Thinking of running a holiday let in France? Alex Romaine explains the tax implications of this type of venture and shares how you can best prepare for the current legislations
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.
For those who rented their French property out for the first time in 2014, the deadline for their French tax return was moved forward to 5 May for clients under the régime simplifié and 19 May for those under the régime micro-entreprise.
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, a partnership or a Société de Personnes resident in France or the UK, under the rules of the current double-tax treaty.
Secondly, if the owner 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.
Many individuals who rent out their French 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% (so tax is paid on 29% of rental income received rather than 50%).
An example of the calculation is as follows: €10,000 income @ 50% @ 20% = €1,000 income tax to be paid.
The obvious disadvantage with this route is that no matter what the actual running costs of the property are, the individual will be liable for 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, which is the regime simplifié.
This régime 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 régime requires more bookkeeping – retaining invoices, a detailed breakdown and itemisation of expenditure and income, plus bank reconciliations requiring separate bank accounts to run exclusively for business activity – the work does offer the chance to ensure that the minimum tax is paid in France and the UK.
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 of accounting can be more beneficial for an individual is as follows:
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 zero, 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 micro-entreprise and simplifié régimes available.
A reputable letting agent should be able to guide you in these matters, whether you are based in the UK or France – and, of course, if in doubt it is always safest to seek professional advice specific to your requirements.
Alex Romaine is a paraplanner at Charles Hamer Financial Services. Charles Hamer provides financial services expertise to cottages4you property owners
Tel: 01844 218957