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  1. Wealth
May 4, 2012

Bircham Dyson Bell: French election will drive HNWs to UK

By Spear's

Regardless of the outcome, an increase in taxation appears a certainty

As the battle for the French presidency nears its conclusion on 5th May, it is still anybody’s guess as to who the new leader will be. Regardless of the outcome, an increase in taxation appears a certainty. This has caused ripples of unrest across France, particularly amongst high-net-worth individuals, who already carry a large tax burden.

James Johnston, leading private client lawyer and head of the French group at law firm Bircham Dyson Bell, expects this tax increase not only to lead to an influx of high-net-wealth French citizens to the UK, but also for it to have an impact on those UK citizens with interests in France.

A high starting point

“The dilemma that France has got is that like all countries, and particularly the UK and Europe, there is a huge demand to raise revenue in order to reduce public sector deficits.

“France already has one of the highest tax rates for high-net-worth individuals. If you add together the combined effects of the top rate of income tax, together with wealth tax and social contributions, it equates to around 60% at present. If you compare this to Germany and the UK, where top rates both equate to 50%, France is at a different starting point, even before any proposed increases.

“Both Presidential candidates have indicated that they would like to change and increase taxes for higher rate tax payers if elected. We could be looking at up to a 75% top rate of income tax– which would bring the total theoretical marginal rate of tax, with everything added in, up to 90%. This is a rate that the rest of the world is not resorting to.

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“There is a significant risk that an increase in taxation would actually result in less revenue being generated, as people who would otherwise be required to pay will vote with their feet and stay abroad until the tax climate improves. This has the wider consequence that France could lose many of the sort of people it needs in these difficult economic times – entrepreneurs and high-achievers who in turn generate jobs and activity on home soil.

Mass exodus?

“For those who have an activity that they can carry on in more than one country, an increased tax rate will be a disincentive to stay in France. It is likely that, as a French-speaking area of Europe that is close to home, both Switzerland and Belgium will be a location of choice for some high-net-worth individuals looking to move elsewhere. Switzerland offers a lump sum basis of taxation in certain cantons, which enables individuals to agree an overall figure to pay based on their expenditure rather than their wealth, which for some is an attractive option.

“Another likely choice is the UK, and should any significant changes to taxation be made it is likely that we will see even greater influxes of French citizens than we already do, coming to live and work in London temporarily, adopting non-domicile status and enjoying a lighter tax burden than they would have at home. French entrepreneurs frequently comment that the UK also provides greater entrepreneurial opportunities than France, with less red tape involved in setting up a business.

US-style renouncement of citizenship?

“An interesting development, with something of a tax exodus becoming an increasingly likely prospect, is a proposition from Nicolas Sarkozy to tax French people on the basis of their citizenship rather than their residence. This would be a similar approach to that of the US government, enabling the French to continue taxing their citizens even if they have left the country.  We could then potentially see a renunciation of French passports ahead of any introduction of that nature.  To my mind this is not beyond the bounds of possibility. As we have seen with America, that is how people sometimes respond when such regimes are implemented.

“How practical such a regime would be is another matter. France has double-tax treaties with other countries across the world, which would require renegotiation in order to change to such a system. Whilst it is relatively easy to change taxes domestically, if you are doing it in a way that affects your international relations with other states it becomes a much more complicated thing.

Impacts for UK citizens with interests in France

“It is not just French citizens that are affected. For all people owning properties in France, Capital Gains Tax (CGT) on properties – including second homes owned by non-residents – has increased.  Previously if a UK citizen owned a property in France for 15 years, they would not have to pay CGT in France on a sale.  However, this has recently been changed to 30 years’ ownership before you are exempt. This may not affect UK residents if they are domiciled in the UK, as they have to pay CGT in the UK in any event on the sale of their French property, but for truly international people it will act as a disincentive to investment. 

“An even more significant impact would be for those, such as retirees, who look to reside in France for more than 50% of the year. For them, any increase in wealth tax would apply not just to property, but to all of their worldwide wealth and therefore significantly alter their levels of spendable income.  It is therefore likely that we could see fewer British retirees settling in France if overall tax rates go up unduly.  Fewer people spending euros in France in retirement would have some impact at least on the economy.

“Whoever is elected to the Elysée this weekend, they will have a difficult balancing act to maintain in setting tax policy for the years ahead.”

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