What are the tax implications of renting out your French property as a gîte when you’re not there? And what’s the most tax-efficient way to declare your rental income? Debbie Bradbury has answers.
Many owners of second homes in France consider renting out their property when they are not using it.
Now that the UK has left the EU, the vast majority of British residents can spend no more than 90 days in any 180-day period in the Schengen Zone, which includes France. Therefore, not only is there less opportunity for owners to enjoy their French property personally but it may also be sitting empty for longer periods.
Perhaps you didn’t previously consider letting your property while you weren’t there, but now feel the need to cover some more of its running costs. However, is it worth renting out the property on a short-term holiday let basis? Will you end up paying more in tax than the profit you make from the rental activity? Here are the main pointers.
Firstly, furnished rental is considered a ‘commercial’ activity in France. This requires registration of the rental activity with the authorities to obtain a business registration number, as well as formalities with the local mairie (town hall) to inform them of the rental activity for the calculation of the tourist tax.
Be careful; in several large tourist cities (Paris, Nice, Bordeaux, to name the main ones), there is a limit to the number of properties that can be let on a short-term basis, so you would also require a special authorisation for ‘change of use’ from the local community in this case.
It is at the point of registration that you need to choose the tax regime through which you will declare your rental income (if indeed you have the choice, according to method of ownership).
If you own the property in your sole name, or if you changed your marriage regime when you purchased the French property to a community-type marriage regime, then you would have the option of either the ‘micro’ or ‘réel’ tax regimes for the declaration of your rental income for a self-catered rental property.
Otherwise, if you jointly own your property, you would be obliged to register on the réel regime of taxation and file annual accounts in addition to a non-resident income tax return.
Réel regime: This has some advantages that you might not expect. Uninformed owners have not registered their activity and simply declared the income under the micro regime, believing it is simple, as it doesn’t involve annual accounting, and the only requirement is to file an income tax return once a year. However, not only is this legally incorrect (the activity must be registered and you cannot have both owners on the micro regime) but it is not necessarily the most tax-efficient of the two regimes – especially as France promotes furnished rental with a very appealing system of amortisation!
With the réel regime, not only can you deduct the true running costs related to the furnished rental activity (such as management agency, advertising, taxes foncières, insurance and utilities) but in France we also take into account any mortgage interests related to the property.
In addition, in the case of showing a profit in the financial accounts, we then offset an annual depreciation allowance based on the amortisation of the property and furniture. As a guideline, this could be in the region of 3% of the value of the property, although calculated on a pro-rata basis when you also use the property personally for part of the year. It does mean that, in a lot of cases, there may be no profit on paper, in which case, there would be no French income tax and no French social taxes (as a reminder, UK citizens now have to pay 17.2% social taxes on any rental income profit, in addition to a minimum 20% non-resident income tax).
Micro regime: As a comparison, the micro is a simplified regime, where you declare your gross income (the amount the guest pays to stay in the property, not the amount you receive from the agency) and the French tax authorities apply a fixed tax-free allowance. The standard allowance is 50% of gross but this is increased to 71% if you have a valid tourist certificate for the property (issued by the local authorities after an inspection visit and valid for five years).
Note, that this means that in every case, UK residents would be paying 37.2% minimum taxation on a fixed profit of either 50% or 29% of your gross income. For French residents, the sliding scale of income tax is applicable.
Double tax treaty
As a UK resident, you also have to declare the rental income on your individual self-assessment. You can only offset deductions on the foreign property pages of your UK return that are allowable under UK law and therefore you may show a profit from this French income in the UK. If this were the case, you would pay your UK rate of tax on your overall income, including the profit from the French rental activity.
Where French tax has been paid, the double tax agreement between the UK and France allows for a tax credit, thus avoiding double taxation.
Don’t get confused between ‘prélèvements sociaux’ (17.2% social taxes applied to rental income profit) and ‘cotisations sociales’, which are social or welfare contributions and already include the social taxes.
Welfare contributions are payable when your short-term rental activity turnover exceeds €23,000. This is because you would then be considered a ‘professional’ landlord and would be obliged to contribute into French social security. These welfare contributions can only be cancelled in France if you are able to obtain a portable A1 document from the HMRC, which may no longer be valid from 2022 in light of Brexit.
If you would like to get an idea as to whether or not it is worth renting out your French home, which options are open to you and whether or not you would be liable for welfare contributions, you should seek advice from a qualified accounting firm or tax advisor in France.
Debbie Bradbury is head of the English-speaking department at Sareg French accountants
Tel: 0033 (0)4 50 25 23 97