French Tax Credit for UK Rental Income
Wednesday 02 July 2014
Rental income from property in the UK benefits from a tax credit against liability to tax in France, irrespective of whether any income tax is actually paid in the UK.
Under the terms of the double taxation agreement with France, rental income earned in the UK by those resident in France is taxable in the UK.
Nevertheless, those resident in France are also subject to taxation (including social charges) on their worldwide income.
In order, therefore, to eliminate the double taxation of such income, under the tax agreement a tax credit is granted against such income, equal to the tax payable in France, "on condition that the resident of France is subject to UK taxation of this income" (Article 24).
The problem with this clause is that there has frequently been uncertainty as to the meaning of the term 'subject to UK taxation', which has been a source of different interpretation by local French tax offices.
In particular, if the amount of the rental income is below the level of the UK personal tax allowance (£9,440 in 2013), does the income then cease to be 'subject to UK taxation' and become fully taxable in France?
According to international tax accountants PetersonSims, the issue has been whether the personal allowance amounted to a tax exemption, thereby making it taxable in France, or whether it was simply the equivalent to a zero tax band, in the same manner as in France, thereby giving access to the tax credit.
Some local offices have adopted the first interpretation, with the result that the income has been fully taxable in France, without any tax credit being granted.
Following representations made by PetersonSims the French tax authority have recently given a ruling on the issue, stating that the UK personal allowance will not be considered to be an impediment to granting of tax relief against UK rental income.
This interpretation will apply, notwithstanding the fact that the person concerned may not pay any income tax on the rental income in the UK, or have other UK taxable income which takes them beyond the personal allowance.
We would be very interested to hear from you on this issue, and if you seek professional support in the matter, then drop us a line at [email protected] and we will endeavour to point you in the right direction.
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