Tax considerations of owning property in France
It is always important to understand the tax implications when buying property, particularly where a foreign tax regime is involved and/or you have liabilities in more than one country.
You should be particularly careful with a second (effectively investment) property that will not be regarded as your principal private residence, as you generally lose the main home reliefs and may have other tax considerations.
Here we look at three key property taxes you need to be aware of in France (there are also local taxes such as the taxe d’habitation and foncière), whether you are resident or non-resident.
This formed part of President Macron’s tax reforms for 2018. Wealth tax as we knew it – Impôt sur la Fortune (ISF) which applied to your household’s total wealth – was repealed and replaced by a new real estate wealth tax – Impôt sur la Fortune Immobilière (IFI).
This was good news for savers and investors, since bank accounts and capital investments are no longer liable, but property investors may feel hard done by.
Individuals resident in France are taxed on the value of their worldwide real estate assets as at January 1 each year. This includes all residences – though the value of a main home can be reduced by 30% for wealth tax purposes – holiday homes and investment properties, whether owned directly or indirectly. This is based on the property wealth of the whole household (note, unmarried couples living together are treated as one household for this purpose).
Non-residents are liable on French real estate, including any rights over property in France.
However, you only need to pay wealth tax if your total taxable property assets are worth €1.3million or more.
There is an €800,000 tax-free allowance, and rates start at 0.5% for assets between €800,000 and €1.3million, rising progressively to 1.5% for assets over €10million.
Capital gains tax
We all hope our property will grow nicely in value, but how much tax will we have to pay when we come to sell?
French residents pay capital gains tax on worldwide property, including shares in property-holding companies, at 19%, plus surtaxes, plus 17.2% social charges. The maximum total rate is 42.2%. There are no surtaxes for gains under €50,000, but after that they rise progressively from 2% to 6% for gains over €260,000.
Capital gains tax is reduced for the length of time you have owned the property, starting from the sixth year of ownership, with full exemption after 22 years. Social charges are also reduced after five years, but you have to wait 30 years to escape the charges completely and the reduction is weighted towards the last seven years.
For residents, your main home is exempt from capital gains tax in France, provided it is your habitual and actual residence at the time of sale.
You would need to be fully integrated into the French tax system to benefit. There can be a 12-month breathing space if you meet certain conditions. Note, however, that a 2017 constitutional court decision ruled that if the taxpayer leaves France and becomes tax resident elsewhere, the exemption does not apply and the gain is taxable in full. So, if you are leaving France, you will want to do your best to find a buyer and conclude the sale before you leave.
EU or EEA citizens who were formerly resident in France but move abroad (such as Britons moving back to the UK) are also entitled to an exemption on the gain made on the sale of one French property after they leave, under certain conditions, as long as they were formerly fiscally resident in France for at least two years. Note that this may no longer apply after Brexit or the Brexit transition period.
Having rented the property out is not a bar to benefiting but if the sale is after December 31 of the year five years after the year when you left, it must have been available for your use since at least January 1 of the year before the year of the sale. The exemption is limited to €150,000 of the net gain, and it is only available once.
This could apply for example to a Briton who leaves France and becomes established as a UK resident but keeps their former French main home as a holiday home or rental property.
If you are in receipt of a state pension or have adisability card, you may be exempt from capital gains tax on the sale of real estate if your taxable income was below a certain level in the previous two tax years and you had no wealth tax liability.
Finally, a property other than your main home may also be exempt from capital gains tax if you use the proceeds to buy a main home for yourself, not having owned one in the preceding four years.
Non-residents selling French property are fully liable to French capital gains tax.
UK residents may also have to pay tax in the UK, though tax paid in France is offset against that due in the UK.
The 17.2% social charges that are also due in France cannot be offset against the UK tax.
If you are renting out a French property, the net income will be taxed at the scale rates of income tax, currently ranging from 14% (for income over €9,807) to 45% (income over €153,784). Additionally you will pay 17.2% social charges.
There are optional schemes (rent thresholds allowing) which give fixed expense allowances. For example 30% for unfurnished property.
Note that the 30% fixed rate of tax (including both tax and social charges) introduced this year for investment income does not apply to rental income. If you are thinking about buying investment property, it is worth first weighing up the tax implications compared to capital investments, particularly since the 2018 tax reforms favour savings and investments in shares, bonds, assurance-vie etc.
There are other issues to take into account besides tax. For example, will you have enough diversification among your investment assets and enough liquid assets should you need to release cash relatively quickly?
Take the time to look at all the various factors, and have a chat with a professional financial adviser, to establish what is best for you. There may be ways to lower your tax liabilities which you are not aware of.
This article is by Bill Blevins of Blevins Franks financial advice group who also writes for the Sunday Times on overseas finance. He is co-author of the Blevins Franks Guide to Living in France (www.blevinsfranks.com).
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.