French tax and your UK pension

Bill Blevins explains how your UK pension will be taxed if you retire to France

Most retirees will receive a UK state retirement pension and also additional income from government service, occupational or private pensions. These four types of pension receive slightly different treatment in France. When you know how much tax you will have to pay you will know how much money you will be left with to help enjoy your new life in France.

State retirement pensionA UK state retirement pension is always paid gross and as a tax resident in France you will be taxed on this income only in France at the French progressive scale rates up to 40%. Under French domestic law, a pension arising from a professional activity is taxed in the same way as salaries (as are disability pensions, child support and alimony), ie the taxable base consists of income net of social security contributions (if any), less a 10% deduction of a minimum of €368 (�310) and a maximum of €3,606 (�3,038) per household per year for 2009 income. The balance is then included as part of the household’s taxable income and taxed under the Parts system at the usual income tax scale rates.

Social charges are payable at a rate of 7.1% unless you have registered a form E106 or E121 with the health department, in which case the income is exempt from social charges.

The state pension is taxed in France even if it is paid into a UK bank account. This pension can be paid into a French bank account in euros if preferred but will be exposed to exchange rate fluctuations.

Government service pensionUK government service pensions such as from the police force, fire brigade, armed forces and civil service (but not from the National Health Service) remain taxable only in the UK even when you are tax resident in France, unless there has been a transfer out before the pension commences (and usually before age 59).

Even though they are not taxed directly in France, the income is taken into account for the purposes of determining the rate of tax payable on other French source income (taux effectif). Again, social charges are payable on the income at a rate of 7.1%, unless you are covered by form E106 or E121.

Occupational pension schemesThese schemes usually pay a tax-free lump sum and a pension (not an annuity) and are liable to tax in France on the income the same as the UK state retirement pension.

You need to ensure that the pension is paid gross in the UK. To do this you should obtain the form FRA/Individual (FD5) from HM Revenue & Customs (HMRC) or www.hmrc.gov.uk/cnr/france-individual.pdf and submit the completed form to your local French tax office, usually with your first French tax return. This form comes in two identical parts (in French and English). The form will be stamped to confirm that you are French tax resident and that the income is taxable in France. The English part will then be sent to HMRC and your pension provider notified to pay the income gross. Any tax deducted at source in the UK since you became French tax resident will be reimbursed.

Not all occupational pension providers will pay directly into a French bank account and you may need to have your pension paid into a UK account.

Tax-free lump sumThere is no equivalent to the tax-free lump sum in the French pension system, and so this is rather a grey area. In the past it was understood that France only had the right to tax periodical pension payments and had no jurisdiction to tax such lump sums, leading since 2005 to the current practice of not taxing them. However, French legislators are said to be considering introducing legislation which will allow the French authorities to tax foreign pension lump sums received by French resident taxpayers.

Private pensionA private (or personal) pension has to be taken in the form of an annuity although up to 25% can be taken as a tax-free lump sum. This is another grey area as to how UK personal pensions are taxed in France, as there is nothing similar under French tax law.

There are two possibilities: i) as a pension; ii) as an annuity. As a pension, it will be taxed at the normal income tax rates. As a whole of life annuity, a portion of the income is tax-free based on your age when the annuity started.

If a portion of the annuity continues to be paid to a surviving spouse on death, the age of the surviving spouse at the time they first receive a payment is used to determine their tax-free percentage.

The annuity is subject to social charges at a rate of 12.1% based on the reduced amount subject to income tax.

Temporary annuities are not very common in France and seem more likely to be encountered as part of a UK investment structure.

For temporary annuities, returns of capital are tax-free, but any income element or increase in value overall is subject to income tax and social charges as investment income in France, without any special relief.

Qualifying recognised overseas pension scheme (QROPS)Most UK private pension funds can be transferred into a QROPS and receive favourable tax treatment in France. If you have more than one eligible pension scheme they can be consolidated in a single QROPS.

A QROPS will no longer be subject to UK tax once you have been UK non-resident for five complete and consecutive UK tax years. Funds in a QROPS can grow free of any French income tax and will only be taxed when you take benefits. Once free of UK tax there will be no UK charges on the fund on your death and the fund can continue through the generations free of UK taxes.

Regular pension payments from a QROPS are taxed under the advantageous annuity regime.

A QROPS can be set up in euros and the income paid to you in euros in France and will no longer be subject to fluctuating currency exchange rates.

Apart from the taxes mentioned above, there is wealth tax and succession tax to consider, but with professional advice you may be able to lower your tax bill. Your UK adviser may not be familiar with the French treatment of pensions and the tax mitigation available there, so it is advisable to consult a tax and pensions expert with full up-to-date knowledge of how both the UK and French systems work.

The tax treatment(s) detailed above is current at the time of writing; it is based on our understanding of French and UK legislation and taxation practice, and may change in the future Blevins Franks www.blevinsfranks.com

September 2010