The impact of inflation on taxation
In a high-inflation market, you’re better off favouring overall or specific income deductions over tax reductions. That’s because investment limits, tax reduction amounts and tax exemptions have not been revalued, other than a few rare exceptions(2). For example, the “Malraux” system investment limit of €400,000 has not been revalued since 2009, despite the Cost-of-Construction Index (CCI) increasing by nearly 35%(3) over the same period.
The same pertains to property wealth tax (IFI) and transfer duties.
The wealth tax (ISF) rate, replaced by the property wealth tax (IFI) rate in 2018, has not moved since 2013. Therefore, the IFI trigger threshold of a total wealth (net value) amount of €1,300,000 remains unchanged. Were it indexed to the house price index (new and second-hand) of INSEE, the French national statistics office, it would have stood at €1,685,000(4) in 2022.
In other words, inflation mechanically increases the value of real assets, particularly the property assets and duties falling under IFI. The result is a gradual taxation of assets that were not subject to tax at the time of the adoption of the thresholds and tax bands.
Similarly, the absence of an automatic revaluation of allowances and inheritance tax scales for 10 years, combined with the valuation of assets, partially explains the sharp increase of such payments (+120% since 2010(5), making what were non-taxable assets taxable in 2022.
This makes it all the more important to start transferring your wealth in your lifetime and from as early as possible. Indeed, gifts are generally less costly than transferring your estate (renewal of allowances and lower tax bands every 15 years, division of property and taxation of only bare ownership, etc.).
It’s a similar case for life insurance, for there have been no adjustments to allowances either. For payments made before the policyholder’s 70th birthday, the allowance of 1,000,000 French francs (FF) per beneficiary under Article 990 I of the French General Tax Code, which became €152,500, has not changed since 1998. Revalued for inflation, that amount would be in the region of €220,000. The same rings true for payments made after the policyholder’s 70th birthday: the total allowance of FF 200,000 in 1991 (€30,500 after moving to the euro), revalued for inflation, would be approximately €50,000(6).
Because allowances have not been adjusted for inflation, the inheritance tax paid on life insurance has increased on the whole.
Another, somewhat anecdotal example of non-indexation is property “tontine” — a French scheme for joint ownership.
The French law of 18 January 1980 lays down the principle that “assets acquired by virtue of a [tontine] clause are, from a fiscal standpoint, considered as transferred for free to each of the beneficiaries of the acquisition” and are therefore subject to inheritance tax. This provision does not apply to the primary residence jointly owned by two beneficiaries as long as its total value is below FF 500,000 (€76,000).
Since 1980, the Cost of Construction Index of residential buildings has been multiplied by 3.58 over the period(7). Accordingly, FF 500,000 in 1980 became €270,000 in 2022. Thus, the law and the initial intention of lawmakers have lost their substance, even if the effects have been offset by the exemption of inheritance tax for spouses, civil partners (under the French PACS civil union contract) and siblings under certain conditions since the French TPA act of 2007. Live-in partners and other non-relatives stand to lose the most from the absence of revaluation.
Accordingly, not indexing certain thresholds and tax rates to inflation often leads to discrepancies with the rationale behind the original texts, and to higher taxation of assets.
(1) Tax rate raised by 5.4% for income earned in 2022.
(2) The 2023 French Budget Act just increased the tax credit limit for childcare from €2,300 to €3,500.
(3) Source: Insee Cost-of-Construction Index (CCI) between Q1-2009 (1.509) and Q3-2022 (2.037).
(4) Source: Insee House price index (new and second-hand) between Q3-2013 (103.6) and Q3-2022 (134.3).
(5) Source: The French Treasury (Direction Générale du Trésor — DGT): “Modèles de micro-simulation des impôts liés au patrimoine des ménages” (Microsimulation models of taxation of household wealth), December 2021.
(6) Source: Insee “indice des prix à la consommation, France hors Mayotte, ensemble des ménages, données annuelles de 1991 à 2021” (Consumer price index, France excluding Mayotte, all households, annual data from 1991 to 2001)
(7) Source: Insee Cost-of-Construction Index (CCI) between Q1-1980 (569) and Q3-2022 (2.037).
Would you like to discuss this subject further with us?
The content provided on this page is for informational purposes only and is not contractually binding. It is not intended to provide an investment service, does not constitute investment advice nor a personal recommendation in insurance, nor any form of canvassing, nor legal, tax or accounting advice from Societe Generale Private Banking France. The data contained in this document are provided for information purposes only, are subject to change without notice, and are aimed at helping guide the decision-making process. Under no circumstances does any information on past performances contained in this document guarantee future performances. Before acquiring any investment service, financial product or insurance product, potential investors (i) must read all the information contained in the detailed documentation on the service or product under consideration (prospectus, regulations, "Key Investor Information Document", Term Sheet, contractual terms of the investment service, etc.), paying particular attention to that concerning the associated risks; and (ii) consult with their legal and tax experts to assess the legal and fiscal implications of the product or service under consideration. Investors may obtain more detailed information from their Private Banker who can also assist in determining eligibility to the product or service under consideration which may be subject to conditions, and whether such product or service meets their needs. Accordingly, Societe Generale Private Banking shall under no circumstances be held liable for any decision made by an investor on the basis of this information alone. These forecasts about future performances are based on assumptions which may not be realised. The scenarios presented are estimates of future performance, based on historical data on how the value of an investment varies and/or on current market conditions, and are not precise indications. The yield obtained by investors is susceptible to change depending on the performance of the market and on the holding period of the investment by the investor. Future performance may be subject to tax in accordance with the personal situation of each investor, and is susceptible to change in the future.
For a more comprehensive definition and description, please refer to the prospectus of the product or, if necessary, to other regulatory documentation (where applicable) before making any investment decisions.
This document is confidential and intended solely for the recipient; it may not be made public or disclosed to any third party, and may not be reproduced in whole or in part without the prior written agreement of Societe Generale Private Banking. Click here for more information.