Today is: 30 July 2010
Please note that French tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
Following on from the Chancellor's announcements in the pre-budget report at the end of 2007 relating to changes in capital gains tax and the taxation of non domiciliaries the draft legislation has been published at the end of January 2008. This has received considerable press comment and the changes are relevant to owners of French leaseback properties. The first announcement was that business taper relief for capital gains tax purposes, which has been at 10 per cent for a number of years, is to go up to 18 per cent, which amounts to an 80 per cent increase in the tax burden. The definition of a "business asset" includes in almost every case a French leaseback property because the leaseback property is used by the hotel operating company as commercial property. This means that any owner of a leaseback property, who would normally pay little, if any, capital gains tax in France, would only pay a maximum of 10 per cent on the gain in the UK, with other exemptions and reliefs possibly being available.
This happy state of affairs was thought to end on 5 April 2008 when we thought 18 per cent will be levied in the UK. However the Chancellor has at the end of January 2008 announced that "Entrepreneurs Relief" at 10% on first £1,000,000 will apply. The press release states that this will apply not only to trading businesses but crucially also to holiday rental properties (but not buy to lets) which will only pay 10%. This should cover sales of leasebacks which are for holiday rentals which will probably only be taxed to capital gains in the UK at 10%. In short nothing will have changed to the rate of taxation which is very good news for UK investors with leasebacks.
The other important announcement relates to non-domiciled individuals who own French leaseback properties. These taxpayers are people who have generally been born abroad and have maintained a foreign domicile but are UK resident. Insofar as income arising abroad is concerned, they have not been taxable on this income, provided they have not brought the money into the UK. The same has applied for capital gains tax purposes. This has meant that for instance a non-UK domiciled person, who is resident here, has been able to have a leaseback property generating income and pay no tax on the rental income, provided the money has not been brought into the UK. On the sale of the property no Capital gains tax was payable in the UK.
For most people, the new rules will mean that they will have to give up this tax benefit from 5 April 2008 as, in order to carry on receiving this benefit they will have to pay a flat tax of £30,000 which will in almost every case far outweigh the actual tax being paid on the income. It also means that for many non-UK domiciled people the income and the asset will have to be disclosed to the UK Inland Revenue, possibly for the first time, as assets abroad which have not had income from them remitted to the UK have not needed to be declared in any shape or form on a UK tax return. This will no longer be the case from 6 April 2008. The non domiciliaries affected are people who are UK resident in the tax year and who have been resident in the UK for 7 out of the last 9 years. Accordingly for recent arrivals in the UK the £30,000 will not have to be paid and the previous favourable position will continue. Of course the position will change from the 7th year.
For these tax payers, one option is to transfer the leaseback property into a self-invested personal pension (SIPP). In the case of a person who is UK resident and UK domiciled, he will have to pay capital gains tax at 10 per cent on the disposal into the SIPP but will benefit from his annual exemption. The asset can either be sold to the SIPP fund, and the pension money paid out to the owner of the leaseback property. Alternatively, the individual can make a contribution in specie of the leaseback property to the SIPP and trigger income tax relief in the UK on the amount transferred into the SIPP subject to various limits, which will probably not pose any problem for most tax payers. In other words, if the tax payer has a leaseback worth £200,000 and a mortgage of £100,000 on it, then the amount contributed to the SIPP will be £100,000 and if the tax payer has an annual salary of £100,000 then no income tax would be payable as a result of the transfer in being entirely deductible against the taxpayer's salary. The cost for this will, however, be the 10 per cent capital gains tax on the disposal to the SIPP. The SIPP will of course then own the leaseback property and will receive the income from the leaseback property, which will be exempt from tax in the UK. Sales by the SIPP of the property will also be exempt from capital gains tax in the UK.
In the case of non-UK domiciliaries, the position is even better. Provided they make the disposal to the SIPP before 5 April 2008, the disposal will be free of capital gains tax in the UK, on the basis that the income is not remitted. In other words, a UK non-domiciliary could do as above, either by selling the leaseback to his SIPP or alternatively by making a contribution in specie. However if the transaction is carried out after 5 April 2008, then assuming the foreign domiciliary does not pay the £30,000 to remain exempt, the transaction will be caught as if the foreign domiciliary was actually domiciled in the UK and liable to UK capital gains tax. Again in the case of the foreign domiciliary, once the asset is in the SIPP it will be free from any income tax and UK capital gains tax and will not need to be declared on the tax payer's tax return from 6 April 2008 onwards.