Lump sums paid on retirement to expats living in France are now liable to French income tax.
It has been a moot point for a long time, but the question has now finally been resolved by an unambiguous clause contained in the loi de finances 2011 that recently passed through the French parliament.
Expats will now pay income tax on any private pension lump payments, provided they are over €6000. Although further clarification is needed, it seems that if the lump sum is over €6000, then the whole of the sum is taxable.
In the UK a pension lump sum is typically paid tax free.
The new rule applies from 1st January 2011.
Government service pensions (ex government and local government employees) will continue to remain exempt, although they may also be bought into the tax net.
Robert Brealey of Siddalls financial advisors says, ‘I suspect that we will see further clarification on government pensions later this year. One possible outcome is that the French authorities will require the lump sum to be declared when calculating the marginal rate of tax on any French earned and investment income, as presently occurs with the annual pension'.
The basis on which private sector lump sums will be taxed is rather complex but, broadly speaking, the calculation is done by adding 1/15th of the lump sum you receive to your other taxable income in the year, and then multiplying the tax then payable by 15.
The lump sum figure used is after deduction of the usual 10% allowance for pension income.
Example: A two person household whose total income is €24,000, and who receive a pension lump sum of €30,000. Under the rules €2,000 (1/15th) of the lump sum would be added to their household income, less the 10% abatement. This would increase their tax liability by €252. So the additional tax on their lump sum would be €3,780 (€252 x 15).
Robert Brealey states that, ‘Unless the lump sum is quite large, in general the 1/15th rule means that for the majority of individuals the lump sum will be taxable at their current marginal rate of tax and, therefore, although not tax-free, it will still receive preferential tax treatment.'
The liability of pension lump sums has been a vexed question for many expats and their advisors for many years, as there is no equivalent form of pension payment in the basic French system.
Those seeking advice or further information can contact Siddalls Ltd.