Budget cuts could hit property plans

Right to deduct mortgage interest payments from income tax will go next year, as will the 5.5% VAT rate for renovation

28 September 2010

PLANNED cutbacks next year may make it harder to buy or renovate a home.

Economy Minister Christine Lagarde has said she intends to scrap the tax credit scheme that allows mortgage interest payments to be deducted from income tax in the first five years of property ownership.

She is also considering raising the 5.5% VAT level on home renovations, which would be a "catastrophe" for the industry, according to the president of building tradesmen’s body Capeb, Patrick Liébus.

The Minister told financial newspaper Les Echos that she is reviewing two key schemes that help with home purchase: the tax credits and the prêt à taux zéro loan (see below).

She wants to replace them, from the start of next year, with "a single tool" consisting of a "reinforced loan".

"The new loan will be for everyone; that’s to say it won’t be means-tested, but it will only be for first-time buyers."

This differs from the current one, which is not available above certain income ceilings.

However, she said the amount available will be variable, with higher sums for those on low incomes, living in high-pressure housing areas (Paris, the Côte d’Azur and the area near Geneva) or buying new-build.

Means brackets would be applied to work out entitlement levels, she said, and she would allow for them to be adjusted if too many people apply for a loan.

Mrs Lagarde said she had no qualms about removing the mortgage tax credit, a key measure from the 2007 TEPA Law brought in at the start of Nicolas Sarkozy’s presidency to boost the economy.

"All we are doing is simplifying so as to be more effective," she said.

She added that those who already benefit from the credits system will continue to do so for the full five years to which it applies.

The new arrangements would cost the state about €2.6 billion a year, compared to €2.8 billion currently, the minister said.

Mrs Lagarde added she was also thinking about possible tax tweaks to encourage more house sales and to stop people holding on to building land without building on it.

For example, at present the sooner you sell a house you have acquired, the more capital gains tax you pay, encouraging people to keep homes for as long as possible.

Mrs Lagarde said she might reverse this. Another possibility is raising taxe foncière on building land.

Concerning the 5.5% VAT on renovation work, she said that "when it comes to niches fiscales [official schemes allowing for tax savings], they are all fair game at the moment, including this one".
A decision may be made this month, she said.

According to Capeb, the reduced rate has, since it was brought in in 1999, helped create 53,000 jobs and has boosted the turnover of the sector by e2 billion.

It believes that 40,000 jobs could be at risk if the low rate is removed.

However, pundits say that, rather than raising the rate to the full 19.6%, the government may opt for an intermediate level.

Building industry representatives FFB say that it is vital it stays below 10% "for psychological reasons".

"The negative feeling would be lessened," its president, Didier Ridoret said.

Loans and tax breaks currently available

Prêt à taux zéro is an interest-free loan for someone buying, or having built, a home for their main residence, as long as they have not owned a home in the previous two years (apart from certain exceptions, such as people with serious disabilities).

The amount varies according to certain factors, but is typically 30% of the cost of new-build and 20% of non-new-build.

You cannot have a loan if your income is above certain ceilings, which vary by geographical area (eg. for a couple in the Côte d’Azur: €43,750).

There are increased sums available for new-build under certain conditions: either that the purchase also benefits from a means-based local authority grant or that it the building has “BBC” low-energy certification.

Mortgage interest tax credit allows you to deduct some of the value of mortgage interest payments from your income tax (up to set ceilings) for the first five years, done by filling in the interest paid in a given year in your tax declaration for that year.

The home concerned must be your main residence. From 2008-09, the deduction rate was 40% of the interest in the first year, then 20% for the next four. Now it depends on whether or not the home meets BBC standards.

If so, 40% applies for seven years. If not, the rate for a purchase this year is 30% in the first year, and then 15%. It was planned that it would be reduced further in 2011 and 2012.

5.5% Vat for home renovations applies to labour and parts, if a firm bills you for them.

The work must not be so extensive as to amount to creating a new property (eg. major extensions or renewing more than half of such major elements as foundations and load-bearing walls).

It applies to main or second homes built at least two years ago.

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