Tax expert Rob Kay explains capital gains tax rules in France and how they could affect you if you sell property or shares in France
One key tax you need to familiarise yourself with when you move to France or buy property there, is capital gains tax. It is important to note that there is no tax on capital gains arising on death or gifts; instead succession (inheritance) tax will be due on the assets valued at date of death, or the date the gift was made.
First of all, the good news is that your main home is exempt from capital gains tax in France. This only applies if the property is your habitual and actual residence at the time of sale.
Therefore, if you leave a property before you sell it, you could lose the relief entirely, even if it was your main home for many years. There is no ‘time-apportionment’ relief as there is in the UK, though other reliefs may apply. The exemption is also unlikely to be available to those who are not registered for tax purposes and fully integrated into the French tax system.
For other properties, French residents are liable for French capital gains tax on the sale of property, whether the property is in France, the UK or elsewhere. If you wait until you move to France before selling your UK property, this means that you will not benefit from the French main home exemption.
Gains made on the sale of property are taxed at a fixed rate of 19%. However, surtaxes also apply from 2013 to 2015, ranging from 2% for gains over €50,000 up to 6% for gains over €250,000.
Social charges of 15.5% are also levied in France on top of the capital gains tax. This means that, at the moment, the lowest combined rate of tax is 34.5%, and the highest is 40.5%.
There is, however, a taper relief system, which reduces taxes the longer you have owned a property. You receive full exemption from tax when you have owned a property for 22 years, with the net gain reduced by 6% per year from the sixth year onwards and 4% for the last year.
For social charges, you need to wait 30 years for full exemption. Again the relief starts from the sixth year, but is weighted towards the last seven years.
UK REAL ESTATE
If you sell UK property while resident in France, the gain is taxable in France, with a credit for any UK tax paid on disposal. Although, currently, non-UK residents generally escape UK capital gains tax, this is changing from 6 April 2015.
If you sell a French property as a UK resident, you are liable for tax on your capital gains in both France and UK. Under the terms of the France/UK double tax treaty, the tax paid in France is offset against that due in the UK. If the UK tax bill is higher, you will pay the difference in the UK.
The 15.5% social charges are payable on gains arising on disposals of French property by UK residents. These cannot be offset against the UK tax payable on the gain (under a specific clause of the tax treaty), so remain an additional ‘tax’ on the gain.
Note that for countries outside the EU, Norway, Iceland and Switzerland, the 19% fixed rate increases to 33.3% (with social charges still applied on top). This is based on residency, not nationality, so if a UK national is living in Monaco when he sells French real estate, he pays tax at 33.3%.
Gains made on the sale of shares and negotiable securities used to be taxed at a fixed rate of 19%. This increased to 24% in 2012, and then from 2013 this fixed rate was abolished completely, and gains are now taxed at the progressive rates of income tax. Therefore, if you are resident in France, when you sell shares and securities, you add the gains realised to your other income for the year and apply the scale rates of income tax.
Income tax rates currently range from 5.5% for income over €6,011 to 45% for income over €151,200. You also need to pay 15.5% social charges on all your investment income and gains.
This means that higher earners pay more tax on their capital gains, but there is some good news. The 2014 budget introduced a new general taper relief scheme for capital gains, so if you have long-term gains, taxation will be considerably reduced.
Investments held for two to eight years benefit from a 50% relief, while those held for over eight years receive 65% relief. Unlike the previous system, where the holding period only started from January 2013, this is based on when you bought the shares. So you can benefit immediately.
Although this taper relief does not apply to social charges, it still presents an opportunity for people who have share portfolios pregnant with gain. You can apply the new 65% discount to release long-term investments, and move the capital into more tax efficient structures. You may be able to considerably reduce your tax liabilities. You would need to seek personalised, specialist advice.
Note that you cannot necessarily escape French capital gains tax by leaving France. An exit tax may be levied under certain circumstances on unrealised share gains made by individuals who have been resident there for the six years before leaving. Again, gains are taxed at the scale rates, plus 15.5% social charges, and the normal taper relief rules apply. Gains made before you were resident in France do not suffer the exit tax.
The taxation of investment income and property can be complex, particularly where two countries are involved. It is important to take specialist advice to ensure you make the most of the opportunities and do not pay any more tax than absolutely necessary.
Rob Kay is senior partner at Blevins Franks, which advises retired expats on tax and wealth management.
www.blevinsfranks.comTax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
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