UK:
Rental income is always taxed in the UK using individual personal allowances. For 2018/19, the allowance is £11,850 per person, meaning you can receive £23,700 between you with no income tax to pay.
- UK property is subject to UK inheritance law, French inheritance taxation, and wealth tax.
- Any income above the allowance is subject to 20% Basic Rate UK income tax, up to a maximum of £46,350 each (2018/19 rates).
- Capital Gains Tax (CGT) will be payable on any profit made if the property is sold.
Advantages and Disadvantages:
- Having income derived and taxed in the UK is tax efficient, as you are unlikely to pay tax at the 40% UK tax rate (included in the French wealth tax calculation). However, tax returns need to be completed on an individual basis.
- It will still be subject to French inheritance taxes, and income cannot be guaranteed, so accessible funds elsewhere are necessary.
- Income is declarable in France and uses up your personal allowance, pushing taxable income into the 20/30% tax bracket. A credit is given by the French tax office for assumed UK tax already paid.
- Property value may rise or fall.
- Rent is not guaranteed and isn’t flexible, meaning there may be periods between tenancies with no income. You cannot vary the income or take a lump sum.
- Running costs of maintaining a property from abroad are typically £200-£800 per year without using an agency to manage it (otherwise around 7-10%).
- Income is denominated in pounds, meaning it is subject to exchange rate fluctuations, which you cannot control.
If you purchase a rental property in France, you will have to pay social charges at 17.2% on net income, as well as income tax.
- You require €50,000 income per annum and are currently receiving €10,000 from the ski chalet and £21,900 or €25,000 from UK investments.
- You only need to generate €15,000 per annum from the €450,000 manoir sale, which equates to a 3.3% return.
- You would not require all your funds to purchase a UK property to generate that level of income.
For additional UK property income:
- £13,000 net (£14,300 gross) would be taxed at 20% (or £2,600 per annum).
- Net income would provide £11,400 per annum, assuming agency fees and after expenses.
- Estimated wealth tax on the value of €2,250 per annum makes this option less attractive.
Assurance Vie:
Assurance Vie is a life assurance-based investment, fully compliant with the French tax system, and invested in a range of assets (deposits, bonds, shares, unit trusts, etc.).
- Income is subject to income tax and social charges in France, but not included in your wealth tax calculation.
- Funds grow tax-free until a withdrawal is made. Only the profit portion of the withdrawal is taxable.
- For example, if you invest £100k and make 5% profit or £5k, and withdraw £5k, only 5/105 would be taxable in the first year (around £240).
- You have the option to be taxed at your marginal rate through your tax return or at a fixed rate at source. After 8 years, the max tax rate is 7.5%, plus the option to withdraw €4,600 per person per year tax-free.
- For the €15,000 you need to withdraw annually, the taxable element for income tax and social charges would be approximately €720.
Advantages/Disadvantages:
- Choice of currency, fund risk level, and income (regular or lump sum).
- Choice of beneficiary, potentially exempting inheritance tax (€152,500 per beneficiary).
- Funds can go to each other regardless of French succession law.
- Social charges are payable on profits at withdrawal, unlike rental income where the net profit is taxable.
- Flexibility to vary income based on need and performance.
- Running costs are typically 1% per annum.
- Capital growth is possible depending on performance and income needs.
- You have the possibility to convert to a UK-compliant investment bond if you return to the UK.
Conclusion:
The running costs of owning an additional UK property would be significantly higher than an Assurance Vie policy in terms of gross and net income.
UK Property:
- Gross: £14,300
- Net: £11,400 per annum (plus estimated wealth tax of €2,250 per annum)
- Does not include incidental running costs such as insurance or wear and tear.
- Total costs: €5,556
Assurance Vie:
- Gross: €15,000
- Net: €14,280
- Running costs of policy: 1% or €4,500, deducted from the total investment policy.
Disclaimer:
This information is based on our current understanding of the taxation framework, which may change in the future. We are not accountants, so if you require verification, you should contact a qualified tax adviser.
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