There were some welcome tax reforms in France in 2007 on the election of new president, Nicolas Sarkozy. Some of these changes included capping French wealth tax in a bid to tempt back the hundreds of thousands of French citizens who have fled the country, driven out by the punitive tax regime.

During Sarkozy’s presidential election campaign, the issue of wealth tax proved to be a controversial issue. Many of the estimated 500,000 wealth tax exiles have sought refuge in more tax-friendly countries such as Belgium, Switzerland, the UK and USA. Probably the most famous of these tax refugees is veteran rock star Johnny Hallyday who reportedly came to an agreement with the Swiss ski resort of Gstaad to pay 300,000 Swiss francs (£130,000) on his earnings of around 10 million Swiss francs (£4 million), provided that he spends 183 days or more there in any Swiss tax year. Hallyday complained that he paid around 70 per cent of his income in taxes in France.

Hallyday was supported by Sarkozy who said that if French taxes were driving its most creative citizens abroad ‘there really was a problem’.

Research shows that it is not only rich and famous people who are fed up with France’s high taxes but wealthy families and investors are also emigrating in growing numbers. According to research by the Economic Analysis Council, approximately 10,000 business directors have left France in the past 15 years, investing billions of dollars elsewhere. A study by French Senator, Philippe Marini, revealed that households escaping the wealth tax climbed to a record 649 in 2005 from 370 in 1997.

French wealth tax was instigated by Socialist president, François Mitterand, in 1981 as a solidarity tax on wealth (Impot de Solidarité sur la Fortune – ISF). It was eliminated by Jacques Chirac five years later who claimed that the move cost him an election as it was seen by the French populace as a gift to the rich. ISF was later reinstated by the Socialists.

In the run-up to his successful election, Sarkozy advocated that nobody should pay more than half his income in taxes. As part of a €13.8 billion (£9.9 billion) tax cut package in August, the bouclier fiscal* was reduced from 60 per cent to 50

per cent.

Under the provisions of the bouclier fiscal for taxes paid in 2007 onwards, combined income tax, wealth tax, social charges (CSG, CRDS and PS) and local property taxes connected to the main residence cannot exceed 50 per cent of your total income for the previous year.

If the relevant taxes exceed 50 per cent of income for the previous year, the taxpayer will have to claim a refund of the excess taxes paid. There is no maximum limit to the amount of refund that can be claimed.

This provision applies to income earned in 2006 onwards. For 2006 income, the total taxes are paid in 2007. If they exceed the 50 per cent limit, a refund can be reclaimed from 1 January 2008.

Other changes to the wealth tax law include an increase in the reduction of the value of your main home assessed for wealth tax purposes, from 20 per cent to 30 per cent. And the time limit for making an enquiry into a taxpayer’s wealth tax return (délai de reprise) was reduced from ten years to six years.

What is wealth tax?

Wealth tax applies to the worldwide assets of individuals resident in France on the 1 January each year over the tax-free threshold of €770,000 (£553,002) – (from 1 January 2008). Non-residents are taxed on their assets located in France as at 1 January each year. The French tax year is 1 January to 31 December.

The tax is based on the wealth of the household, including spouse or civil partner and infant children. Unmarried couples living together are treated as one household for wealth tax purposes. Wealth tax liability is reduced by €150 (£107) for each dependent child under 18 years of age.

There are restrictions on exactly how much of your taxable income can be taken in income and wealth taxes.

If your net wealth is €2,420,000 (£1,738,006) or less for 2007, then your total wealth tax plus income tax, plus social charges, cannot exceed 85 per cent of your income. It is not necessarily just taxable income though, and will include for this purpose many exempt or relieved items.

If your wealth is above €2,420,000 (£1,738,006) for 2007, the reduction is limited to 50 per cent of the full wealth tax, subject to a minimum wealth tax being payable of the cumulative tax due of €11,530 (£8,280) for 2007.

In most cases, though, the bouclier fiscal provisions are likely to be more beneficial.

Assets taken into account for wealth tax include real estate, vehicles, debts due to you, furniture, horses, jewellery, shares, bonds, redemption value of any life assurance and endowments.

Exemptions include assets necessary to a business conducted by its owner or his spouse, pictures, tapestries, statues, sculptures, lithographs and antiques more than 100 years old. Funds in a pension fund are usually exempt, as are annuities constituted in respect of an employment or business (subject to certain conditions) and portfolio investments such as bonds, cash deposits, and shareholdings of less than

10 per cent in French companies held by non-residents.

A new double tax treaty between France and the UK is expected to be finalised in 2008 and to take effect from 2009. The agreement will exempt UK nationals from French wealth tax on non-French assets for the first five years after becoming a resident of France. Wealth tax will only be payable on assets in France. In the sixth year following French tax residence, wealth tax would then be payable on worldwide assets as normal. If you then become a non-French tax resident for a period of at least three years, and then become a resident of France again, then the five-year exemption period will re-start.

Usufruct and nue-propriété

If the ownership of a property is split into lifetime interest (usufruct) and underlying ‘freehold’ interest (nue-propriété), the full value of the property (not just the lifetime interest) is assessed on the owner of the usufruct. The nue-propriété owner is exempt. The usufruct holder is only assessed to wealth tax on the portion of the property over which their entitlement exists. So, if an individual has a usufruct over only one quarter of the property, he will pay wealth tax on one quarter of the value of the property.

Filing date

The deadline for filing your wealth tax return and for payment is 15 June if you are resident in France. Non-residents living in the EU have until 15 July. It is not possible to defer payment or pay by instalments.

*The Bouclier Fiscal was introduced in 2006, before Sarkozy was elected president. It is the limit on the amount of combined taxes (income tax, wealth tax, taxe foncière and taxe d’habitation on your home and social charges) you need pay as a proportion of your taxable income. When introduced the limit was 60 per cent, but Sarkozy has now reduced it to 50 per cent.

Where the total of taxes paid exceeds 50 per cent of your income for the previous year, you can claim a refund of the overpayment from the fisc.