Property vs capital investments in France – which is better?

There are various pros and cons to consider when weighing up real estate versus capital investments. 

I will not attempt to predict which would give you the most returns – the best performing asset class varies each year and is notoriously difficult to forecast. Rather, I will highlight various aspects to consider when exploring your options.

The starting point with investments is to ensure your portfolio is well diversified and suited to your situation, goals and risk tolerance. It is also important to understand and weigh up the tax implications, as these can impact your returns. 

If you already own a second property or more, or you live in France permanently but maintain UK property, is this in your best interest? What about your heirs? 

Capital gains tax 

When you sell a property that is your habitual residence at the time, the gains are exempt from capital gains tax.

Other real estate gains are taxed at 19%, plus 2%–6% surtaxes for gains over €50,000, plus social charges (normally 17.2% but reduced to 7.5% with Form S1) – a maximum of 42.2%.

Tax and social charges are reduced for length of ownership, starting from the sixth year. 

Full exemption is achieved after 22 years for capital gains tax and after 30 years for social charges.

French residents selling UK property are assessed for tax in both countries. The taper relief applies for French tax, while UK tax is calculated on gains from 2015 (residential property) or 2019 (commercial). The gain is taxable in France with a credit for any UK tax paid on disposal. 

In contrast, gains made on the sale of capital investments, such as shares, are taxed at a fixed rate of 30% covering both tax and social charges, or 20.3% if you have Form S1. 

Gains are treated as investment income and taxed alongside interest, dividends etc.

This treatment also applies to income generated from UK investments. 

Gains made on the disposal of capital investments are generally taxed in your country of residence.

Income tax

Net rental income from a French property is taxed at the scale rates of income tax from 11% to 45% for income, plus social charges.

Rental income from a UK property is directly taxed in the UK. However, you must still include it as part of your annual taxable income in France and a credit equal to the French taxes is allowed. 

Income generated from capital investments (interest earnings, dividends, capital gains on shares etc) is taxed at the fixed 30%, including social charges. 

In both cases, the 17.2% social charges reduce to 7.5% for those with Form S1. 

Read more: new ways to release equity from French property

Wealth tax

There is no contest between the two assets here, since French wealth tax only applies to real estate assets. Any other wealth, including shares, bonds, assurance-vie etc, is not liable to wealth tax. 

French residents are taxed on the value of their household’s worldwide real estate assets each year. This includes residences (the 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.

You only pay wealth tax if your total taxable property assets surpass €1.3million. 

There is a €800,000 tax-free allowance, with rates then ranging from 0.5% to 1.5%.

Succession tax

If you are resident in France when you die, your worldwide estate is liable to French succession tax. Each beneficiary pays tax on the amount they receive, so whether it is investments or property makes little difference. 

Spouses/Pacs partners are exempt on inheritances. 

The value of your main home can be reduced by 20%, provided your spouse/Pacs partner or children continue to live in it. 

There are more opportunities to reduce your succession tax liability on capital investments than with real estate. For example, holding equity and bond funds within an assurance-vie. 

Assets in the UK are also assessed for UK inheritance tax (IHT), to include pension funds from 2027. 

If your UK property is currently below the IHT threshold, your pensions could bring your estate into the inheritance tax net. 

Reconsidering which assets you retain in the UK could noticeably improve your family’s inheritance. 

Other investment considerations

• Liquidity – while property can be a solid investment, it locks money away. If you need to release funds, you may not be able to sell quickly or for the right price. In contrast, you can usually sell equity and bond funds fairly fast and just the amount you need, not the whole investment.
• Diversification – while both shares and property can provide good returns over time, there are always risks with investments. 

The key to reducing risk is diversification. By spreading across different regions, market sectors and asset types – including equities, government and corporate bonds, cash and property – your capital has the chance to produce positive returns over time without being vulnerable to any single area under-performing.

It is generally easier to obtain effective diversification though capital investments (which can include shares in property funds), 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.

When contemplating a new asset, consider whether this is a suitable investment for you and how it fits in with your portfolio, plus understand and weigh up the tax implications.

With personalised advice, you can reduce your exposure to risk while ensuring you hold all your assets in the most tax-efficient way possible.