French Wealth Tax (ISF)
This page outlines
- Taxable assets for ISF
- Wealth tax rates
- Wealth tax penalties
- Wealth Tax Optimisation
- Tax ceiling (75% income)
As a high net worth individual - either resident or with significant property in France - it is critical to understand and track the changes in French wealth tax.
In his final year Sarkozy reduced ISF rates significantly, but this was immediately reversed by François Holland.
Emmanuel Macron proposes limiting ISF to property assets - renaming it IFI (impôt sur la fortune immobilière). He says he will retain the existing rates and thresholds including the 30% reduction for the main residence. Clearly the final rules will depend on the government and will be confimed later this year.
Below, we describe the rules in place prior to the elections and applicable for assets held at 1 January 2017.
Following his initial aim of significantly raising tax rates, Hollande found himself obliged by the courts to create a tax ceiling. This may not seem to be of interest at first sight (capping taxes at 75% of income). However, by living as far as possible off capital (eg withdrawing from a wrapper such as an Assurance Vie), your “income” is deemed minimal - and your taxes are therefore limited to a minimal amount too.
For those subject to ISF and not in a position to live purely off capital, there is an excellent reduction for investments in PME (small & medium sized enterprises). You can effectively choose between investing 10 in PMEs (with high risk of some loss but also a chance of gain) or paying ISF of 5 (effectively equivalent to 50% loss on 10). Given that carefully chosen PME investments do not have to be such high risk - and can be anywhere in Europe - there is plenty of scope to reduce wealth tax - both for residents and non-residents.
This website is regularly updated with any changes to wealth tax rules. Please contact us if you would like further information or assistance in wealth tax optimisation.
"Non-residents" with property in France are only liable for wealth tax on assets physically situated in France (therefore excluding purely financial investments). Residency is defined by French law and is not simply a matter of being present for 183 days. If in doubt, please contact us.
There is a partial exemption for five years from French wealth tax for most people moving to France. The exemption only covers assets outside France, so careful financial planning is necessary. Newcomers may prefer to choose appropriate foreign assets that fall under favourable French tax rules - but beware of the additional costs if living off foreign assets...
Assets must be consolidated for all members of the household. Couples must make a joint declaration whether married or not. Assets held by children below 18 years of age must also included.
- Land & buildings (Principal & secondary residences, rental property, ...)
- Financial investments (quoted & unquoted stocks & shares, bank accounts, ...)
- Jewellery and precious stones
- Cars, Motorcycles, Boats, Aeroplanes, ...
Even if you are not the owner, simply having the right to live somewhere or receive income can be enough to make you liable on the capital value. Trust assets are now clearly included.
If you own shares of a property company (eg SCI), your declaration is based on the current value of the underlying property. Any loans to a SCI are also liable to French wealth tax.
WEALTH TAX RATES
French Wealth Tax is payable by those with net assets above 1300000€ - evaluated as at 1st January.
To calculate the tax, add up the total value of assets for the household and deduct all outstanding debts and overdrafts as at 1st January
For 2017, the following bands apply (identical to the bands for 2016):
Assets (k€) ISF Rate applicable
0 - 800 0%
800 - 1300 0.5%
2570 - 5000 1.0%
5000 - 10000 1.25%
above 10000 1.5%
There is a reduction for those with assets just inside the entry level (1.3-1.4M€). The formula for this reduction is 17500€ - (1.25% x P) where P is the value of assets. The starting value for ISF (ie assets worth 1.3M€) therefore becomes 1250€ instead of 2500€.
French residents with net taxable assets between 1.3M€ and 2.57M€ declare their wealth on the normal annual income tax return in May (paper) or June (online) each year. For further details of these deadlines click here. These residents receive an ISF “avis” (statement) in August and must pay the wealth tax by September 15.
French residents with net assets above 2.57M€ complete a specific paper form by June 15 and must pay the associated tax at the same time.
Non residents subject to ISF on French assets must complete the paper form and send in their payment by July 15. There is no longer an additional delay for non-European residents. Non-residents with net assets between 1.3M€ and 2.57M€ and who receive income taxable in France (such as French rental income) must declare and pay their ISF at the same time as their income (May for paper forms and June for internet declarations - precise dates not available at the time of writing).
PENALTIES FOR INCORRECT or INCOMPLETE DECLARATIONS
French tax authorities carry out regular controls to determine if ISF declarations have been correctly submitted. Specific events, such as sales or inheritance of high-value property, can also lead to a tax control.
If the authorities consider that you have underpaid ISF, they will challenge not only your last ISF declaration - but may go back up to 10 years. The time available for the tax authorities to question valuations or omissions is variable:
Assets in France
- 3 years if the asset description on the ISF form was sufficiently precise requiring no further research
- 6 years if the description was insufficient or omitted
- 10 years if there was intentional fraud
Assets outside France
- 3 years if the asset description on the ISF form was sufficiently precise requiring no further research
- 10 years in all other circumstances
Those with net assets between 1.3M€ and 2.57M€ declare only a summary on their income tax forms with no requirement to provide “precise descriptions”. However, it is considered that sufficient information has been provided unless the authorities specifically request full details from you and you fail to provide this within the time allowed (usually 30 days).
If the authorities consider that you have underpaid wealth tax, they can claim
- the additional wealth tax that should have been paid
- annual interest on the unpaid wealth tax (approx 4% pa) as from the initial due date
- a penalty of 10% (on the additional tax due) for late payment
- an uplift of 40% (on the additional tax due) if they consider that you have not been of good faith (mauvaise foi)
- an uplift of 80% (on the additional tax due) if they consider you have used fraudulent techniques to hide assets
The above is only an outline of the key rules. If you receive correspondance from the tax authorities challenging your declarations it is always important to react quickly and take legal advice.
OPTIMISATION : HOW TO REDUCE WEALTH TAX
1. Know your rights.
Don't over estimate property values, for example:
- As a French resident, for your principal residence, you can deduct 30% from comparable sales value
- For each rental property you can often deduct up to 20% if let unfurnished
Don't include any exempt assets used for company or professional purposes if they meet the appropriate conditions.
Do specify as liabilities all eligible taxes and invoices due at year-end, including:
- income tax and social charges payable in the current year (you can generally use your last “avis” as an estimation)
- property taxes (Habitation and Foncier)
- the ISF for the current year (creating an interesting complexity in the calculations...)
These items reduce your net taxable assets.
2. Tax ceiling (plafonnement ISF) at 75% of income
There is a wealth tax cap known as “plafonnement ISF” (similar to the previous Bouclier Fiscal) so that total French & Foreign taxes should not exceed 75% of income. The calculation compares prior year taxable income to the income & social taxes due on that income - plus current year wealth tax. If the ratio is over 75%, the wealth tax is reduced (potentially to zero).
Retired or semi-retired high net worth individuals should therefore consider living off capital - and leaving income & gains to build up inside private investment companies or capital wrappers (such as Assurance Vie).
Despite two attempts by the government to take unrealised “wrapper” income into account, the Conseil Constitutionnel has confirmed that no interest or gains received within an assurance vie are taken into account in the 75% calculation.
The mechanism is complex, so please contact us if you require further details.
3. Start transferring assets.
One of the most effective ways to reduce ISF is to spread assets amongst your descendants once they become adult.
Rather than making a full gift, you can also make “temporary gifts” known as usufruit temporaire.
If well organised, the family will pay lower rates or avoid ISF altogether.
If badly organised, you could end up paying high levels of gift tax instead.
Careful planning is therefore required and we suggest discussing with professional advisors at an early stage.
4. Make use of available exemptions & deductions.
If your French friends have decorated their houses with antiques & works of art, it may have been for more subtle reasons than you thought! Virtually any object that you can claim to be over 100 years old - or created by hand - is normally exempt.
Investing in small European companies (known in France as PME’s) is another method to reduce ISF.
50% of the cost is deductible - limited to 45,000€ per family (ie 90,000€ maximum real investment). Rather than choosing a company yourself, you can use professional venture capital funds, including regional (FIP) and innovative (FCPI) funds managed by specialists. In this case, the limits are 18,000€ and 50% of your investment (ie 36,000€ maximum real investment). In the years after the purchase, the qualifying investments are usually exempt. The detailed rules are complex and the number of venture capital companies proposing funds to wealth tax payers is vast - so please contact us for more information or recommendations. You should clearly not proceed unless confident that the venture capital company is competent.
Other types of investment can sometimes provide ISF exemption, though the financial performance is often worse than the saving in ISF. We would be glad to review and comment on any schemes proposed to you.
Many types of exemption do exist and depend on your personal interest, your short and long term financial objectives and your appetite for risk.
5. Use of French bank loans by non-residents.
Since non-residents are only assessed on net assets located in France, they should certainly consider using a mortgage when purchasing property - even if the capital is readily available elsewhere - especially given the current low rates of interest.
The mortgage should be clearly secured on the French property - and confirmed by a notaire - to ensure the debt will be subtracted from the property value when estimating your liability to wealth tax.
Please contact us if you would like more information on this, or if you would like assistance obtaining a suitable loan from a French bank.
LOANS within SCI’s held by NON-RESIDENTS
Loans by non resident individuals or companies made to French property companies (SCIs) are no longer deductible when calculating the value of the property shares for wealth tax purposes.
Copyright © 2017 Cabinet Gregory Latest modification: 6 June 2017 Email: email@example.com