This column is by Bill Blevins of Blevins Franks financial advice group (blevinsfranks.com). He has decades of experience advising expatriates in France and co-authored the Blevins Franks Guide to Living in France.
Moving to France pre-Brexit
These are busy times, with many UK nationals finalising their move to France before the Brexit transition period ends on December 31. If you are one of them, you have so much to look forward to as you settle into your life here and start to reap the benefits. We have come across a number of British residents who ended up being in France throughout lockdown and were persuaded to make France their permanent home after enjoying their time here.
Whether you are in that category or this will be your first time living in France, obtaining legal residency before Brexit will probably be top of your to-do list. However, moving to France also means you need to review your tax and estate planning, together with your investments and pensions, so it is advisable to take specialist advice sooner rather than later.
We covered this in last month’s article, but since buying property is such a large part of moving to France, we are taking a closer look at that here. It is important to understand the tax implications when buying property in a new country and/or you have cross-border tax liabilities.
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 there may be other tax considerations. Here we look at three key property taxes you need to be aware of in France – although there are others. You also need to explore the succession implications, as France imposes “forced heirship” rules, and establish the best way to own the property to suit your family’s needs.
France imposes an annual wealth tax on property, impôt sur la fortune immobilière (IFI). It affects households with total taxable property assets worth €1.3million or more. There is an €800,000 tax-free allowance, then rates start at 0.5% and rise progressively to 1.5%.
Residents of France are taxed on the value of their household’s 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. Non-residents are liable on French real estate, including rights over property in France.
People who come to live in France after being a tax resident of another country for at least the preceding five calendar years do not pay IFI on non-French property until the sixth calendar year following the year when they move to France.
Capital gains tax
We all hope our property will grow nicely in value, but how much tax will you pay when you come to sell? Other than their main home, French residents pay capital gains tax on worldwide property (including shares in property-holding companies) at 19%, plus surtaxes, plus social charges, which are generally 17.2% but can be reduced to 7.5% for Form S1 holders. The surtaxes rise progressively from 2% for gains over €50,000 to 6% for gains over €260,000. So the maximum total rate is 42.2%.
Capital gains tax is reduced for the length of ownership, starting in the sixth year and 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 and you are in the French tax system. There can be a 12-month breathing space if you meet certain conditions. French nationals living abroad, and residents of EU countries, Norway and Iceland – Brexit could potentially affect UK nationals here, we don’t know yet – are entitled to an exemption on the gain made on a French residence if the sale takes place within five years of leaving and you were fiscally resident for at least two years.
The exemption is limited to €150,000 of the net gain and is available once. The property does not have to be your main home at the time of sale and can be rented out. If the sale occurs after five years of leaving, the property must be your home in France, available for your use in the year of sale. If you are in receipt of a state pension or disability card, you may be exempt from capital gains tax in France on the sale of real estate if your taxable income fell 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 be exempt 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 there, though tax paid in France is offset against that due in the UK. The 17.2% French social charges cannot be offset against UK tax.
If you are renting out a French property, the net income will be taxed at the scale rates of income tax, ranging from 11% (for income over €10,064) to 45% (income over €157,807) in 2020, plus 17.2% social charges. The same applies to French residents who rent out property abroad. Note that the special 30% fixed rate of tax available for investment income does not apply to rental income.
If you are thinking about an investment property, it is worth weighing up the tax implications compared to capital investments, particularly since the current tax regime favours savings and investments in shares, bonds, assurance-vie, etc. There are other issues to take into account besides tax: for example, will you have sufficient asset diversification and liquid assets? Take the time to look at all the various factors and have a chat with a professional financial adviser to establish what your options are and which is best for you.
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.