French Tax - New French Tax Reforms

During his election campaign, Nicolas Sarkozy promised to revolutionise public finances and improve the French economy. His tax reforms have been welcomed, especially those relating to France’s unpopular wealth and succession taxes. Wealth tax is often cited as a key reason why France lags behind its competitors in terms of investment and economic growth. It is hoped that reforming the tax will tempt back the thousands who have moved to less punitive tax regimes.

The most revolutionary change is to succession tax, which has been abolished or massively reduced for most inheritors (though the rates remain unchanged – and therefore high, up to 60% – for people who are not closely related to the donor). The key tax changes are listed below.

Succession tax on death

• Succession tax has been abolished between spouses and PACS partners. Under the old rules, tax rates ranged from 5% to 40% for spouses, above a tax free allowance of €76,000. 
• Siblings who are single, widowed or divorced are also now exempt if they lived with the deceased for the five years prior to the death and are aged 50 or over or suffering from an illness that prevents them from earning a living.
• The tax-free allowance for children (and for parents inheriting from their children) has tripled from €50,000 to €150,000 per person.
• The allowance between brothers and sisters has increased from €5,000 to €15,000.
• The allowance for nieces and nephews has increased from €5,000 to €7,500 and also apply on death (it is currently only available for lifetime gifts).
• The allowance of €50,000 for the disabled has increased to €150,000 and can be cumulated with other allowances.
• The rate bands will be increased in line with inflation each year.

Succession tax on lifetime gifts

• The allowance for children has increased from €50,000 to €150,000 over a rolling six-year period. A child can therefore receive up to €300,000 (€150,000 from each parent) tax free every six years.
• The allowance for lifetime gifts between spouses remains at €76,000. For PACS partners, the current allowance of €57,000 has increased to €76,000 in line with that of spouses.

Succession tax on cash gifts

• The specific exemption for cash gifts has increased from €20,000 to €30,000 where the gift is made to a child or grandchild or, if there are no direct line descendants, to nieces or nephews. This is provided the donor is over 65 years old and the donee over 18. This exemption can be cumulated with other allowances, but it does not renew after six years and can only be used once.

Wealth tax reforms

• The main home reduction has increased from 20% to 30%. 
• The bouclier fiscal (the limit to the amount of taxable income that can be taken in combined income and wealth taxes) has been reduced from 60% to 50%, meaning you may pay less tax overall, especially if you structure your finances to take advantage. This provision should be applicable from 1 January 2008.
• A reduction of up to €50,000 is allowed on 75% of the amounts invested in PMEs (small and medium enterprises) or organisations of general interest. For close investment funds the reduction is 50% of the amount invested and capped at €10,000.

Tax relief on mortgages 

• A tax credit is now available for French tax residents on interest paid on a mortgage to purchase your main residence in France for the first five years of ownership. People who do not have a tax liability will receive a refund from the French tax authorities. The credit is 20% of the borrowings, limited to €750 per year for a single person (or widow/widower or divorcee) and €1,500 for married couples or PACS partners. The credit is increased by €100 per dependent and by €50 where a child lives alternately with both parents. 
• There is a proposal to double the credit and ceilings for the first year, to 40% of the borrowings, limited to €1,500 for a single person and €3,000 for a couple. This will be debated as part of the Finance Bill 2008.
• For disabled people, the credit is 20% of the interest paid, capped at €1,500 for a single disabled person (or widowed or divorced), or €3,000 for a married couple or PACS partners where one of the couple is disabled. 
• The tax credit is currently available for interest paid in 2007 where the compromis was signed after 22 August 2007, although in the 2008 Finance Bill the government proposes to backdate the credit to instances where the acte authentique was signed before 6 May 2007.
• The credit applies for the first five years following the acquisition of the main residence. This provision will be open to everyone who acquires a main residence, not just firsttime buyers.

Other changes 

• Overtime is totally exempt from social charges and tax for employees from 1 October. 
• The exemption whereby it is possible to avoid tax on the gain realised from the exercise of stock options by gifting the options to children at the time of exercise has been removed. This only applies to options granted from 20 June 2007.

Unfortunately there are no proposals yet to reform the outdated Napoleonic code of succession law, which forces parents to leave a major proportion of their wealth to their children instead of their spouse or partner. Estate planning therefore remains necessary to ensure your wealth is distributed as you wish. 


Bill Blevins is the financial correspondent at Blevins Franks www.blevinsfranksinternational.com

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