Service France

Discussion between a British buyer planning to raise finance for a higher value property acquisition in France using a Monaco bank and David Anderson, Chartered Tax Adviser, at Sykes Anderson LLP.

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. Taxation and law are complex subjects and the information herein is intended only for general information. Nothing herein constitutes financial advice.

Q. I am seeking to purchase a property for 3 million euros and have 1 million euros as the deposit and want to finance the balance of 2 million euros. I had thought of simply borrowing the 2 million euros from a French bank but understand that it may be better to go via a Monaco bank.

A. The Monaco private banks, many of which are owned by the major French and British banks offer a private client type service which is tailored to the needs of the wealthier purchaser. Private banks normally only see mortgage lending as a small part of their business and are more interested in long term relationships with clients which involve managing portfolios of assets. They see property purchases in France as a way of attracting new clients.

Q. So how would it benefit me making use of a Monaco bank for my property purchase?

A. The lending is usually structured with you taking out a 3 million euros loan for the full price of the property. You then deposit the 1 million euros with the bank in a separate account which is in your name. This deposit account is however entirely separate from the loan account and there is no set off of mortgage interest. The 3 million euros loan is normally an interest only loan which contains provisions for repayments on dates which are specifies and which are generally rolled over by the bank if there have been no events of default.

Q. Why would I want to borrow 3 million euros when the only funding I need is 2 million euros? What is the point of depositing 1 million euros with the bank in this scenario?

A. There are a number of reasons for doing this which will generally only appeal to the wealthier and more financially sophisticated person which is the client private banks is looking for. Some of the reasons depend on the specific circumstances of the individual and may not be immediately obvious. A simple advantage is that you create additional debt on the property so that for, say, French wealth tax purposes it is unlikely that you will pay any wealth tax for a number of years until the property increases substantially in value to bring you into the wealth tax bands. You will recall that French wealth tax is based on the net equity in the property after you deduct any loans on the property. This is because the asset (the deposit of 1 million euros) is not situated in France (it is in an account in Monaco) and so does not have to be counted for wealth tax purposes if you are not a French resident. The property you have purchased is situated in France but is completely financed by debt and so there is no wealth tax liability.

Similar considerations apply for inheritance tax as if there was an unexpected death then the mortgage would have to be deducted reducing the exposure to French inheritance tax considerably. Clearly you will still have an inheritance tax exposure in the UK but in some cases involving people who are resident in the UK but not UK domiciled or deemed domiciled, the asset may well not be assessable to UK inheritance tax as the deposit in Monaco will not be an asset in the UK and so outside the scope of UK Inheritance Tax.

Q. Are there any other obvious advantages relating to income tax?

A. Yes if you are renting the property then you will have a larger interest bill to show the French Revenue which can be deducted against the rentals you receive. This will also mean that as a UK resident you should pay very little, if any, income tax as the amount you are paying to service the debt will also be taken into account when calculating your net profit on the property rental.

Q. What happens with regard to the interest on the 1 million euros deposit I have left with the bank?

A. This is not subject to income tax in Monaco but will be subject to income tax in many cases if you are UK resident. In practice Monaco will either deduct 15% as required by the European Savings Directive or it will pay you the full interest gross and provide your details to the UK Revenue. The legal position is that the money is taxable in the UK if you are UK resident and UK domiciled. Again, for non domiciled individuals who do not remit the money the interest arising will be tax free.

Q. But wouldn’t the rent arising for a non domiciled person also be tax free if they did not remit it to the UK? What is the point of having the bank account?

A. You are right that the rental income which is not remitted back to the UK would not taxable in the UK. However, the income would arise from a French property and so would be subject to French income tax as France taxes all income arising in France from property there. The Monaco structure allows you to avoid the French income tax.

Q. This structure sounds interesting. However I am UK resident and UK domiciled and so would have to pay tax at 40% on the interest arising on the 1 million euros deposit in Monaco. Is there any way round this?

A. Yes. If you use structures which are exempt from UK income tax then you will have no liability in the UK (or in Monaco) on the income arising in Monaco. There are a number of such UK funds which are exempt from income tax which include pension funds including SIPPs. There is no restriction on a SIPP investing in a bank account in Monaco or in funds managed via a bank there. This can provide a relatively simple and low cost way for UK residents to take advantage of an offshore tax structure for investing in French property without having to get involved in the expense and difficulties associated with offshore trustees or having to leave the UK for periods of time in order to establish a non-UK residency and possibly non-UK domicile. It also opens up many other interesting and tax effective investment opportunities in both commercial and importantly purely residential property both in France and the UK.

Q. Would the 1 million euros deposit be typically held in a bank account?

A. Yes, it can be, though this is where the private banking angle comes in and the Monaco private bank will be keen for you to invest in funds which they will sell to you. Most of these funds are, as you would expect, fairly well known and regulated. The idea is that the funds grow and enable you to pay off the interest only mortgage at the end of its term.

Q. What happens if I default on the mortgage?

A. The bank will take a mortgage over the deposit monies or fund i.e. in this case the euros 1 million and will apply these to pay any missed interest payments on the mortgage. From the bank’s point of view this is a good structure because they are unlikely to need to foreclose on the property as there will be sufficient funds for them to have the interest paid for a long period of time from the deposit monies. Most borrowers seeing their deposit funds being depleted will sell the property.

Q. What happens if the bank runs into difficulty?

A. You are quite exposed. The deposit account with the 1 million euros is quite separate from the loan account. It has to be for the structure to be effective for tax purposes. This means that if the bank were to become insolvent then you would still owe the bank’s liquidator the 2 million euros loan but may well find that you cannot recover the 1 million euros which you have already deposited. It is important to ensure that you are dealing with bona fide banks that are likely to honour their commitments. It is unlikely that there will be a problem in Monaco though if you are offered similar structures in less well known jurisdictions you are probably best advised to ensure you know who is running the bank.