New capital gains tax rules in France

On the 25th August 2011 the French government proposed a significant change to the current capital gains tax rules. Before this date capital gains tax was 19% for non-residents and 31.3% (19% + 12.3% social charges) for residents in France. This capital gain would then be reduced by 10% per year from years 6 to 15 so that by year 16 there would be no capital gains tax to pay at all. However, on the 25th August this all changed and the government proposed that capital gains relief should be spread over a 30 years period rather than a 15 year period. Below is the proposal (still to be passed by parliament):

-2% relief from year 6 to 17
-4% relief from year 18 to 24
-8% relief from year 25 to 30

Fortunately for property owners who own the property directly (not through shares in a company which owns the property like an SCI) this new capital gains rule does not come into effect until the 1st of February 2012. Unfortunately for people who own property via a company (like an SCI) the new capital gains calculations came into effect immediately. We have drawn up an example of how this capital gain is now calculated:

Mrs Brown buys a property in 2001 for 100,000 Euros. If she had of sold it before the 1st Feb 2012 then she would have been entitled to 5 years of exemption at 10% per annum (the 1st five years of ownership not being exempt). She would have paid just 50%of the 19% CGT which is 9,500 Euros. If she sells it after this date then she would only qualify for 5 years relief at 2% per annum giving a total relief of just 10% on the 19% CGT. This means she would have to pay 17,100 Euros.

If you were a French resident then this relief would not be calculated on 19% but rather 31.3% which after the 1st of January 2012 rise to 32.5% (19% + 13.5%) as the social charge increases from 12.3% to 13.5%.

It is important to remember, however, that as a non-resident you would normally also be liable to pay capital gains tax in your own country of domicile. For most EU countries and some others there is a double tax treaty between them and France which means that you do not end up paying the tax twice and just end up paying the difference between the two countries’ rates. So if you were a higher rate tax payer in the UK for example, you would be paying a capital gains tax at a rate of 28%. So in this case, regardless of how many years you would have owned the property, when you sell it you would normally have to pay in total the higher of the two rates which is 28%. The most the French authorities would have charged would have been 19% (the other 9% would be paid in the UK) so the new rules would have no impact on you whatsoever as the capital gains rate in your own country would have been higher anyway.

Potentially this may create a particularly active buyer’s market up until the 1st of February as sellers (particularly French residents) rush to sell their properties and drop their prices ahead of the tax increases giving the reactive buyer some excellent opportunities.

For further information please contact your French tax specialist or notaire.