Capital Gains Tax on French Property New rules to the ownership relief

Capital Gains Tax on French Property – New rules to the ownership relief

Please note that tax and international law are complex subjects and you should not rely on this article without professional advice on the facts of your case. Nothing herein constitutes financial advice and if you are in any doubt as to your financial position you should consult an IFA.

By David Anderson solicitor and chartered tax adviser and Andinee Pillay Jagambrun trainee solicitor both at Sykes Anderson LLP Solicitors and Chartered Tax Advisers.

The French Government has made further changes to its 2011 budget in order to deal with its deficit. The changes, including amendments to the capital gains tax relief, were adopted by the Assemblée Nationale on 7th September 2011 and the Senat on 8th September 2011. The amendments reduce the annual 10% taper relief and effectively increase the 15 years ownership exemption from capital gains tax for second home owners to 30 years. This rule will affect sales taking place (ie completing) on or after 1st February 2012.

This article looks at the consequences of abolishing this capital gains tax relief and the implications for UK individuals who own holiday homes in France.

Current position

As a general rule, when individuals sell property they own in France they will be liable to French capital gains tax on the gain, at different rates depending on their residency. French residents are subject to a fixed rate of 19% on the gain plus social charges, which have been increased to 13.5% under the new law. Non-residents pay tax at 19% if they are resident in the EU, Iceland, Norway or Switzerland or 33 1/3 % if resident elsewhere, with no social charges to pay. Residents of “black-listed” countries are charged at 50 % tax.

Home owners are exempt from capital gains tax if the property is their main residence. Second home owners benefit from a 10% annual reduction on capital gains tax from the sixth year of ownership with a full relief granted after 15 years of ownership. The current position will remain until 1st February 2012.

The new rule

The new rule reduces the annual 10% abatement from the sixth year of ownership to the following progressive rates:

2% for every year of ownership from the 6th year;
4% for every year of ownership from the 17th year; and
8% for every year of ownership from the 24th year.

Individuals who have owned their second homes for 30 years or more will be fully exempt from French capital gains tax.

In anticipation of individuals crystallising any latent gains by transferring their property to another entity such as an SCI, the French Government has included an additional provision to the new rules, which has retrospective effect. The provision stipulates that where an individual transfers their property to an entity such as an SCI on or after 25th August 2011, the new progressive rates will apply. Interestingly, the provision does not cover transfers made to another individual. Accordingly, it may be possible to transfer the property to children or a spouse to crystallise any latent gains.

Who are affected?

Clearly, the new rules on capital gains tax will affect French residents who have owned their second/holiday homes in France for 15 years and more, as they will now have to pay capital gains tax whereas before they would not have had to. They will now have to wait 30 years before they can dispose of their second homes without being liable to any capital gains tax.

Non-French residents residing in countries where disposals of properties abroad are not subject to domestic capital gains tax will also be in a worse off position. This will include UK residents who claim non-domiciled status. However, UK residents should not be affected too much by this new rule. The reason for this is because as a general rule, UK residents are subject to capital gains tax in the UK at the rate of 28% on disposal of their worldwide assets, with a credit given to them for any French capital gains tax paid. This effectively means, whilst they will pay 19% capital gains tax in France they will receive a credit towards the UK capital gains tax due.

Ways to mitigate capital gains tax

The principal family home will continue to be exempt from capital gains tax in France. It may therefore be possible to elect your holiday home as your main residence prior to the sale of the property. There are conditions which will need to be considered and in particular non-French residents would need to become French resident to make such a claim. A further exemption exists for non-French residents who have been French resident in the past. These individuals may, in certain circumstances be able to claim relief on the disposal of their French dwelling. The relevant provisions in the French legislation need to be checked carefully.

It may also be worthwhile considering transferring the property to children or a spouse in order to crystallise any latent gains. However, as discussed above, transferring the property to another entity such as an SCI will be caught by the anti-avoidance provision which the French Government has implemented.

Effect on the property market

The main losers will be people who have properties standing at substantial gains, who have owned them for close to, or more than 15 years and who are not UK domiciled or are able to benefit from some other exemption from UK tax for instance by being not UK resident. This tax will affect wealthier people most. The additional tax may result in more properties being put on the market this autumn in an attempt to beat the 1st February 2012 deadline. It is important that it is completion and not exchange of contracts which counts here. The danger is that unscrupulous buyers exploit this deadline possibly at the last moment to drive the price down.

Conclusion

The sale of the principal family homes will continue to be exempt from both capital gains tax and social charges. Accordingly, an individual who buys a holiday home in France with the intention of settling in France, say following retirement, should be able to benefit from the primary home exemption and will not be subject to capital gains tax when they come to sell the property. Equally, individuals who have elected the property as their main residence prior to the sale should also benefit from the primary home exemption.

Critics had hoped that the French Government would recognise that imposing additional taxes on wealthy individuals was not the way to deal with France's deficit and scrap these proposals. However, this has not been the case and so high net wealth individuals will now have to either consider other jurisdictions to invest in or adopt more aggressive tax planning to avoid these high taxes.

Sykes Anderson has a wealth of experience and knowledge of tax planning and has advised many high net wealth individuals with structures to mitigate capital gains tax. We can assist you with putting in place a suitable structure to benefit your circumstances.

September 2011