Today is: 30 July 2010
Non French residents who own more expensive property in France are often concerned about French Wealth Tax ("ISF") which is an annual tax assessed as at the 1st January each year on net French assets. This tax, which is self assessed, requires a declaration to be filed by non French residents with the French Centre for non-residents tax office in Paris. It gives the French tax authorities an overview of the non resident's assets in France.
Relevant factors
The two factors which need to be taken into account are:
- Wealth tax is levied on a household basis,
- Wealth tax is levied on the net value of an asset.
The fact that wealth tax is levied on a household basis means that a husband and wife are taxed together whether or not property is held jointly. Thus, if a husband owns a property in his own name, the wife owns a property in her own name and they jointly own a third property; all three properties are taken into account for calculating wealth tax and there is just the one threshold between the couple (€790,000 in 2009). Wealth Tax rises according to the net wealth starting at 0.55% and rising to 1.8%.
It is worth noting that the rules on what constitutes a household in France vary when calculating income tax and wealth tax and can include assets owned by children.
Mitigating Wealth Tax using debt
The fact that Wealth Tax is levied on the net value of a given asset means that debt can be deducted. The rules on what debt is deductible are quite clear; the debt must relate to the property, but it does not need to be secured over the property. This means that the debt must be for the purpose of purchasing the property and not for any other purpose. The debt must also be "real" which is taken to mean that "back to back" loans in which the buyer deposits the purchase price in cash with a bank and then effectively borrows his own money ostensibly as a loan from the same bank are not deductible.
In practice most debt is secured by way of a mortgage taken when the property is purchased. We have never seen a case in which a deduction relating to a mortgage in favour of a bank has been queried by the French Revenue. However in some cases the buyer may not want a mortgage secured on the property either to keep the structure flexible or more often because he does not want to pay the notaries' costs associated with the mortgage. This is often the case when the buyer has other assets such as a portfolio of shares and bonds, usually held in a low tax jurisdiction (such as the Channel Islands), which he wishes to use instead as collateral. This often arises with non UK domiciled but UK resident individuals who have tax free non remitted income and gains arising offshore which they wish to use to finance the French property purchase. This can be attractive from a UK tax point of view for the UK non domiciled especially if all ongoing costs relating to the French property can be paid out of non UK remitted income.
In this case the bank which advances the money for the French property purchase is unconcerned about the French property because it has secured itself on the portfolio which is more attractive as security because it is more liquid and is also within the bank's own jurisdiction. The buyer will prefer this because the interest rate is usually lower because the bank's security is better. In these cases it is advisable to have a facility letter from the bank stating that the loan advance is for the purpose of purchasing the property and that in the event of default the bank can take steps to secure itself on the property.
The French Revenue may require such evidence to be produced as part of the annual Wealth Tax return especially as it will be clear from the Land Registry records that no mortgage is registered. Whilst we have seen this done on a number of occasions it raises the difficulty of whether the loan relates to the French property. If in reality the bank, in the event of default, has no intention of ever proceeding against the French property the facility letter should contain clauses requiring that the share/bond portfolio value is maintained and is in some way secured for the loan which would be a highly problematic facility letter to produce to the French Revenue.
Interest on loans
An issue which usually arises is whether interest should be paid on the loan in the circumstances outlined above. The bank could be paid from the income arising on the portfolio which simplifies the position. However this is not advisable as the French Revenue are likely to view such an interest free loan as not "real" and disallow it as a deduction. If interest is paid to a lender in the UK there will not be any French income tax issues. The same applies if interest is paid to say a Jersey or similar low tax jurisdiction lender by an individual who owns French property. However if an SCI or similar corporate body is used to own the property and interest is paid to Jersey there is likely to be a French withholding tax on the interest payment because the payer is a corporate entity. This is often overlooked when such transactions are structured but is disclosed to the French Revenue when the Wealth Tax Return is submitted with the claimed loan deduction.
Monaco Loans
A number of banks in Monaco, including banks part of major French and UK groups, offer packaged loans with asset collateral which mitigate Wealth Tax. These are only effective for non French nationals and ideally non French residents which include residents of Monaco who own a second home in France. Usually non residents seeking mortgages in excess of € 5 million will be directed by banks to their Monaco offices which offer a more tailored private client service and have the capacity to agree higher value loans. Similar facilities are available from banks in Geneva though it may be better to have the loan made through Monaco with assets held in Switzerland.
You will be required to provide two assets as security for the bank in Monaco which will usually lend you 100% of the purchase price of the property plus in some cases a facility for works to be carried out. The first security is a mortgage over the property and the second is a pledge over an account which can consist of cash or securities. The pledged account does not have to be in the same name as the buyer of the French property so say a Jersey trust could pledge assets for a loan to an individual buyer. The amount of the pledge is negotiated on a case by case basis and depends on the assets pledges, but often the bank will require a sum of up to around 50% of the loan to be pledged. The bank will then obtain security over the pledge as well as the property.
The 100% mortgage from the Monegasque banks has in our experience been accepted by the French Revenue as deductible without challenge in many cases we have dealt with. The pledged account is entirely outside the scope of French tax because it is not in France but in Monaco. This arrangement however suffers from drawbacks. Firstly you will in almost every case have to pay to have a mortgage registered by the notary in favour of the Monegasque bank because they will not proceed on an unsecured basis. Secondly you have to pay interest to the bank. Thirdly your money is tied up in the pledge account and you need the bank's permission to invest it.
Non-debt ways to avoid Wealth Tax
All the above arrangements suffer from the inconvenience for cash buyers of the need for a loan. Buyers sometimes ask whether there is any other way to legally avoid Wealth Tax without the cost of taking out a loan and paying interest and notary costs when they have the money to pay cash. There is a fairly simple way of structuring the purchase to legally avoid Wealth Tax without any loan arrangement, which has been used successfully by wealthy non French buyers for a number of years and has not, to our knowledge, been challenged by the French Revenue despite Wealth Tax returns being filed on this basis. We have seen this structure used on a number of occasions by notaries with specialised tax knowledge who deal mainly with wealthy non French clients.
David Anderson
Nicole Gallop Mildon