What are the tax implications of owning a property in France?
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Whether you’re buying a French property for holidays or relocation, it pays to know in advance what taxes you’ll be liable for
If you are considering buying a property a France, whether as a permanent home or to enjoy on holidays, it is worth being aware of what the tax implications will be so you can prepare for them in advance if possible. Be particularly careful with investment property and second homes, as they will not be regarded as your principal private residence so you will generally lose the main home reliefs.
If you have not bought your property yet, do take the time to research the various ownership options as this can affect your heirs’ succession tax liabilities as well as who you can leave the property to, noting that France imposes ‘forced heirship’ rules. Take the time to establish the best way to own the property to suit your family’s needs.
If you arrive in France with an intention to reside there indefinitely you become a tax resident the day after arrival.
If you are hoping to spend around half the year in your French holiday home you will need to follow the tax residence rules very carefully so you know where to pay your taxes.
You will be deemed tax resident in France if you meet any of these four tests:
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• France is your main residence or home
• France is your principal place of abode; this usually means more than 183 days in France per calendar year
• Your principal activity (occupation) is in France or your main income arises there
• Most of your substantial assets are located in France
France tax residents are liable to pay tax on worldwide income, gains and real estate wealth. You do not have a choice; you either are, or are not, a French tax resident under the rules. Non-residents are liable to French tax only on French source income and assets located in France.
Be aware that France imposes an annual wealth tax on property called ‘Impôt sur la Fortune Immobilière’ (IFI). It affects only households with total taxable property assets worth over €1.3m. There is a €800,000 tax-free allowance, then rates start at 0.5% and rise progressively to 1.5%.
Residents of France are taxed on the value of their household’s worldwide real estate assets as at 1 January each year. This includes all residences (though the value of a main home can be reduced by 30% for wealth tax purposes), including holiday homes and investment properties, whether owned directly or indirectly.
Non-residents are liable on French real estate, including rights over property situated in France.
Capital gains tax
Other than their main home, French residents pay capital gains tax on worldwide property at 19%, plus surtaxes, plus social charges (which are generally 17.2% but can be reduced to 7.5% for Form S1 holders). The surtaxes rise progressively from 2% for gains over €50,000 to 6% for gains over €260,000 – a maximum total rate of 42.2%.
Capital gains tax is reduced for the length of ownership, starting in the sixth year and with full exemption after 22 years. Social charges are also reduced after five years, but you have to wait 30 years to escape the charges completely and the reduction is weighted towards the last seven years.
For residents, your main home is exempt from capital gains tax in France – provided it is your habitual and actual residence at the time of sale. There can be a 12-month breathing space if you meet certain conditions. If you are resident in France and in receipt of a state pension or disability card, you may be exempt from capital gains tax in France on real estate if your taxable income fell below a certain level the previous two tax years and you had no wealth tax liability.
A property other than your main home may also be exempt if you use the proceeds to buy a main home for yourself, not having owned one in the preceding four years.
Non-residents selling French property are fully liable to French capital gains tax. UK residents may also have to pay tax in the UK, though tax paid in France is offset against that due in the UK. The 17.2% French social charges cannot be offset against UK tax.
If you are renting out a French property, the net income will be taxed at the scale rates of income tax, ranging from 11% (for income over €10,084) to 45% (income over €158,122) in 2021, plus 17.2% social charges. The same applies to French residents who rent out property abroad.
There are various tax regimes for French rental property, so you will need to do your homework and speak to an accountant. Note that the special 30% fixed rate of tax available for investment income does not apply to rental income.
Succession tax on the property will hopefully not be due until a very long time in the future, but you do need to plan for it early on.
France’s inheritance tax is charged on each beneficiary individually (rather than on the estate), with the rates and allowances varying considerably depending on their relationship to you. While children receive decent allowances and rates start at 5%, other relatives can pay tax at 35%-55% with very little allowance, and non-relatives pay 60%.
Both residents and non-residents pay ‘taxe d’habitation’ and ‘taxe foncière’.
The ‘taxe d’habitation’ is paid by the person owning or having the use of a residential property. It is based on a notional rental value for the property multiplied by the tax rate fixed in the locality. This tax is being phased out from 2018 and expected to be completely abolished in 2023.
The ‘taxe foncière’ is paid by the owner of the property at 1 January. It is divided into two parts: tax on the building based on 50% of the notional rental value and tax on the land based on 20% of the rental value, and multiplied by the tax rate fixed in the locality. With both taxes there can be exceptions and deductions.
Taxation in France is often more complex than first meets the eye. The above is a summary based on our understanding of current tax conditions. However, professional advice tailored to your personal situation is always advisable.
If you remain UK resident, you also have to follow the France/UK double taxation treaty to confirm where you should be declaring the income and gains and paying tax. The same applies if you become resident in France and earn income in the UK. A cross-border wealth management specialist is best placed to help you here. n
Rob Kay is a Senior Partner at Blevins Franks