Bill Blevins takes a close look at how rental income is taxed in France
Many Britons buy property in France and let it out for income. Some owners stay UK resident and use the property themselves when it is not rented, while others move to France and let property as French residents. All rental income arising from properties situated in France is subject to tax in France, no matter in which country the payment is received.
The rental income is liable to both UK and French tax if you remain a UK tax resident, but any French tax is deductible against UK tax on the same income. If the UK tax is more than the French tax, the difference is paid in the UK. If the UK tax liability is less than the tax liability in France, you do not pay any tax in the UK. The income still needs to be reported in both countries though.
French residents pay tax on rental income at the scale rates of up to a top rate of 40% plus social charges at 12.1%. Non-residents pay a minimum tax rate of 20% (but no social charges) on all income in France, which includes rental income.
To reduce the French tax liability, non-residents can apply the French income scale rates to their worldwide income in order to establish the effective tax rate on the income (taux effectif). The tax liability is calculated on your worldwide income as if you were French tax resident, but then the proportion of the tax liability related to the income that is not subject to French taxation is discounted; eg if your French rental income represents say 10% of your worldwide income, and your French tax liability calculated under the scale rates of tax is say €4,000, then €3,600 would be discounted under this scheme and only €400 would be taxable. If the tax calculated under the 20% rule is say €500, the scale rates would produce a lower tax liability. The French system can appear quite complex for taxing renting income. Below is an outline of the various possible methods.
Furnished lettings Tax on rental income from furnished accommodation can be calculated under the Micro-BIC (b�n�fices industriels et commerciaux) regime for privately owned properties. The threshold is €32,100 (�26,369), and the tax-deductible element of the gross income is 50%. However, for income derived from g�tes, chambres d’h�tes and meubl� de tourisme, the threshold is €80,300 (�65,965), and the tax-deductible element of the gross income is 71%.
Under the Micro-BIC regime, you do not need to show expenses or prepare accounts although you do have to adhere to specific record-keeping formats. The main drawback of this regime is that it always shows a fixed taxable profit (ie it can never show a lower net profit or a loss).
If the property is a leaseback property or is held in a French property holding company (SCI), the Micro-BIC regime cannot apply.
An alternative is the r�gime r�el simplifi� (RRS), which is available for rental income up to €763,000 (�626,797). This option is irrevocable for a period of two years. To opt into the regime, you must write to your local tax authorities before 1 February of the year from which you would like the RRS to apply and it will be automatically renewed after the second year unless you notify the French authorities by 1 February of that year that you wish to change the tax regime.
Under the RRS, the majority of the letting expenses are deductible, so it is possible to record a loss. The range of deductibles includes all maintenance, repairs, restoration, running expenses and interest on loans used for the acquisition, construction, restoration or improvement of the property. Accounts to French accountancy standards and additional tax forms have to be prepared under the RRS so administration is more expensive than the Micro-BIC regime.
The r�gime r�el normal usually applies to businesses whose annual turnover is more than €763,000 (�626,797), although it can apply by option to income under this threshold. A full set of accounts, and all supporting documentation, must be submitted to the French tax authorities annually. There are also specific record-keeping requirements under this regime, and all documentation should be kept for a period of 10 years.
Professional furnished landlord (PFL)If you want to let furnished properties on a professional level you can register as a PFL or loueur en meubl� professionnel (LMP). Registering as a PFL usually automatically registers you with social security as a self-employed person and so is not ideal for non-residents. The Micro-BIC regime can still apply. There are many tax benefits to this status, including exemption from wealth tax in relation to the properties. To benefit from this PFL status, your total turnover from furnished rental activities must exceed €23,000 (�18,894) and must represent at least 50% of the household’s net earned income excluding investment income or capital gains. At least one member of the household must be registered with the Registre de Commerce et des Soci�t�s. You have to register the business prior to starting to professionally let out properties; this regime cannot be retrospectively applied.
Letting roomsIf you live in a French property as your main home and let rooms to visitors you will be taxed under the Micro-BIC regime as for furnished lettings unless the income from rent is below €760 (�624) per year in which case it is exempt. Certain conditions have to be met in order to qualify as a chambres d’h�tes: ie the most guest rooms you can have is five and each should have access to a shower room and toilet.
The income is tax free if you let a room on a permanent basis so that it is in effect the tenant’s home, providing the rent is up to €118 (�96.93) per square metre.
Unfurnished lettingsRental income from unfurnished lettings can be taxed under the Micro-Foncier regime. It is similar to the Micro-BIC regime; ie you don’t need to provide documented expenses or prepare accounts, although the thresholds and percentages are different. If the total gross income from unfurnished lettings is below €15,000 (�12,322) per year, you can deduct a flat 30% as expenses, and so only 70% of the gross rental income from the unfurnished lettings will be taxable in France.
If you need more specific advice suited to your particular aims and objectives, consult a tax and wealth management specialist with full knowledge of the UK and French tax rules who can help to recommend the most tax efficient regime for you.
The tax treatment(s) detailed above is current at the time of writing although the tax treatment outlined may change in the future. Blevins Franks www.blevinsfranks.com