Tax on renting unfurnished property in France
PUBLISHED: 12:30 04 May 2015
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For those planning to generate an income from their French home, Kate Brehaut considers the tax implications of renting out an unfurnished property in France
In a buyers’ market, with low interest rates currently available on French mortgages and a favourable exchange rate, now just might be the ideal time to take that step onto the French property ladder.
For those who want to make a property work as an investment, there are a couple of main options available. Owners who want to enjoy the property themselves for holidays may decide to let the property out on a furnished basis for short-term holiday lets during the periods when they are not using the property. Gross returns on this type of letting activity are normally quite attractive but are not guaranteed year on year and running expenses may be quite high.
For those who do not intend to use the property, it is worth considering letting the property out on an unfurnished basis using a standard French lease of three years. The gross returns may not be as high as those available for furnished holiday lets, but running expenses are generally lower and, of course, with a formal lease in place, you should be guaranteed a regular income for the duration of the lease.
However, before you make any decision, make sure you are aware of the French tax consequences of such an unfurnished activity.
In accordance with the France-UK double-tax treaty, France has the primary right to tax any income earned from French property. For individual landlords (i.e. those who own and let the property in their own name as opposed to through any kind of corporate structure), the tax treatment of the rental income will vary depending on the level of gross income received and there are two régimes which deal with unfurnished rental income: the micro-foncier and the régime réel.
The micro-foncier is a simplified régime which applies automatically to unfurnished rental income which falls below €15,000 for the year in question. The gross income is reduced by an abatement of 30%, and French income tax is levied on the remaining 70%. The 30% abatement is supposed to cover all the allowable expenses pertaining to the letting activity, with no expenses being deductible separately.
If your expenses are over 30% of your gross income, you can opt out of the micro-foncier régime and into the régime réel. The option is irrevocable for three years. The régime réel will also apply automatically when your gross annual unfurnished rental income exceeds the amount of €15,000.
Under the régime réel, the gross rental income can be reduced by the allowable expenses that you have paid during the year. The main categories of deductible expenses include mortgage interest, copropriété charges, management and administration expenses (including fees paid to any professional for the preparation of your French tax returns), specified legal and professional fees, insurance premiums, certain repair, maintenance and improvement expenses, and the annual taxe foncière and its annex charges.
Other expenses not already included in one of the deductible categories of expense (such as advertising costs, for example) are not deductible separately but they are covered by a somewhat meagre fixed annual allowance of just €20.
There are certain specific regimes (the Duflot for example) which allow for additional or increased deductions, but entry into these depends on the property and location, and there are restrictions to the amount of rental that can be charged.
IMPLICATIONS IN THE UK
UK-resident individuals are liable to French income tax at the rates set out in the barème (French tax scale rates), but subject to a minimum rate of 20%, charged on the net taxable income howsoever calculated. In practice, the overwhelming majority of people will be subject to this 20% flat rate.
UK residents have also been exposed to an additional 15.5% in social surcharges. The application of these surcharges to non-French residents has been contested and recent developments from the European Union Court of Justice indicate, as these charges go towards funding the French social security system, that they are illegal on capital gains realised, and rental income earned, on French property by non-French residents.
In terms of tax returns, you will be required to file annual French income tax returns. The returns need to be filed in June every year, and report the income (and, if using the régime réel, expenses) from the preceding calendar year.
If you are taxed under the micro-foncier regime, you will simply declare the gross income on the main French tax personal return 2042. If you are taxed under the régime réel, you will need to obtain the annex form 2044. On this, you will declare the gross income and any eligible expenses.
As a UK resident individual, you would have to declare the French rental income on your UK tax return. In accordance with the France-UK double-tax treaty, you should not suffer any double taxation as the UK grants a tax credit equal to the amount of French tax paid. Of course, if the UK tax is in excess of the French tax paid, you would be due to pay the excess in the UK. The net taxable income for UK tax purposes would be calculated in accordance with UK legislation and you should ensure that you take appropriate advice before any investment is made.
Finally, there are legal issues to consider here too, such as ensuring that you have a formal lease drawn up in accordance with French law, and again you should liaise with appropriate professionals such as your notaire or estate agent to ensure that everything is put in place accordingly.
Kate Brehaut is the director of La Belle Vie, a Guernsey-based company specialising in tax, property and translation services
Tel: 01481 710 093