Alex Romaine explains the tax implications of running a holiday let in France and shares how you can prepare yourself in order to comply with the current legislation
There is often confusion and misinformation about the taxation requirements for individuals who rent out their French properties. However, it’s vital that current property owners and those considering letting their property for the first time familiarise themselves with the most up-to-date rules and regulations.
If you are renting out your French property for the first time in 2014 then now is the time to get your French tax affairs in order, including registering with the French tax offices and deciding upon the most suitable method of accounting.
UK residents renting out their French property should be aware that any letting income generated by the property is always taxable in France, regardless of where the money is paid or received. This applies whether the property is owned by an individual, partnership or société de personnes resident in France or the UK, under Article 6 of the current Anglo-French double tax treaty.
If the owner of the property is resident in the UK at the time, the income will also always be taxable in the UK. It is therefore a legal requirement that tax returns are made in both France and the UK, regardless of whether there is a profit or a loss.
The French tax year runs from 1 January to 31 December, with any profits for non-French residents taxed at a flat rate of 20%. French lettings activity must be registered at the local tax office, with additional tax forms needing to be sent to the non-resident tax office.
If your holiday let is fully furnished, there are two income assessment methods to consider, both of which fall under the Bénéfices Industriels et Commerciaux (BIC). The income from your holiday let is treated as commercial income for calculation purposes. It is important to check the deadlines for submitting accounts under both methods as these do vary annually.
ASSESSMENT METHOD ONE:
Régime des micro-entreprises
A lot of individuals who rent out their properties opt for the régime micro-entreprise, whereby tax at 20% will be applied to 50% of income. In certain limited circumstances, this 50% figure may be reduced to 29%.
An example of the calculation is as follows:
Gross income: €10,000
Taxable income (50%): €5,000
Tax payable: €1,000
The obvious disadvantage with this is that no matter what the actual running costs of the property are, the individual will be liable to tax. As such, if your running costs are in excess of 50% of the gross income, it becomes more advantageous to look at the second income assessment option available, which is the régime simplifié.
ASSESSMENT METHOD TWO:
This regime requires simplified accounts to be drawn up and presented each year, with tax being assessed against actual income and expenditure incurred.
Losses arising from excess expenditure can be carried forward for a maximum of 10 years, while losses resulting from depreciation can be set against future profits indefinitely. As a result, an altogether more tax-efficient approach can be maintained.
Although this regime requires more bookkeeping – retaining invoices, detailed breakdown and itemisation of expenditure and income, bank reconciliations requiring separate bank accounts to run exclusively for business activity – the work does offer the chance to ensure that minimum tax in France and the UK is paid.
When you consider the fact that simplified records need to be kept in order to complete the UK self assessment returns, the extra work involved really is worthwhile.
An example of how this method can be beneficial is clear:
Gross income: €10,000
Trading costs: €5,000
Mortgage interest: €6,000
Total costs: €15,000
Loss created: (€5,000)
The total income tax payable in France is €0 with €5,000 of losses to be carried into the next year.
For a French resident the income tax rate depends on several factors, including the number of people in your household and the amount and nature of other income. However, the taxable profits from the rental activity are arrived at in the same manner as described above, with both the micro and simplifié regimes available.
Alex Romaine is a paraplanner at Charles Hamer Financial Services. Charles Hamer provides financial services expertise to cottages4you property owners
Tel: 0845 268 1657