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France plans to deduct income tax at source

No sooner had the deadline passed for this year’s dreaded tax declarations than the French government announced plans that it would move towards a system of taking income tax automatically out of workers' wages. Not everyone will greet the news with a sigh of relief.

France plans to deduct income tax at source

Perhaps President François Hollande simply got fed up filling out his tax return this year.

The day after the deadline for sending off French tax returns, France’s government spokesperson Stephane Le Foll suggested they had finally had enough of the current system.

The government intends to move towards a system whereby income tax (Impôt sur le revenu) is taken automatically at source rather than the following year after the individual annual declarations, as is the case in France currently.

Le Foll did not set any dates nor deadlines but just said it was what they would now work towards.

“The idea is to move towards a simplification of tax collection, with gradual implementation through the simplifying of payslips and taking [taxes] at source,” was how Le Foll put it.

He added that president Hollande had given the go ahead to put a new system in place but that the government would take its time to make sure everything runs smoothly.

The French tax declaration system often leaves both locals and expats confused. Given that certain social security payments are deducted automatically the question is asked why can't income taxes be paid the same way.

It would at least mean the end of having to save up wages for over a year to cover the much-feared tax bill – which is normally paid in three parts.

But anyone desperate to see the end of annual tax declarations shouldn’t hold their breath. The issue has been raised many times before, and as recently as 2013, when former PM Jean-Marc Ayrault admitted the current system was “almost unreadable and very complex”.

Back then an Ifop public opinion poll showed that just over half of those surveyed supported deducting taxes at source.

There are issues that would mean changing the system very complicated in deed and despite Hollande’s wishes the hurdles may yet scupper the move.

“The practicality of changing the way taxes are paid in France, means it would be extremely difficult to do,” French tax expert Patrick Delas, from Russell-Cooke in London told The Local previously.

“It would also be extremely expensive for a government that doesn’t have any leeway in terms of budget. It will also mean much more work for businesses, who already have the complicated job of working out social security contributions.

“There will also be the people who work in the revenue offices for the government, who will fear job losses if this change is made.”

Delas also believes that many tax payers themselves would rather have the chore of filling in declarations once a year than have their employers deducting their taxes.

“Many employees will not like the fact that their companies will have access to personal information, whether they have second incomes, their household income or whether there has been a change in their personal life etc,” he said.

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PROPERTY

French property: What is buying ‘en tontine’?

If you're buying property in France, you might be thinking about buying 'en tontine' - this has advantages especially when it comes to France's strict inheritance laws, but can also have tax implications.

French property: What is buying 'en tontine'?

What is it?

The ‘clause de tontine’ sometimes also known as a ‘clause d’accroissement’ is a clause that is inserted into the property deeds when you are buying a house or apartment.

It can only be inserted during the purchase, and cannot be added later.

It’s basically a ‘group purchase’. It’s most commonly used by unmarried couples who are buying together but it can be used by larger groups too – for example a group of friends buying a holiday home together.

You will have to ask a notaire to draw up the tontine clause during the property purchase and it can only be used if 

  • the parties are equally involved in the financing of the purchase
  • the parties involved have a roughly equal life expectancy (for this reason tontine clauses may be rejected if there is a significant difference in age between the purchasers)

What’s the point of it?

The main reason that people use it is to sidestep France’s strict inheritance laws, which assign that a certain portion of every estate must go to children, at the expense of a partner. 

READ ALSO How France’s strict inheritance laws work

For this reason it is particularly used by couples who have children from previous relationships.

On a property with a tontine clause in effect, when one owner dies their share of the property passes in its entirely to the other member/members of the tontine.

This cuts out children from inheritance, but means that a surviving partner is not evicted from their home in favour of the children of the deceased. 

It also has the advantage of making the intentions of the deceased clear, to avoid arguments among heirs after their death.

It should be noted, however, that the tontine clause only takes in the property that it covers – other assets may be subject to French inheritance law so it’s therefore probably wise to arrange a will, to ensure your wishes for your estate are met.

The surviving party can ask a notaire to update the property deeds to show that they are the sole owner, if they want. Be aware there will be a fee, which could reach four figures for the privilege – and it doesn’t actually involve any change to the property title.

Drawbacks

The advantages of the system are clear, especially for blended families, but there are some potential drawbacks too, which mean that anyone considering buying in this way would be well advised to take proper legal advice before they start.

Inheritance tax – while a tontine will help you to avoid restrictions on inheritance, it does not exempt you from inheritance tax. French inheritance tax is structured according to your relationship to the deceased, and people who are neither married nor related to the deceased pay an eye-watering inheritance tax rate of 60 percent.

The only exception to this top rate of inheritance tax is if the property is your main residence and it is valued at under €76,000 – in that case, tax is paid at a rate of 5.8 percent.

Married couples and family members pay a much lower rate or not tax, but if you’re not married to your tontine co-purchaser, be careful that you’re not lining yourself up for a massive tax bill in future years.

Wealth tax – depending on the value of the property, it could tip you over into the ‘wealth tax’ category when you inherit. France’s wealth tax is a real estate based tax and is levied on anyone who has real estate assets (property and land) worth €1.3 million or more.

The calculation includes property held en tontine.

Tax savings – you might hear tontines being advised as a way to limit your French tax liability.

While this used to be true, changes to tax laws means there are no no significant tax advantages to buying this way – the same is true for buying a property via an SCI, which used to represent a tax saving until the law was tightened up.

Disinheriting family membersOne side effect of the tontine clause on mixed families is to effectively disinherit any children of the first person to die.

Because the property passed to the survivor, under French law, only their direct descendants – rather than any family by marriage – are entitled to automatic inheritance.

That means that the children of the surviving partner will be entitled to the statutory share of the entire asset (between 25 and 30 percent depending on the number of children), but the children of the first person to die will be entitled to nothing. Obviously you can choose to leave them something in your will, but you can only leave them some or all of the estate which is not automatically given to the children on the survivor.

Divorce/dispute – if the members of the tontine split up or (in the case of friends) fall out, then they can either sell the whole property or agree to buy each other out.

However, if one party refuses to sell, then you have very limited legal options – unlike a standard property purchase a tontine is not regarded as joint ownership, so one partner cannot be forced to sell as part of a divorce procedings, for example.

Basically the tontine can only be ended or changed with the agreement of all parties – so if you can’t agree between yourselves then you may be stuck with it.

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