Today is: 18 May 2012
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.
The French Government has proposed more changes to deal with its deficit. The proposals include abolishing the 15 years ownership exemption from capital gains tax for second home owners. These proposals will be put forward to the French Parliament on 6th September 2011 and, if adopted in its current draft, will have retrospective effect on all sales of second homes from 24th August 2011 onwards.
This article looks at the consequences on 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 of 12.3%. 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.
Change
If the proposals are adopted by the French Parliament when they review them on the 6th September 2011, the 15 year ownership exemption will no longer be available to second home owners. This relief will be replaced with an indexation allowance, which takes into account the inflation rates from the date of purchase onwards. Whilst this is likely to reduce the capital gains tax liability, it will be far less favourable to those who have owned their property for 15 years or more. The idea of the indexation allowance is to bring the capital gains in line with the inflation. However, in many cases the price of property has increased at a much steeper rate than inflation.
Whilst we do not have specific details of how the indexation allowance will apply, we understand that if the proposals are adopted then it will have immediate and retrospective effect, and all sales of second homes after 24 August 2011 will be subject to capital gains tax. This effectively means if a compromis de vente has been signed after 24 August 2011, but completion has not yet taken place, the seller will be liable to pay capital gains tax at the applicable rates.
Who are affected?
The abolition of this relief will have a severe impact on 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 where they would not have had to.
Non French residents residing in countries where disposals of properties abroad are not subject to 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 change. The reason for this is because as a general rule, UK residents are subject to capital gains tax in the UK 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.
Will anyone benefit from the change?
Individuals who have owned their second/holiday homes for 5 years or less will be in a better position as they will receive a relief, by way of the indexation allowance, a relief they would not have been otherwise entitled to. Investors looking to invest in French properties should also be optimistic by this change as they too will benefit from the indexation allowance.
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.
These proposals are still in their very early stages and may not be adopted. It was not so long ago that the French Government announced an additional tax on second homes for non French residents, which was quickly scrapped. It will be a matter of waiting to see if the French Parliament adopts the Government's proposal or perhaps they will recognise that imposing additional taxes on wealthy individuals is not the way to deal with France's deficit and scrap these proposals too.
High taxes make France unattractive for mobile high net wealth people who will go elsewhere. It will also encourage more aggressive tax planning as wealthy individuals seek to avoid tax.
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
David AndersonSolicitor and Chartered Tax Adviser
Andinee Pillay Jagambrun
Solicitor
Sykes Anderson LLP