In my dealings with prospective and actual clients, it is clear that there is some confusion and misconceptions out there regarding what triggers tax liabilities in France and/or the UK. I am thinking in particular of people who fall into two broad groups:
- Those who have always lived in the UK and then subsequently move to France or are considering doing so.
- Those living in the UK who have a second home in France which they rent out.
Broadly, they represent the two principles which normally trigger tax liabilities in both France and the UK: residence and source of income (or capital gains) respectively. Limiting ourselves to France and the UK, in a nutshell:
- You are probably liable to tax (on your worldwide income) in your country of residence.
- You may be liable to tax in the country where your income is generated (for example rental income from a property located in that country).
I have used expressions like ‘probably’ and ‘may be’; this is because in practice the answers are not always straightforward. Both countries have their own specific laws to determine residence and there is also a double tax agreement in place between the countries which can override the national law and limit the application of the general principle. In the UK there is an additional complication due to a concept called ‘domicile’, which can affect your liability to UK tax. The vast majority of UK nationals are also UK domiciled. Although there is no legal definition, court cases have shown that it is very difficult to change domicile even if you have left the country for many years. To limit the scope of this article, I will be assuming that the interested reader is UK domiciled.
Most just want to get it right and ensure that they do not have any surprises. It is also clear that there are many who have strong opinions of what they should do, perhaps based on what they feel is commons sense or just. If you wish to stay on the right side of the law in both countries, it is important to put personal opinions aside and to follow the prescribed rules; in both countries, not declaring income you are supposed to is tax evasion and is considered a criminal offence. Getting it wrong may not only mean the administrative headache of trying to sort out a problem which may go back many years but you may also face financial penalties and, depending on the level of deception, imprisonment.
1. I am British therefore I pay taxes in the UK not France
Nationality does not feature in the definition of residence in either country. The main guiding principles are residence and the source of income. A British person who is living in France on a permanent basis (working or retired) is most likely resident in France. Normally such a person would be liable to French tax but also possibly liable to UK tax on UK source income such as rent from a UK property.
2. I pay my taxes fully in the UK where I am resident, there is no need for me to declare anything to the French authorities
This is a common misconception. UK and France have a double tax agreement in place for income and capital gains tax which limits liability to tax for some types of income and gains to just one country. A typical example is bank interest which is taxable only in the country of residence. Rental income is an example of income which is taxable in both countries; you avoid double taxation by claiming double tax relief in the country of residence.
3. I received no notification from the tax authorities
In both countries, the onus is on the taxpayer to notify the authorities of income or gains that they need to declare.
4. I was not aware I had to do anything in France
Unfortunately, rightly or wrongly, ignorance of the law is no excuse. Even if your level of French means you struggle to deal with tax matters, you can still approach the tax authorities for assistance or seek independent professional advice.
5. I shouldn’t have to pay tax in two countries because there is a double tax agreement between France and UK
As stated in no. 2 above, yes, there is a double tax agreement in place between the two countries, but there are some types of income (e.g. rent) which need to be declared in both countries. You are entitled to double tax relief in your country of residence.
6. I have chosen to be French resident
Residence for tax purposes in both countries is determined by the facts of the situation. Of course you are free to arrange your affairs so that the facts suit your wish as regards residence. For example if you wish to be French resident, you can ‘choose’ to do so by moving permanently to France and set up home there with your family and return to the UK for no more than a total of 15 days in the tax year.
7. I am resident in both countries and I chose to pay my taxes in the UK
Both countries have different rules for determining whether you are resident there. It is entirely possible to satisfy the conditions for residency in both countries simultaneously. If this happens, there is a clause in the double tax agreement between the two countries which will determine which of the two countries will be the deemed country of residence based on the facts. This clause therefore will override one of the two countries.
8. The income has already been taxed at source (PAYE) therefore I do not have to pay in France
This is something that happens often with pension income of retirees who have moved to France and are resident in France. Assuming it is not a UK government service pension, the double tax agreement states that it is taxable in your country of residence. If you are resident in France, then it is taxable in France, not the UK. There is a procedure in place for notifying the UK tax authorities who can issue an NT PAYE code (NT for ‘no tax’); the pension provider should not deduct tax at source thereafter. Failing that, you can file a UK tax return to claim back the tax deducted at source in the UK.
9. I am not known to the tax authorities, how will they find out?
This is a dangerous line of thinking. As mentioned, deliberately not declaring income in both countries is tax evasion which carries stiff penalties. Firstly, whether you ‘get away with it’ is in a sense irrelevant; most people consider themselves to be law abiding and should therefore comply if they wish to stay on the right side of the law. Secondly, there are many ways the tax authorities can discover undeclared income: tip-offs from disgruntled neighbours, third-party information for example estate agents managing a rental property or marketing a property for sale, land registry data, obtaining online information such as websites used for advertising rental property, cooperation with overseas tax authorities through formal agreements between countries.
10. I have kept the average days spent in the UK under 91 days to ensure I am not UK resident
This is now an old myth. It has been demonstrated through court cases that this will not always work if you leave the UK – it was only one of the factors used by HMRC to determine whether you still remained resident in the UK after leaving. In addition from 6 April 2013, new rules were introduced in the UK to determine residence essentially based on day counting and ties to the UK. Under the new rules, it is possible to be resident in the UK having only spent 16 days in the country in the whole tax year.