I have been thinking a fair amount about France lately. For a start, your scribbler is off to the southwest of that beautiful land at the end of July to escape the London Olympics (I did not get any tickets, alas). We recently ran an interview with the co-heads of the BNP Paribas wealth management business, and judging by the reader traffic, it was well received. I have also spoken recently to BNP’s biggest rival, Société Générale, about how its investment thinking is playing out.

And of course, looming over all of this is the current presidential race, due to enter the second round at the start of May. In the first round, president Nicolas Sarkozy lost narrowly to his socialist rival, Francois Hollande, while the far-right National Front took almost 18 per cent of the vote.

As the second-biggest eurozone economy (the world’s fifth largest by nominal GDP) behind its neighbour, Germany, and home to several of the biggest wealth management shops in the world, France ranks as a big-hitter in the wealth management stakes. A few days ago, it was reported – but not confirmed – that the Rothschild family intends to secure long-term control over its international banking empire by merging its French and UK assets into a single group. The reorganisation will reportedly reunite the shareholdings of the French and English sides of the family into a single company, listed in Paris.

And the UK linkages with France do not end there. According to one report in 2008, there were around 190,000 French nationals in London (source: New York Times). That figure has almost certainly increased since then. The Eurostar rail link between London and Paris, not to mention the existence of cheap(ish) flights between the capitals, also helps this trend. While some Britons spend their middle ages and beyond in the bucolic delights of the Dordogne or, if they can stand the tourists, Provence, a younger group of citizens have left la République for the UK, many of them affluent people working in the City. (I even used to work for a French-born editor before coming here.)

Wealth managers should take note

Whatever one thinks about all this (personally, I think such movement is a good thing as it can enrich both sides), developments in France, and how other countries, such as Switzerland, react, are important to the wealth management industry.

In the UK’s case, it has been, or is in the process of, clarifying its rules on domicile and residence. A new UK visa regime for investors is in place to encourage high net worth investors to put money into the country, and some of that money may be French. The UK’s Conservative/Liberal Democrat government, in the annual budget in March, intends to cut the top, 50 per cent income tax rate to 45 per cent on incomes of £150,000 (around $242,100) a year or more from next April. (In my view such a timid cut satisfies no-one; far better to go back to the old 40 per cent and have done with it.)

And what about Switzerland? In the past, that country would be expected to benefit if the tax and economic climate worsens in France, but this may not be so easy this time around. The country’s bank privacy regime has been under relentless assault and the high value of the Swiss franc means that footloose French people may find it harder to move to the Alpine state than used to be the case. So this could benefit the UK. And don't rule out a possible move by some to Canada with its large, French-speaking population in Quebec.

French tax changes

The Sarkozy regime has instituted a number of changes. For example, from 1 February, a person owning a second home in France must hold it for at least 30 years to obtain relief from capital gains; previously, an owner must have held a property for 15 years. Tax incentives for French tax residents are squeezed; when investing in specific real estate properties, overseas investments and ecological equipment, French corporate taxation of prior losses will be changed. Under changes that took effect in 2001, are adjustments to the taxation of trusts.

French law now considers the settlor of a trust who has a French “link” as being the owner of the underlying assets in terms of applying wealth tax. As previously reported, increased disclosure requirements have been imposed on French trusts, which have been likened to the onerous compliance tests now applied on financial institutions dealing with US citizens. And last but not least, the top rate of wealth tax in France has also been cut to 0.5 per cent from 1.8 per cent. 

If Hollande wins

The relative merits/downsides of doing business on either side of the English Channel could take a sharp turn if – as some polls at this point suggest – Hollande enters the Élysée Palace in May. Hollande, a man who has gone along with the “banker bashing” rhetoric seen in recent years, wants to impose a 75 per cent marginal income tax rate on incomes of €1 million (around $1.32 million) or more.

Such a severe tax rate would put the French tax authorities right down the wrong end of the Laffer Curve, as avoidance from taxpayers, and a general chilling impact on entrepreneurship, could seriously offset any benefit from such an onerous tax. The French economy stuttered last year, expanding only 1.7 per cent (source: INSEE). Mind you, the UK’s own performance was dire (up just 0.8 per cent). But a crackdown on the wealthy in France will only mean that the sounds of French accents will get louder in such haunts as South Kensington.

Of course, much can happen between now and 6 May. Even so, there is no doubt that the austerity measures called for by Sarkozy and his eurozone peers are unpopular in a continent that has come to accept a generous welfare state as a matter of right, but which has endured sclerotic growth and scandalous high unemployment (particularly among the young and immigrant groups), for far too long. If French politics do turn more hostile to private wealth then wealth managers operating outside of France had better start sharpening up their language skills. They could be busy.