The « Loi des Finances » 2010 has plugged many a tax loophole and removed many tax breaks (mortgage interest relief, solar panels, furnished rental reliefs, loi Scellier new builds, the exempt amount for capital gains tax etc).
In addition, taxes have been increased on capital gains and many forms of unearned income ; bank interest and investment income. As if this wasn’t bad enough, British retirees who are tax resident in France will see the French « fisc » taxing previously tax-exempt lump-sum amounts from British pension schemes. Typically, a British pension scheme offered the possibility of taking a 25% commutation of the pension due as a tax-free lump-sum. What was tax-free in the UK was ipso facto deemed to be tax-free in France.
Not anymore ! From 1st January 2011 the lump-sum will be taxable in France. In effect, the tax will not be applied on the full amount in year one, but will be spread in 15 equal instalments over 15 years. So, if the lump-sum was worth 150.000 EUR the taxable portion per year will be 10.000 EUR. This will be added to other pension income and – after the application of the 10% personal allowance – will be subject to French income tax at the marginal rate of tax prevailing.
Anyone considering moving to France would thus be advised to take their tax-free lump-sum prior to becoming French tax resident. By and large, pure income tax rates are lower in France. So, let’s say you had a pension of 60.000 EUR a year as a retired married couple, your marginal rate of tax would only be 8.5%, whereas in the UK it would certainly be over 20% So, perhaps the bad news on the taxing of the lump-sums has to be seen in the broader context.
Another change has seen the possibility of taking 20% of the pension emanating from a French PERP as a lump-sum. Again, this will be taxed in the same way as above, using the 15-year rule. This change pertaining to a French PERP could be good news, therefore, to anyone who has transferred a UK pension into a PERP using the QROPS regulations.
As ever, the local tax offices in France will be unaware of these changes in legislation, so consult a tax advisor before bearing your soul to the local tax inspector !