Property versus capital investments
Which is best?
Many people who have capital to invest will automatically look at securities such as shares or bond funds. Others are attracted to property, considering bricks and mortar a more solid, tangible asset. But which is right for you?
This article does not attempt to predict which investment would give you the best returns – the best-performing asset class varies year by year and is notoriously difficult to forecast – but rather looks at various aspects you need to consider when weighing up these options.
While you may not want to “let the tax tail wag the investment dog”, as the saying goes, here in France you certainly need to consider the tax implications.
Capital gains tax
If you sell a property that is your habitual residence at the time of sale, the gains are exempt from capital gains tax.
Otherwise, gains made on the sale of real estate are taxed at a flat rate of 19%, plus surtaxes, plus 17.2% social charges – a maximum of 42.2%.
The surtaxes kick in for gains over €50,000 and range from 2% to 6%.
Capital gains tax and social charges are reduced for the length of ownership.
For tax, the reductions start after six years, with full exemption after 22. Social charges start being reduced after five years, but the reductions are weighted towards the last seven years, with full exemption after 30.
If you are resident in France and the property is in the UK, you are liable for capital gains tax in both countries, though charges for non-UK residents only apply to the gain from April 2015.
The tax paid in France will be offset against your UK liability, but you cannot offset social charges.
Gains made on the sale of moveable assets, such as shares and other financial assets, are treated as “investment income” and taxed at a flat rate of 30%, including social charges.
Tax on rental income
Net rental income is added to your other general income for the year and taxed at the scale rates of income tax, currently starting at 14% for income over €9,964 and rising to 45% for income over €156,244.
You will additionally pay 17.2% social charges.
While investment income is taxed at the 30% flat rate mentioned above, this applies to interest earnings, dividends, capital gains on shares, etc. It does not apply to rental income.
French residents 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 any rights over property situated in France.
You will only pay wealth tax if your total taxable property assets are worth €1.3million or more.
There is an €800,000 tax-free allowance, with rates then ranging from 0.5% to 1.5%. In contrast, with effect from January 2018, capital investments, bank accounts etc are no longer liable to wealth tax.
If you are resident in France when you die, your worldwide estate is liable to French succession tax – each beneficiary has to pay tax on the amount they receive. Spouses and PACs partners are exempt on inheritances.
In this case, whether they receive investments, property or other assets makes little difference, as the tax is calculated on the value of their inheritance.
However, there are more opportunities to reduce the succession tax liability for your heirs on capital investments – for example, holding equity and bond funds within an assurance-vie – than there are for real estate.
While it is certainly worth weighing up the tax implications, there are other important factors to consider. These include:
- Liquidity – How long will you be able to hold the asset before you need to sell it? How easily could you retrieve your capital, should you need it earlier than expected?
While property can be a solid investment, it locks your money away in a highly illiquid way. If you need to release funds, you may not be able to sell quickly, or for the right price. And if, for example, you need €20,000, you cannot sell just part of a property. In contrast, if your portfolio includes equity and bond funds, you can usually sell them fairly quickly, and just the amount you need, not the whole investment.
- Diversification – While both shares and property have the potential to provide good returns over time, there are always risks with investments. And the key to reducing risk is diversification.
By spreading across different regions, market sectors and asset types – including equities, gilts, corporate bonds and cash, as well as property – your capital has the chance to produce positive returns over time without being vulnerable to any single area under-performing.
If you already own one or two properties, buying another could make you overexposed to this one asset class, increasing risk, especially if you do not own many equity or bond holdings.
For most people, it is easier to obtain effective diversification though capital investments, which can include shares in property funds, rather than with bricks and mortar.
Financial assets also offer more flexibility to change strategy in line with market or personal developments.
Ultimately, successful investing is about having a strategy specifically based around your circumstances, time horizon, needs, aims and risk tolerance.
So when you are thinking of buying a new asset, first consider whether this is a suitable investment for you and how it fits in with the rest of your portfolio. And, yes, understand and weigh up the tax implications.
With personalised, cross-border advice, you can reduce your exposure to risk while ensuring you hold all your assets – in France and elsewhere – in the most tax-efficient way possible.
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.
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).