A look at the controversial Solidarity Tax on Fortune (ISF) - France’s Wealth Tax - which must be declared and paid this month by eligible residents in France. Others living abroad who have French property above a certain value have to pay by July 15 (EU) or September (outside EU).

FRANCE is one of only four countries in Europe to impose a wealth tax.

The others are Spain, Norway and Greece. Switzerland levies at cantonal level at variable, mostly low, levels.

Several countries have abolished their versions of the tax in recent years, including Austria, Denmark, Germany, The Netherlands, Finland and Sweden. Spain's president has promised to follow suit. Others, including Britain and Belgium, have never had one.

The tax is based on your overall net worth above €770.000, being all assets after deduction of exempt property and debts.

It is controversial (see page 8) - with critics claiming it drives away so many rich people. France loses money because of it. A recent report by a senator estimated 843 people left France in 2006 as a result of it, taking away wealth of €2.8 billion.

The idea of a wealth tax is partly ideological as in no country does it contribute a large proportion of national tax.

It is seen as “redistributive,” helping narrow the gap between rich and poor, hence its name - “solidarity tax.” Opponents, on the other hand, joke that the ISF is an Incitement de Sortir de la France (Incitement to leave).

The tax is:

• Calculated on your total net wealth exceeding €770,000 as of January.
• Your responsibility. If you think the possessions of your household exceed the threshold, you need to take the initiative to assess their value and submit the form with full payment.
• Declared by residents in France by June 16; by other EU residents who own French property valued in excess of the threshold by July 15 and by other people by September 1.
• Assessable on overall worldwide net wealth if you are a French fiscal resident, and only on property situated in France if you live abroad

• ISF is assessed on people only. It is not, for example, applied to businesses. It applies to anyone who is a fiscal resident of France or those who own property in France, if the net value of their estate is in excess of €770,000 as of January 1, 2008.
• Assessment is based on the total net wealth of the household - “foyer fiscal.” This term can, for this tax, be:
  • A single person
  • A couple (whether married, PACS'd or cohabiting)
  • A family, being a couple (whether married, PACS'd or cohabiting) and any children for whom they are the legal guardians.

Note however, that in some instances where couples no longer live together they may be assessed separately. This will be couples who have a “séparation des biens” marriage
regime and no longer live under the same roof, or others with different marriage regimes who are undertaking judicial separation or divorce proceedings and have been legally authorised to have separate main residences.

In cases like these the estate of any children is split between the parents.

• Where the taxable person is fiscally resident in France, liability to wealth tax extends to all of their estate, that is their assets and liabilities which are not only in France but also outside of France.
• Where the taxable person is fiscally resident outside of France, liability extends only to property that is situated in France, including:
  • Property, in the bricks and mortar sense
  • Minus mortgages on that property
• It should be remembered that the estate is considered to be not only assets owned directly (for example a house you own) but also beneficially. Examples would include a Société Civile Immobilière and reversionary interests.

Essentially, these are similar to those assessable for inheritance tax.

In summary they include:

• Land, whether forest, agricultural or for development
• Buildings in the course of construction
• Finished buildings, whether for private or business use and whether used by the owner or rented out.
• Furniture and fixtures
• All personal possessions (“chattels” in legal terminology) including jewellery, precious stones, ingots, gold or other precious metals, cars, boats, horses, planes and helicopters etc.
• Investments such as stocks and shares, PEPs and ISAs, the sums in bank and building society deposit accounts, current accounts, the value of premium bonds, cash etc.
• The value of legal rights owned by yourself, such as an 'usufruit' (the right to live in a house for your lifetime) or nu-proprieté (residual value of house when someone else has the usufruit) or even a 'droit d'usage' (lifetime right to use another’s property for personal or family needs)
• The value of certain businesses you own

Totally exempt:

• Professional assets needed in order to be able to work.
  Also the value of company shares held by directors of that company.
• Antiques (pieces that are over 100 years old, including furniture)
• Art and collectables. Included under this heading are:
  • Hand-made carpets and tapestries
  • Original paintings and drawings
  • Original engravings, prints and lithographs
  • Original sculptures, enamelwork and ceramics
  • Postage stamps and coin collections
  • Collectables with geological, botanical, mineralogical, historical, achaeological, paleontological or ethnological interest
• Pension fund capital
• Funds resulting from a personal injury claim
• Certain exempt life assurance investments for the purposes of wealth tax mitigation
• Cemetery rights as long as the holding of these rights is not a business activity

Assets that may be exempt:

• Company shares: Where the holder has at least 75% of the company’s shares and they are worth at least €50,000
• 50% of an investment into investment funds called FIPs (Fond d'investissement de proximité) which invest in small and medium-sized businesses
• Shares in your own company: Where you hold at least 75% of the company’s shares and you have held them for at least six years (or at least three years prior to retirement).
• 75% of the value of woods and forests
• The capitalised value of any alimony payments

From your estate value can be deducted:

• Your debts
• Loans
• The remaining value of your mortgages and interest on it
• Credit card balances
  However note that if the above, and outstanding interest, are repayable within the year (i.e. in course of 2008) then they are not to be deducted.
• Bank overdrafts
• Outstanding invoices
• Outstanding tax liabilities, including:
  • Income tax due on 2007 income
  • The "taxe d'habitation" (payable on a property by a person resident there in January 2008)
  • The audiovisual tax
  • Your 2008 ISF bill can itself be deducted from the final total, once you have worked it out (see right for the calculation of the ISF)
• Outstanding social charge liabilities (not healthcare ones)
• Outstanding inheritance tax
• The capital value of outstanding divorce settlements

The above deductions are allowed “once they are known and definitive.”

On top of this, there are measures in place to potentially reduce the amount of wealth tax payable :

Plafonnement

This is a safety cap that applies by restricting the amount of wealth tax as at January 1, 2008. In other words your 2008 ISF and income tax due in 2008 against income in 2007 is restricted to 85% of 2007 income. This cap is calculated on the form itself, resulting in the ISF being reduced before being paid.

“Income” is:

• All salaried or pension income after a 10% abatement
• All income tax exempt income (such as the Livret A, the CODEVI, the LDD),
• All income liable to the prélèvement libératoire

Bouclier fiscal

In essence, this is a measure that seeks to limit the overall fiscal burden, and a new version of this measure takes effect from January 1, 2008.

The aim in general is, for 2008, to restrict fiscal liabilities (tax and social charges) by reference to income from 2006. Accordingly, taxes paid on 2006 income, therefore paid in 2007, together with January 2007’s wealth tax, should not exceed 50% of the income received in 2006.

However, the system does presume that the taxpayer will effectively advance the tax and social charges liabilities before being refunded any excess, in that the actual liabilities will have had to have been paid in 2007, to then be partly refunded in 2008 if the 'bouclier' applies.

The taxes and charges to take into account are :

• Income tax paid in 2007
• ISF paid in 2007
• Impots foncières (property taxes) paid in 2007
• Social charges paid in 2007
• Other taxes deducted at source in 2006 :
  • 'prélèvement forfaitaire' tax on taxed-at-source income
  • 'plus values' (capital gains) tax on property sales

Concerning these caps, another valuable point is that the 'bouclier' is available in addition to the 'plafonnement', otherwise both are individually available, but it should be noted that both measures are only available in the case of habitual declarations.

If you are caught and required to make a wealth tax declaration by the authorities, neither the 'plafonnement' or the 'bouclier' are available.

The tax authorities (le fisc) do sometimes carry out checks on people’s wealth tax declarations. These can be random checks but likewise there can be checks based on other parameters such as income.

If caught for not having made a wealth tax declaration, the tax offices can go back and assess the previous 10 years (from June this year, they can go back only six years). Penalties amount to interest of 0.4% for each month for which the tax is paid late, and a fixed penalty of at least 10% of the wealth tax due.

There are some sums that can be taken off the wealth tax liability itself (but not creating refunds of tax paid).

These are €150 per person for which the assessed taxpayer is legally responsible.

Such additional “personnes à charge” as at January 1, 2008 are the same ones as under normal income tax rules:

• Children under 18 or disabled, or in some cases children who have returned to the family home (Code Générale des Impôts art. 196)
• People holding the disabled person’s card as long as they also live with the taxpayer concerned.

These amount to 75% of donations to organisations recognised as being of “utilité publique” (for the public good - the French equivalents of a charity), research and higher education establishments, up to a limit of €50,000.

These can be printed off the internet at www.impots.gouv.fr

• The 2725 is the main form for the ISF. it is accompanied by five annex forms plus explanatory notes (in French).
• 2725 K - is the version of the main form and its annexes and notes that is sent by the tax office to those who have previously completed an ISF declaration.
• 2725 SK - This shortened form (with three annexes) is only sent to taxpayers who completed an ISF return in the previous tax year, and who do not have :
  • Forests or woods
  • Rural property let on long leases
  • Part shares in agricultural land that is let held by Groupements Fonciers Agricoles (GFA) or Groupements Agricoles Fonciers (GAF) - similar to SCIs but for agricultural land.
  • Shares in collective organisations that have been held at least six years
  • Shares held by an employee in the company in which they work
  • Exempt shares recently acquired in a business concern

If this is your first time filling out the form, then, as stated above, you will need the full 2725 set of forms, otherwise if you have already submitted a form then the tax office will send you the shorter 2725 SK version.

In general terms, all assets have to be listed individually on the form but it is frequently simpler and more practical to prepare a computer spreadsheet which does all of the individual additions for you, necessitating only the group totals to be carried across to the tax form and then added.

If you use this method, don't forget to include a copy of your schedule with the tax form.

The 2725 K, the main form, in its complete set comprises the following (the SK version being the same but with the main form being preprinted with your personal details):

The main form:

• Section 1: Enter your name and date and place of birth.
• Section 2: Enter your address as at January 1, 2008.
• Section 3: Enter your address as at January 2007 if this is different.
• Section 4: This is for people completing the form on behalf of another person.
• Section 5: Enter your family details as requested.
• Page 2 A: Enter your children's details.
• Page 2 B: Enter your current work situation.
• Page 2 C: Enter details of any exemptions arising from businesses registered here in France.
• Page 4: This page is the summary page, the figures coming from the annexe pages as follows :

Annexe 1: for ownership, directly, or indirectly, of property that is built

• Insert your name and address at the top, the number of copies of the annexe, and the year to which the form relates - 2008.

On each line, enter:

• Column 1: The item number
• Column 2: The nature of the property
• home, flat, secondary residence etc.
• Column 3: The address of the property
• Column 4: The area of the land
• Column 5: The habitable area of the property
• Column 6: The number of rooms
• Column 7: If the property is part owned with third parties (not your spouse or partner), the percentage of the property that you own
• Column 8: If the above details refer to your principal private residence, the value of your (combined in the case of spouses or partners) share of this property. Otherwise, in:
• Column 9: Enter the same value of the property to which the above details relate.
• Column 10: This refers to property or rights which are beneficially owned, and thus in the majority of cases would only be used if holding the 'nu propriété' or the 'usufruit.'
  The aim here is to show that the property is not owned outright.

Where the value of your principal private property is inserted, insert the value after the deduction of the 30% abatement for homes, unless you prefer, given the space available, to insert on one line the actual value, then the deduction of the 30% abatement on another line, and then the net value.

Total the columns, and carry the totals in the boxes at the bottom to the main form, page 4, where the box reference will be the same.

Annexe 2: for ownership of other property that is in the process of being built, land etc.

• Complete this form in the same manner as the Annexe 1, inserting the value in columns 8 through to 10

Annexe 3-1: this is for all other assets

• Insert your name and address at the top, the number of copies of the annexe, and the year to which the form relates - 2008.

On each line, enter:

• Column 1: The item number
• Column 2: The nature of the asset: Bank account with 'X', investment with 'Y', car, furniture, property, personal chattels etc.
• Column 3: The method of the valuation, which will generally be by estimation (e.g: house contents), comparison (e.g: car) or actual (eg: bank accounts, cash and investments)
• Column 4: Holdings in anything where the minimum period for which the asset can be held for is six years (generally not applicable to foreigners)
• Column 5. The value of employee shares or of the business you own
• Column 6. Other share, unit trust or life assurance investments
• Column 7. Cash and bank accounts, including deposit accounts
• Column 8. Other assets such as vehicles, house contents, personal chattels and so on
• Columns 9 onwards are unlikely to be used by foreigners unless having a business registered here in France.

Total the columns, and carry the totals in the boxes at the bottom to the main form, page 4, where the box reference will be the same.

Annexe 3-2: is probably used only exceptionally by foreign residents, so will not be taken further in these lines

Annexe 4: this is for deductions

• Insert your name and address at the top, the number of copies of the annexe, and the year to which the form relates - 2008.

On each line, enter:

• Column 1: The item number
• Column 2: The nature of the asset, its purpose and the date the liability was created or relates to
• Column 3: The name and address of the debtor
• Column 4: The amount of debts and loans (except those repayable in the year), usually at least:
  Your 2007 tax year income tax liability
  Your 2007 tax year social charges liability
  Your 2008 taxe foncière liability
  Your 2007 taxe d'habitation liability
  Your 2008 wealth tax liability - based on the net value of the estate thus far, so needing a separate calculation using the tax bands and allowances on page 5

Annexe 5: used only exceptionally by foreign residents, so will not be taken further in these lines

Once all of the asset and deduction figures have been transposed from the individual annexes to page 4 of the main form, and totalled as indicated on the form, you will have the net taxable estate at the bottom of page 4.

Page 5 of the main form then deals with the calculation (for the second time) of the ISF liability.

The first part of the form is easy enough, inserting the taxable amounts in the grid in order to work out the tax due.

• Section 2 relates to the reductions available, split into two sections, one for additional people (children mainly) for which the taxpayer is responsible, and one for the values into the entities as listed.
  Deducting any of these amounts from the tax due as computed in section 1 leaves the net tax potentially due.
• Section 3 of the form relates to the plafonnement (ceiling) where total fiscal charges exceed 85% of income.
  Clearly if this is not likely to be the case there is little point in completing this section. Otherwise you will need the income tax liability figure as inserted in the deductions Annexe 4, but also the total income assessable for 2007 from your income tax return - and any income received from tax-free accounts such as theCODEVI,LDD and Livret A accounts.
  Again following the instructions on the form as to the additions and multiplications will result in seeing whether the plafonnement applies or not, and then again if it does, whether it is restricted - all resulting in the final amount for which your cheque should be written.

The form and a cheque in payment of the due ISF need to be submitted:

• If French fiscally resident by June 16
• If fiscally resident elsewhere in the EU - July 15
• If fiscally resident elsewhere in the world - September 1

NOTE: A declaration for someone who has died since January 1 should be completed no later than six months from the date of death.

• The declaration must be made in euros
• It should be made at the official exchange rate at December 31, 2007, which was €1.3636 to 1GBP
• With regard to the centimes, if they fall below €0.50 they are ignored, while if they are above €0.50 they are rounded up to the next euro.

The calculation of the actual amount of tax due is done in two steps:

1. The ISF tax is calculated on the net estate (all the assets minus all the deductions)

2. The tax due is then deducted from the net estate, and the tax calculation is again repeated on this net figure so resulting in the actual amount of wealth tax that is due.

By cheque, accompanying the ISF declaration.

Note that while it is possible to pay with 'things', such as property, art, collections and the like, the whole liability has to be settled in one payment. Staggered or deferred payments are not accepted.

VALUING your property is a key part of working out your ISF. Everything forming part of your declarable estate has to be valued at market rate, which for cash, shares, bank deposits and the like is easy to establish as its actual value on the day.

You have to estimate the value of jewellery and personal chattels (seek an expert opinion if in doubt), which should in any event never be less than what they are insured for.

The method for valuing bricks and mortar property is no different but, compared to the other assets, this is frequently much more difficult to assess. Indeed, while the law refers to the market value as being the only true real legal value to be used, this is frequently very difficult to ascertain - particularly for remote properties, or those which have no resemblance to other neighbouring properties.

While the more official valuation methods are listed below, the general thrust is to ensure that the value is realistic, remembering that this as at January 1.

This is why, particularly with regard to real estate, it is always wise to assess the value on the day itself and not try to estimate a value when actually doing the ISF declaration at the beginning of June, after the house has had its spring-clean, the pool water is sparklingly clear
and inviting, and the plants are all in full bloom.

• The most common way to value property is by comparing the property to other similar ones after taking into account the following basic principles:
  • The ground area of the building
  • The surface area on all floors
  • The amount of the total surface area that has been developed for use
  • The amount of the total surface that is actually available to be used or which is habitable
  • The number of rooms

You should also consider the following additional issues:

• Physical factors: The quality of materials, architecture, space, state of the property, where is it located, the level and standard of equipment
• Legal factors: How long the lease on the property may be for, servitudes, restrictive covenants relative to the property or even local development restrictions
• Occupational factors:
  Property owned that is let out:
  • Reductions of 25 - 40% may be used for property that is on long term leases.
  • Reductions of 10 - 20% may be used for property that is let for shorter terms.
• Property owned as a main residence:
  • Property that is used by the owner on January 1 as their principal private residence, is entitled to a deduction of 30% of the market value (up from 20% in 2007).
    Note that where families live in France in more than one property (e.g. one for the summer and one for the winter) then only one property can be deemed to be the home, and thus entitled to the reduction.
• Other methods of valuing buildings:
  • Having it professionally valued, usually by taking an average of three professional valuations.
  • By readjusting previous values. This is where the previous value is increased by multiplying it by a coefficient, such as the regional index for the increase in property prices (now the index for property construction), available from INSEE (in French) online at:
    
    http://www.pap.fr/calcul-immobilier/indice-insee.php?type_indice=icc
    
    However, using this method is normally limited to five years before a new formal valuation has to be established.
  • By ascertaining the cost of rebuilding the property and refurnishing it. This is a variation of the option for properties that have been built (below) but, as is stated below, this can be a fairly uncertain means of establishing a value. You would also have to pay an architect to provide the costings figure.
  • Where you have had the property built - by taking the total cost of the construction and furnishing of the property, and then multiplying this cost by an appropriate factor to arrive at the property's probable current overall value, and then discounting the value for age and wear and tear of comparable properties.This is a very uncertain method since the 'factors' for this purpose are in fact not published.
  • Where residential property is rented out on long term leases, the market value can be obtained by reference to the annual rent received. This is done by multiplying the annual rent by a factor, the maths being :
    
    annual rent x (100 divided by factor)
    
    For residential lets, the factor can range from three to nine, depending on the town but a local estate agent should be able to provide this local factor, know as the taux de capitalisation.