Upping the ante
David Anderson and Andinee Pillay Jagambrun explain how the new rules on capital gains tax will affect British property owners in France
The French government has made further changes to its 2011 budget in order to deal with its deficit. The changes, including amendments to the capital gains tax relief, were adopted by the Assembl�e Nationale on 7 September 2011 and the S�nat on 8 September 2011. The amendments reduce the annual 10% taper relief and effectively increase the 15 years ownership exemption from capital gains tax for second homeowners to 30 years. This rule will affect sales taking place (i.e. completing) on or after 1 February 2012.
This article looks at the consequences of abolishing this capital gains tax relief and the implications for UK individuals who own holiday homes in France.
As a general rule, when individuals sell property they own in France, they will be liable to French capital gains tax on the gain, at different rates depending on their residency. French residents are subject to a fixed rate of 19% on the gain plus social charges, which have been increased to 13.5% under the new law. Non-residents pay tax at 19% if they are resident in the EU, Iceland, Norway or Switzerland or 33.3% if resident elsewhere, with no social charges to pay. Residents of black-listed’ countries are charged at 50% tax.
Homeowners are exempt from capital gains tax if the property is their main residence. Second homeowners benefit from a 10% annual reduction on capital gains tax from the sixth year of ownership with a full relief granted after 15 years of ownership. The current position will remain in place until 1 February 2012.
Who is affected?
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The new rules on capital gains tax will affect French residents who have owned their second/holiday homes in France for 15 years and more, as they will now have to pay capital gains tax whereas before they would not have had to. They will now have to wait 30 years before they can dispose of their second homes without being liable to any capital gains tax.
Non-French residents residing in countries where the disposal of properties abroad are not subject to domestic capital gains tax will also be in a worse-off position. This will include UK residents who claim non-domiciled status.
However, UK residents should not be affected too much by this new legislation. This is because, as a rule, UK residents are subject to capital gains tax in the UK at the rate of 28% on disposal of their worldwide assets, with a credit given to them for any French capital gains tax paid. This effectively means, while they will pay 19% capital gains tax in France, they will receive a credit towards the UK capital gains tax due.
Ways to mitigate capital gains tax
The principal family home will continue to be exempt from capital gains tax in France. It may therefore be possible to elect your holiday home as your main residence prior to the sale of the property. There are conditions that will need to be considered and, in particular, non-French residents would need to become French resident to make such a claim. A further exemption exists for non-French residents who have been French resident in the past. These individuals may, in certain circumstances, be able to claim relief on the disposal of their French dwelling. The relevant provisions in the French legislation need to be checked carefully.
It may also be worthwhile considering transferring the property to children or a spouse in order to crystallise any latent gains. However, as discussed opposite, transferring the property to another entity such as an SCI will be caught by the anti-avoidance provision which the French government has implemented.
Effect on the property market
The main losers will be people who have properties standing at substantial gains, who have owned them for close to, or more than, 15 years and who are not UK domiciled or are able to benefit from some other exemption from UK tax, for instance by not being UK resident. This tax will mostly affect wealthier people. The additional tax may result in more properties being put on the market in an attempt to beat the 1 February 2012 deadline. It is important that it is completion and not exchange of contracts which counts here. The danger is that unscrupulous buyers exploit this deadline possibly at the last moment to drive the price down.
The sale of the principal family home will continue to be exempt from both capital gains tax and social charges. Accordingly, an individual who buys a holiday home in France with the intention of settling in France, say following retirement, should be able to benefit from the primary home exemption and will not be subject to capital gains tax when they come to sell the property.
Equally, individuals who have elected the property as their main residence prior to the sale should also benefit from the primary home exemption.
Critics had hoped that the French government would recognise that imposing additional taxes on wealthy individuals was not the way to deal with France’s deficit and scrap these proposals. However, this has not proved to be the case and so high net wealth individuals will now have to either consider other jurisdictions to invest in or adopt more aggressive tax planning to avoid these high taxes.
David Anderson is a solicitor and chartered tax adviser, and
Andinee Pillay Jagambrun is a trainee solicitor at Sykes Anderson LLP
Tel: 020 3178 3770