Written by Professor Robert Anthony, Anthony & Cie
French Property News, August 2009
Tax expert Robert Anthony looks at the consequences of buying a French property, and how to minimise your obligations.
When purchasing a property in France, it is important to be aware that ownership has implications regarding inheritance tax and inheritance law and can generate French capital gains tax, French income tax and French wealth tax. In specific cases, VAT at 19.6% is also applied to the purchase of a French property, which can be claimed back under certain conditions (e.g. leaseback).
When purchasing with the intent of selling after a short period of time, the French tax administration may consider you as a property dealer. If so, the applicable tax regime is then very different from the one applicable to private individuals.
In light of the above, it is essential to carefully consider how you structure the ownership of your French property. You can own it directly or through a French company (SCI). Foreign companies and trusts can also offer interesting tax-planning opportunities for wealthy clients. However, ownership of a French property by a UK company can creates a tax nightmare which need to be restructured. Carrying out furnished rental activities through an SCI is also not very tax efficient.
Regarding French inheritance tax, if neither the deceased nor their heirs are tax resident in France at the time of death, generally only the French-source assets are taxable in France (French property, shares in a company owning French property….). These rules are subject to tax treaty provisions that may decide otherwise.
France will tax the net value of the assets taking into account debts such as bank loans. Therefore, it is sometimes advantageous to take out a loan, in particular an interest-only loan. It can also be beneficial to bequeath or donate shares of a company owning the French property. Donations can be very tax efficient, especially if they are made in “nue-propriété”. Current French inheritance tax rates range from 5% to 40% between parents and children. There is no longer any inheritance tax between spouses. A 60% rate is applicable between unrelated parties.
Under French inheritance law, children are entitled to a part of the deceased’s estate, which cannot be taken away by contract or a testament. If you wish to protect the surviving spouse, French law allows you to change your marital contract and to choose the “universal community regime”, meaning that the asset is commonly owned between the husband and wife. At the time of the first demise, there is no inheritance tax to be paid. Changing a marital contract has tax implications which you should be aware of, and can be contested by children from a previous relationship.
For non-French tax residents, the use of a French company can be an interesting alternative to escape French forced heirship rules, as the inheritance law applied when transferring company shares is that of the country of residence of the shareholder. A UK resident can for example, freely bequeath the shares of a French company.
Should the property be owned directly or through a fiscally opaque company, the French private capital gains tax (CGT) regime will apply. Under this regime, French tax residents pay CGT at 28.10%, EU tax residents at 16% and non-EU tax residents at 33.33%.
The gain is calculated with a reduction of 10% per annum after the fifth year of ownership. In other words, after 15 years no capital gains are taxable. Certain costs can be deductible for the calculation of the capital gains tax, for example, some improvement work. No capital gains tax is due upon the sale of a main residence. The above rules are general and subject to tax treaty provisions that may decide otherwise.
If you rent out a French property which you own directly or through a French company subject to French income tax, you will be taxed in France, even if you are not a French tax resident. You can choose between two tax regimes:
– the micro regime which entitles you to deduct an allowance amount from the income received. Regarding furnished rentals, the rental income must be lower than €32,000 and the relief is 50% (for years 2009 and after; it was 71% previously). Regarding unfurnished rentals, the rental income must be lower than € 15,000 and the relief is 30%.
– the real expenses regime, which entitles you to deduct some of the expenses on the property (interest on your loan, property tax…)
Current French income tax rates range from 5.5% to 40% with a minimum of 20% for non-French tax residents. For French tax residents, a French personal income tax return needs to be filed before 30 May of the year following the taxable year. For non-French tax residents, the declaration deadline is normally 30 June for EU, African, Mediterranean and North American residents and 15 July for other residents.
French tax residents are liable to French wealth tax (ISF) on the net value of their worldwide assets while non-French tax residents are liable to French wealth tax on the net value of their French-located assets. In order to be liable, the net value of the French assets needs to exceed a certain limit (currently fixed at €790,000 as of 1 January 2009). These rules are subject to tax treaty provisions that may decide otherwise. Current French wealth tax rates range from 0.55% to 1.8%.
For-non French tax residents, wealth tax can be minimised by debt and by creating a shareholder’s current account should the property be owned by a company. For French tax residents, French wealth tax returns need to be filed normally before 15 June of the year. For non-French tax residents, the declaration deadline is normally 15 July for EU residents and 1 September for other residents with certain tax-planning tools, ISF can be legally reduced for residents.
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