January 2016 saw the rolling out of a system for exchanging financial information between participating countries. This system, developed by the Organisation for Economic Co-operation and Development (OECD), and known as Common Reporting Standards involves HMRC (in the UK) providing the financial information of non-UK residents with the relevant tax authority in the country of residence.
Although the impact of this was not expected to be seen until September 2017, it would appear your local taxman is receiving your information as you read this.
A couple of weeks ago, I received a request from a prospective new client asking for advice regarding their stocks and shares Individual Savings Accounts held in the UK. As you may know, it is still possible to hold existing ISA’s even after becoming non-resident. What you may not know is that the tax advantages in UK do not apply in France; so income taken from an ISA account, although tax-free in UK is taxable in France. Within an ISA, under UK rules, capital gains tax doesn’t apply to realized gains made, either on the sale and cashing-in of the ISA, or by the switching of the funds within the ISA account. Unfortunately, in France, such transactions do attract a capital gains tax liability.
This is what has caught out these prospective clients. It seems their UK Independent Financial Adviser had carried out fund switches in 2014, and this information has now found its way to their seemingly very nice female tax officer, who has written to this couple with a list of investment fund switches, asking for details of book price, sale price and length of time held.
These particular clients, not unusually, have held these ISA’s from before they became ISA’s, in other words from Personal Equity Plans (PEPS).
The tax officer can trawl back to the very beginning in order to gather information, so if you have ISA’s, you might like to dig out that shoe-box containing all your statements, and dust it down in preparation!
This seemingly very nice tax lady has the power to go back 5 years in order to claim capital gains tax on all switches made during that time; needless to say, cashing in your ISA’s will also trigger a CGT assessment in France. So, what are the alternatives?
You can keep your ISA’s for evermore, not making any fund switches, at least not those that would realize a gain, anyway. This may suit some investors, but for the majority who look for active investment management, finding yourself invested in poorly-performing funds would, I suggest, irritate.
The alternative is to ‘bite the bullet’, cash in part or all of the ISA account, and reinvest the proceeds in an Assurance Vie contract, where there is no liability to capital gains tax on gains made within the contract. This will allow active investment management without it resulting in a tax bill every time a fund is changed.
The personal financial landscape has changed permanently, people hiding assets ‘offshore’ will be found out as will people failing to declare UK assets. The longer you hold on to seemingly tax-efficient investments like ISA’s, the greater the potential capital gain will be, and the greater the tax bill will be in France.
In France, the assurance vie is the go-to alternative investment, especially in view of its advantageous tax benefits. Investors therefore have to weigh up the cost of getting out of ISA’s with the future advantages of the assurance vie. And I haven’t even mentioned the Inheritance Tax advantages of the assurance vie, yet….
Don’t forget, I conduct a drop-in clinic most Fridays (holidays excepting), when you can pop in to speak to me. Our office telephone number is 04 68 31 14 10.