome.
Keep informed on reforms in both countries in case you need to revise your arrangements. For example, few long-term residents of France were concerned about UK inheritance tax, but it is now a bigger issue.
Read more: Letters: A tontine clause may ease inheritance fears in France
Tax planning for France and the UK
Reassess your tax planning when moving to France to ensure it remains effective. If you live in France and keep UK assets, you require a strategic solution to cover both jurisdictions.
The France/UK double tax treaty determines where cross-border income must be declared, but it can be confusing. Let’s say, for example, that you are tax-resident in France and own and rent out a UK property. You and your spouse receive UK state pension, government service and private pension income.
UK rental income is taxable in the UK, not France, but included on your French income tax return (with credit for the French tax). You benefit from the UK personal allowance and do not pay French social charges on this income.
Government service pensions are also only taxed in the UK (but also included on your French return). In contrast, state and private pension income is not liable to UK tax; you pay income tax in France, plus social charges unless you hold Form S1.
Paying tax in the wrong place could prove costly and stressful, so take professional advice. A DIY approach, or even using a UK-based adviser not experienced with French taxation, could result in higher taxation than necessary.
Ensure your tax planning is suitable for France. What was tax-efficient in the UK may not be tax-efficient here, and potentially even detrimental. ISAs are taxable in France, and you no longer benefit from the UK’s capital gains tax and dividend allowances on UK investment portfolios.
Revising how you hold investment capital, using tax-efficient arrangements in France such as assurance-vie, could significantly reduce your tax liability (plus provide estate-planning and investment benefits).
Cross-border estate planning
The UK levies inheritance tax (IHT) and France succession tax, but only succession tax will apply to your estate if you are resident (and so deemed domiciled) in France.
Except, that is, for assets in the UK, which are subject to both taxes (your heirs will not pay tax twice but will pay the higher amount of French and UK taxes).
Previously, pensions were not included as part of your estate for UK inheritance tax, but this exemption is scheduled to end soon, pushing many more British expatriates into the IHT net.
Additionally, the nil-rate bands are frozen until 2030. With asset values rising, the £325,000 threshold does not provide nearly as much protection as it used to.
The UK allows you to choose who to leave your assets to; France imposes ‘forced heirship’ rules. The European Succession Regulation enables you to opt for the succession law of your country of nationality, but is this the right decision for your family?
Your children could still make a claim against the assets located in France. Also, electing for UK laws could call your French domicile into question, potentially exposing your worldwide estate to UK inheritance tax.
Pensions
Although UK pension income may be liable to French rather than UK tax, other UK rules and charges still apply.
For UK pensions, the maximum Pension Commencement Lump Sum entitlement is £268,275. This is paid tax-free in the UK, but anything above this maximum would be taxed as income.
Furthermore, on your death your beneficiaries could pay income tax on lump sums over £1,073,100 (or lower if lump sums previously taken), or, if you die after age 75, the whole fund would be taxable.
If your beneficiaries live in France or elsewhere outside the UK, they may be able to reclaim this through the relevant double taxation agreement.
Additionally, UK pension funds will be subject to UK inheritance tax from 2027.
Transferring UK pensions into a Qualifying Recognised Overseas Pensions Scheme (QROPS) now incurs the 25% overseas transfer charge (unless you are resident in the same EU/EEA country as the QROPS and there are no QROPS in France).
Explore the options available to you as a French resident, considering the tax calculations and pros and cons of each one. While the 25% overseas transfer charge may seem prohibitive, weigh this against how much UK tax your beneficiaries could pay.
An alternative to QROPS may be to take your fund as cash and re-invest in a tax-efficient arrangement in France.
While reducing tax liabilities is a strong incentive, ensure that your decision is suitable for your circumstances and objectives and does not risk your retirement savings. Professional cross-border advice, from a firm regulated to give advice on UK pensions in France, is important here.
Cross-border wealth management can be a minefield – tread carefully. An adviser who knows their way around the tricky landscape will help you avoid pitfalls and take advantage of the opportunities France has to offer. Overall, you want to aim to get the best of both worlds while avoiding the worst of both worlds.
Read more: Wealthy retirees could be taxed more under French minister’s new proposal
Rob Kay is a financial advisor and Regional Director at Blevins Franks
