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How do the new property related taxes in France affect you?


Francois Hollande, the President of France, kicked up quite a storm on both sides of the English Channel when his socialist party first discussed a raft of changes relating to the taxation of property. Some changes like the yearly charge on second homes were quickly quashed as it was just too unpopular while others were passed. Many of the articles that appeared in newspapers at the time were largely headline grabbing and mainly about appeasing left wing voters in France rather than actually bringing in any significant extra revenue for the tax administration and below I shall explain why.

The two significant changes for non-residents that were eventually made were to do with capital gains tax and the tax on rental income.

For capital gains tax the rate increased from 19% to 34.5% for residents of countries in the EU plus Liechtenstein, Iceland and Norway. This rate rises to 48.5% if the person resides in a country outside of this economic area and to 65.5% if they are on a list of uncooperative countries. This however decreases after year 5 as follows:

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

So after year 30 there will be no capital gains tax to pay and even if sold before this period the capital gains will be substantially reduced. This change to capital gains tax was actually proposed by the previous French President Nicholas Sarkozy and was then followed through by Hollande’s party once they took power so these changes would actually have happened regardless.

In addition however based on the capital gains tax due as calculated above there is now an additional tax on gains greater than 50,000 Euros on a progressive scale from 2% to 6% as set out below:

- 2% from 50 000 to 100 000€

- 3% from 100 000 to 150 000 €

- 4% from 150 000€ to 200 000 €

- 5% from 200 000 € to 250 000 €

- 6% above 250 000 €

This additional tax can be avoided however if you meet all of the following criteria:

-If you are a resident of an EU country with a tax agreement with France,

-If you have lived in France for a minimum of 2 years,

-If the property was not rented out since the 1st of January of the previous year.

Also there is a double tax treaty between France and the UK (and most countries around the world) so owners will normally never pay tax twice. Since CGT is currently 28% in the UK then if the property is sold in the first few years, since the tax is higher in France than the UK there will be nothing to pay in the UK when the money is brought into the UK. However after say 20 years when the capital gains in France will be far lower than the UK (because it has decreased as indicated above) when/if money is brought back into the UK the owners would then pay the difference in the UK to reach the higher tax rate that the UK is charging. So in actual fact if people are investing for the medium to long term as they should be then in actual fact the CGT in the UK is always higher so even if the rate were zero in France you would still need to pay the 28% that the UK charge if you are a UK tax resident. So as you can see for most non-residents these “headline” tax hikes actually make very little difference to most investors/second home buyers in France.

With regard to Tax on rental income on regular Buy to Let properties in France the new rules make a difference as now it has increased to 35.5%. For unfurnished rental property you are permitted to deduct the usual costs such as maintenance charges, management fees, repairs, mortgage interest, accountancy fees, inspections etc and will pay tax on the remaining profits much like the UK and most European countries. Since in the UK for example the tax you would pay would be simply what your income tax rate is, if you were a higher rate tax payer paying 40% tax per annum (which most non-resident property investors are) then in fact you would actually be paying a higher rate on your rental property in the UK than in France so this increase by the French authorities is simply bringing taxes more in line with the rest of Europe and is not an overbearing socialist tax hike as is sometimes declared in some media platforms.  

In addition however if you own and rent out a furnished property that is rented to tourists on short term lets (nightly or weekly) then you can avail to the BIC tax system (a type of commercial business tax) if its prime objective is rental and not personal use. Essentially if properties are available to rent out for tourism purposes (which is beneficial to the local economy) then the French tax authorities in addition to the normal practice of being able to offset costs such as mortgage interest, accountancy fees, inspections etc also allow 90% of the price of the property and the notaire fees to be offset against any rental income over a 30 year period. This means that if a mortgage is taken, even if just say a 50% mortgage, then there will be zero or very little tax to pay on rental income and in fact even if bought for cash will still have no tax to pay or very little for a long time and once tax is paid it will still be very little due to this tax break.

So as you can see the tax relating to rental property in France is actually often more advantageous for owners than the tax rate applied in many European countries including the UK. It just requires investors to take the time to look past the attention grabbing newspaper headlines and into the detail to see how a property investment in France will actually be treated.