David Anderson Solicitor and Chartered Tax Adviser at Sykes Anderson LLP London solicitors and chartered tax advisers.
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.
Q: I have been looking at property in France and noticed that the price of some properties includes VAT. What properties is VAT charged on?
A: A buyer must generally pay VAT on the purchase of a new build which is less than 5 years old, or ‘off plan’ property. VAT must also be charged on an older property which has had certain work done to it. If there are no works or the work is not of a particular ‘substantial’ type then you will have to pay stamp duty (usually at 5.09%) on the purchase price.
Q: What works qualify to make VAT chargeable on the sale price?
A: The type and amount of works are set out in the French tax code. If you carry out one or more of the following you will have to charge VAT on the sale price.
- renew 50% or more of the foundations
- renew 50% or more of the structure
- renew 50% or more of the facades
- renew at least 2/3 of all of the following 6 items:
- Partitioning
- Windows and doors
- Plumbing
- Electricity
- Heating (including climate control and air conditioning)
- Floors (non load-bearing)
Q: Is VAT chargeable on the sale of a property which has had one or more of these categories of works done to it at any time?
A: No. VAT is only chargeable on a sale within 5 years of the completion of the works. A sale after this time is subject to stamp duty.
Q: What should I do if I am planning to do these types of works on a property I am looking to buy?
A: If you are planning to do work on your property you should take advice on whether the work is likely to bring the property within the scope of VAT. If this is the case, it is possible to declare your intention to develop the property to the French Revenue and pay VAT on the purchase price. The VAT paid on purchase can usually either be recovered soon after purchase or after you have accounted for the VAT on sale. This will depend on your status regarding French VAT. You can usually recover the VAT paid on the works as well if you have paid VAT on the purchase price.
Q: What happens if I buy with stamp duty and later decide to develop the property so that it comes within VAT?
A: This is a worst case scenario from a VAT perspective. The stamp duty paid initially is not recoverable nor is VAT paid on the works. You must charge VAT on the sale price if you sell within 5 years of completion of the works. This is likely to be at 19.6%.
Q: How might the French authorities discover that I have done these types of works to my property?
A: Invoices for major works are deductible for capital gains tax in France. The invoices must contain detailed descriptions of the work which has been carried out. When a claim is made to reduce the capital gains tax liability, the authorities will inspect the invoices and may become alerted to the fact that VAT should be charged. It is the seller who is responsible for paying the VAT to the Revenue. The payment of the VAT is enforced by the notaire not being permitted to release the funds to the seller until the VAT has been paid.
You can also ask the French Revenue to send an inspector to the property to decide whether the property is within VAT. We understand that this has not been a popular option!