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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. 

CGT relief

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.

Outlook

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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27 comments so far. Why not have your say?

Bernard Mocatta

Jul 10, 2012 at 17:21

Lorna wrote:-

Most home owners will have bought their property with a mortgage and this will be deducted from the sale price before any CGT is calculated

I think this is not correct as the mortgage is not usually offsettable against any gain. For inheritance tax it is as it is the net value that is taxed , but not capital gains.

Mortgage interest against rental income - yes that is normally offsettable.

Otherwise an enjoyable article as usual

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Tongue of Fire

Jul 10, 2012 at 17:29

Curious that Blevins Franks have not noticed that the Social deficit arose from the French health insurance programme, for which non-residents should not be liable.It is laughable that Hollande's Government is clutching at budgetary straws, and shifting liabilities around, in order to bring them into income tax, rather than the equivalent of national insurance.However the last laugh will be on the non-resident and the Exchequer of their country of residence, as the CGT liability in France will now exceed the UK tax , the increased tax credit will remove a budgetary ressource from our dear George.

One important point, the mortgage is not deducted from the CGT liabilty. Loma should perhaps consult an expert. Peter Harris of www.clerksroom.com is generally quite good I have been told as he does both the English tax and the French tax advice although I believe he is now in Jersey.

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sally harris

Jul 10, 2012 at 17:51

Are you sure the excess CGT paid in France will be repaid by George in the UK ?

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Simon Oliver

Jul 10, 2012 at 18:08

A proportion of the mortgage used to be offset against income tax (if the property was bought before 2011 and if the property was your 'main residence') but this loophole has now been closed. It only ran for the 5 years after purchase and was intended to incite people to own their own homes. It didn't.

As a French resident I find it normal that foreigners who own property in France should pay the same rates as us.

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Jonathan

Jul 10, 2012 at 18:54

All countries in the Euro zone seem to be trying to reduce their deficit by increased taxes. The UK is just printing money. It will be interesting to see the results of the different methods in a few years.

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Rob Walker

Jul 10, 2012 at 19:35

Lorna, you seem to have omitted a key piece of information which may have made your article worth reading. How is the UK £10k capital gains allowance treated between countries? Is there a similar allowance in France? Seeing as many properties in France are likely to make a loss on sale, or maybe a small (under £10k ) gain, this information is particularly important and seems to have been omitted from this rather fuzzy report.

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stormdog

Jul 10, 2012 at 19:49

Ha!

Since years the French have made a business out of taxing overseas French residents.

There was a report earlier today claiming that Cameron told, or would tell, Hollande, who has been here today, that Britain would be delighted to welcome as many French rich as wanted to come here, brilliant!

Sarkozy most sensibly raised the French retirement age to 65, within days of being elected Hollande dropped it again to 60, this guy must be out there with the fairies.

The difference between the two positions can be measured in billions of euros.

How on earth is France going to be able to pay for this?

Surely when push comes to shove, Merkel will tell the French to take a running jump.

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Marcus Frisby

Jul 10, 2012 at 19:54

My understanding is that if your french property is rented out and qualifies under UK tax as a furnished holiday let, CGT on the sale of the property (for a UK resident) would be at 10% rather than 28% as it's seen as a business. In this respect, these new laws would represent a significant increase to 34.5%.

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stormdog

Jul 10, 2012 at 19:58

The end of the first paragraph of my posting above should read:

......................of taxing overseas people who have a second home in France.

Many apologies.

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HGE

Jul 10, 2012 at 20:04

I doubt a 15.5% French social charge can be offset against either UK income tax or CGT. Normal double-taxation offset rules are "same type of tax on the same transaction" - so eg it's been uncertain whether (when a French property is gifted) the French gifts tax can be offset against UK CGT.

I'd prefer to be contradicted on this though - so if anyone here thinks that the 15.5% *will* be offset-able against UK taxes I'm all ears.

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NickH

Jul 10, 2012 at 20:25

It is important to note that the UK capital gain will be calculated by converting the purchase price and sale proceeds into sterling at the prevailing exchange rate on those dates. As a result of fluctuations in exchange rates, this could easily result in the 28% CGT paid in the UK being greater than the 34.5% French CGT (where the euro has strengthened between the date of acquisition and disposal). In this case, a UK resident sellers position will be unchanged by the increase from

The other side of the coin is that if the Euro has weakened against sterling between purchase and disposal, the increase in overall tax exposure by the proposed new 34.5% rate could be greater than simply the difference between UK and French CGT rates (ie more than the 6.5% quoted in the article).

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mikeran

Jul 10, 2012 at 21:49

Rob Walker--As I understand it there is no equivalent CGT 10 k type allowance in France. Or any difference between Husband and wife. They are treated as one ( Male) person for tax purposes. The wife does not it seems exist, however her earnings will be taken into account under joint taxation.

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Tongue of Fire

Jul 11, 2012 at 09:33

@Sally Harris

I understand that if you sold a property in France in your own name as a UK national and resident, you used to pay French CGT at 19%. You were then taxed in the UK at a higher rate, and could use the credit for the French tax against that. George Osborne will perhaps not be paying, but he will simply see the French Treasury use up the the gain without being able to tax it himself.

@Rob. Things have moved on there a little since the War, but I think you mean the foyer, which is an entirely different fiscal menagérie to the British, and seems to give the French great advantage as the number of individuals and children in it means that overal tax rate is lowered proportionately. Perhaps we should speak to George.

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derek farman

Jul 11, 2012 at 09:37

Having just returned from the wonderful Cap Ferret area near Bordeaux , we were amazed at the number of shut properties . It would appear that the French maybe do not rent their holiday homes out , perhaps keeping them purely for their own usage. It could also mean that if they rented them out , they would then alert the French tax authorities to these assets.

It was a shame though to see so many houses under maintained, and with very scruffy, overgrown gardens in this otherwise beautiful area .

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Lorna B

Jul 11, 2012 at 19:17

Perhaps I should have made it clearer that the mortgage is deducted from the purchase price - not the CGT liability - before calculating the tax and as I pointed out, although any French liability can be offset against a UK liability, if the former is greater than the latter the UK tax man doesn't refund the difference.

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sally harris

Jul 11, 2012 at 21:03

So much for the double taxation treaty!

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Tongue of Fire

Jul 12, 2012 at 08:05

@Lorna B

Lorna, if you are talking about the French CGT what you say is wrong. You cannot deduct the mortgage from the purchase price on a sale in France. You may be confusing it with the annual Wealth tax issue, where certain mortgages, regsitered in France may be allowabe to get the "net" assessment. You should check that you are getting the information from somone who understands the French sale system which I understand requires the appointment of a fiscal representative, registered with the tax administration, who does the tax declaration, calculatation, and payment for the seller. NO mortgage deduction is possible in a sale by an individual, you might be able to sell a foreign company's shares including the liability, but believe me that is a can of worms as even that is taxed in France!

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Anonymous 1 needed this 'off the record'

Jul 12, 2012 at 08:07

@Lorna B

Lorna, if you are talking about the French CGT what you say is wrong. You cannot deduct the mortgage from the purchase price on a sale in France. You may be confusing it with the annual Wealth tax issue, where certain mortgages, regsitered in France may be allowable to get the "net" assessment. You should check that you are getting the information from somone who understands the French sale system which I understand requires the appointment of a fiscal representative, registered with the tax administration, who does the tax declaration, calculatation, and payment for the seller. NO mortgage deduction is possible in a sale by an individual, you might be able to sell a foreign company's shares including the liability, but believe me that is a can of worms as even that is taxed in France!

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Lorna Bourke

Jul 12, 2012 at 10:29

Profuse apologies - I am confusing CGT with wealth tax. It would make no difference to any gain anyway if you were to deduct the mortgage from either the buying or selling price. The mortgage can be deducted from the value of a property for the purposes of calculating inheritance tax.

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Tongue of Fire

Jul 12, 2012 at 14:31

@Lorna.

Thanks, that clears things up.

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Anonymous 2 needed this 'off the record'

Jul 14, 2012 at 10:16

It is unlikely that the UK tax authorities will allow the 15.5% social charge to be offset against any potential Capital Gains Tax. They will probably view this as National Insurance and therefore instead of an additional 6.5% you will end up paying substantially more than the usual Capital Gains tax.

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Anonymous 1 needed this 'off the record'

Jul 16, 2012 at 09:20

Anonymous 2 is quite right in principle, although the new 2008 Tax Treaty does cover these as income / capital gains taxes, and article 24 does provide for a credit for a tax in general.The French probably knew what hey were about to do in the negotiations leading up to 2004 and then 2008. In other words George Osborne will end up paying for it in uncollected taxes.

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Anonymous 1 needed this 'off the record'

Jul 16, 2012 at 10:16

Thinking about it, HMRC do a pretty awful job in protecting their own taxpayers and budget in tax treaty negotiation. They were convinced by the French negotiators in the 2004 negotiations that the 3 times annual rental value tax (art. 164C CGI) was not going to be applied to British citizens on the basis of the EU freedom of movement provisions, when in fact they were challenging that defence in several domestic procedures, which they subsequently won before the ECJ. Income tax was outside the scope of the Treaty, at least at that time. However, by that time the ambrosian olympians at HMRC had agreed to the removal of the strong exemption clause in the previous Treaty. That is now leaving Brits with French homes open to this additional charge, when for example, the Spanish are not so exposed. .Personally, and in wry humour; I would put HMRC on some form of "performance" basis and adduce a percentage of tax owed by reference to their capability of defending their taxpayers and their exchequer, which frankly they do not. If I were a UK dom, I would see a serious difficulty in paying tax to a bunch of clodhoppers who were incapable of defending their own exchequer against gallic subtility, and what is worse making me pay foreign tax on a deemed income basis wiythout credit.That adminstrative "tolerance" removes value from the British pound. There is currently a conspiracy as to mutual toleration of bad behaviour and adminsitrative mispractice between European tax administrations.

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NickH

Jul 18, 2012 at 12:50

In the event that the additional contribution is allowed as a credit against UK tax, it is important to note that the UK capital gain is, broadly, calculated by reference to the purchase price and sale proceeds being converted at the prevailing €/£ exchange rate at the dates of acquisition and disposal respectively. This can lead to a situation where there is negligible French Tax payable but still a substantial UK CGT liability as a result of the Euro strengthening against sterling throughout the period of ownership.

Individual's should take UK advice if necessary and should rely on the UK CGT liability being automatically covered, even if the creditable French rate is greater than 28%.

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NickH

Jul 18, 2012 at 13:53

Apologies, last sentence should read

"...should NOT rely..."

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alex2013

Oct 11, 2013 at 13:03

good info on change in French capital gains tax, and other key info if you buy, sell or own property in France

http://frenchpropertytrend.wordpress.com/category/capital-gains-tax-on-french-property/

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Andrew Boughton

Sep 26, 2014 at 22:03

Looking for some help - I assume these property taxes only apply to capital gain - is that correct? I am about to sell some pieces of land and non-habitable buildings to a neighbour (residue of previous ownerships) all will be at a loss or nominal differences from purchase prices 5-10 years ago- surely the whole sale value isnt taxed- may seem a silly question but the blog (quite understandably) relates to house sales and assumes a gain in value. These are pieces of land and derelict barns of nominal value . When I sold farmhouse and cottage several years ago the tax was just a few thousand euro.

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