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French property tax: will François Hollande's plans affect you?
If you own a second home in France, you might be concerned about Francois Hollande's planned tax increase. Lorna Bourke investigates.
Before paying any tax on rental income you can deduct costs including heating, lighting, cleaning, laundry, TV and broadband fees, insurance, advertising, local property taxes, the costs of a managing agent, guardian, caretaker, swimming pool maintenance man or gardener and the costs of insurance taken out against the risk of non-payment of rent by the tenant.
Also deductible are the interest costs on a mortgage for the purchase, repair or improvement of a rented property or a property purchased with a view to it being let. It is therefore unlikely that many owners will have any income tax liability on rental income.
As in the UK, owners of French homes are exempt from CGT if the property is their main residence. Although French CGT relief has been reduced, most recently in February of this year, second home owners still benefit. There is a 2% annual reduction on CGT from the sixth year of ownership, 4% for every year of ownership from the 17th year and 8% for every year of ownership from the 24th year.
Therefore those who have owned their second homes for 30 years or more will be fully exempt from French capital gains tax.
But regardless of any changes to French CGT, they will, of course, still have liability to CGT if they are a UK resident of either 18% for basic rate taxpayers or 28% for those who pay at higher rates. However, under the double taxation agreement any CGT liability in France can be offset against a UK tax liability, although there is no rebate if the French tax bill is higher than the UK liability.
Given that most UK owners of French homes are likely to be higher rate taxpayers, the worst that can happen is that on selling a French property the UK owner pays an extra 6.5% CGT.
Tax on the rich
The tax changes are unlikely to have much effect on the average Brit with a holiday home worth, say, €350,000 – or Brits resident in France. Hollande is after the rich. Wealthy UK citizens who have property and other assets in France worth €1.3 million or more could be affected by changes to annual wealth tax.
Currently wealth tax, an annual levy, is applied at 0.25% on taxable assets worth between €1.3 million and €3 million, and then at 0.5% on wealth above that level. If the new proposals are passed it will be applied at six different rates ranging from 0.55% to 1.8%, starting at €1.3 million.
This could be onerous for those who live in France for more than 50% of the year as it applies not just to property but worldwide assets. This could reduce income significantly.
Whether or not the proposals become law remains to be seen. Critics have pointed out that the additional social charge added to the tax bills of foreign property owners could be challenged and deemed unfair by the European Union as it imposes a ‘social contribution’ on British home owner who will not derive the benefits to which French residents are entitled.
Sarkozy gave up on trying to impose a similar tax hike on the grounds that France benefited enormously from foreign tourists spending money there.
However, with governments across Europe strapped for cash and the UK looking to impose CGT on profits made by foreign owners of UK property (many think not before time) it seems likely that other EU governments may well follow the French and impose higher taxes on foreign property owners.
Those owners with euro mortgages are already suffering from the weakness of sterling and the relative strength of the euro (on a historical basis) – not to mention collapsing property prices in areas such as Spain which has left many in negative equity. The outlook for increases in tax for owners of holiday homes is not good.
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