Renting out your French property
Renting out your French property can help cover costs. Kate Brehaut explains your tax liabilities...
In the current climate of economic doom and gloom, people are having to be increasingly careful with their money and are looking for ways to make their assets work for them. An obvious choice for French property owners is to rent out their French holiday home for holidays lets when they are not using it. The income earned could be a vital addition to household revenue and if you don’t have the confidence to run the lets yourself, there are numerous property management companies and estate agents dotted all over France who would be more than willing to help.
If you do not envisage using the property frequently, and money is tight, you could consider renting the property out unfurnished and on a standard French lease of three years, thereby guaranteeing you a regular income through the economic downturn. One word of caution before you jump straight in though; France has the primary right to tax any income earned from French property and as such, you will be exposed to French income tax and required to submit annual returns to the Centre des Non-R�sidents in Noisy-Le-Grand.
The tax treatment of the rental income will vary depending on whether the property is let unfurnished or furnished and the level of gross income received.
There are two tax regimes for unfurnished rental income; the micro-foncier or the r�gime r�el.
The micro-foncier is a simplified regime 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.
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If your expenses are over 30% of your gross income, you can opt for the r�gime r�el. The option is irrevocable for three years. As intimated earlier, the r�gime r�el will also apply automatically when your gross annual unfurnished rental income exceeds €15,000.
Under the r�el regime, the gross rental income can be reduced by the allowable expenses that you have borne during the year. The main categories of deductible expenses include mortgage interest, copropri�t� charges, management and administration expenses (including accountant’s fees for the preparation of your tax returns, concierge’s salary and so on), certain legal and professional fees, insurance premiums, repair and maintenance expenses and annual taxe fonci�re and annex charges. Of note, stationary, advertising and travel expenses are not deductible. Instead, these are covered by a somewhat meagre fixed allowance of €20.
Finally, there are various abatements available for those who rent their properties out unfurnished and adhere to certain strict guidelines governing the level of rent they charge (Robien, Borloo and Besson regimes).
Under French law, furnished lets are considered as a commercial activity and taxed under the B�n�fices Industriels et Commerciaux rules which comprises three sub-regimes; micro-BIC, r�gime r�el simplifi� and r�gime normal.
The micro-BIC is aimed at those with a lower income, and simplifies record-keeping requirements and other formalities. It is, subject to certain exclusions and following the enforcement of the Loi de Finances 2009 (2009 French Finance Act), applicable to individuals whose rental income falls below €32,000. The net taxable is calculated as 50% of the gross income and there is no requirement to prepare formal accounts, although a level of record keeping is expected. The 50% abatement is supposed to cover all expenses pertaining to the letting activity.
Previously, and for income earned up to 31 December 2008, the threshold is €76,300 and the abatement is 71% (i.e. leaving a net taxable of 29%).
It is important to note that eligibility for the micro-BIC regime is not only based on gross turnover, but also on the ownership structure of the property and whether the owner is TVA (VAT) registered.
Finally, properties which are classed as g�tes ruraux, chambres d’h�tes and meubl�s de tourisme are not subject to the new limit for 2009, but instead are able to declare under the micro-BIC when the gross income is under €80,000 per annum, and will benefit from the old abatement of 71%.
For income above the threshold, or for those people who are not able to benefit from the micro-BIC, the r�gime r�el simplifi� applies. This regime allows the gross rental income to be reduced by the real expenses of the activity, including mortgage interest, depreciation, maintenance, repair and running expenses, management costs, insurance, property taxes and so on, but requires the preparation of simplified French accounts and has increased filing requirements.
It should be noted that if the property owner carrying out the lets is not registered with a Centre de Gestion Agr�e (CGA), their net profit is multiplied by 125% to reach the overall net taxable income. If you register with a CGA, this additional 25% increase does not apply (i.e. you are taxed on 100% of your profit). However, registration is not free and will normally require you to appoint a French accountant, so you should always calculate beforehand whether the benefits outweigh the costs.
It is possible to opt out of the micro-BIC and into the r�gime r�el simplifi�, which could be of interest to those realising a loss but unable to claim as such under the micro-BIC, which always results in a taxable profit.
The r�gime normal allows a similar calculation of net taxable income as the r�gime r�el simplifi� but applies to income over and above €763,000 and requires full-blown accounts and heavier filing obligations.
Furnished rental income may also, in certain cases, be liable to the taxe professionnelle (local business tax), although if you are liable to this tax, the taxe d’habitation (local occupier’s rates) would no longer apply.
Regardless of the regime you fall under, or whether the property is let furnished or unfurnished, UK resident individuals are liable to French income tax at the rates set out in the bar�me (French tax scale rates), but subject to a minimum rate of 20%, charged on the net taxable, howsoever calculated. In practice, the vast majority of people will be subject to this 20% flat rate.
Pros and cons
Obviously, each type of let has its own advantages and disadvantages, both in terms of taxation and other issues. Furnished lets tend to earn a higher rent, but don’t offer the guaranteed income and security of an unfurnished let. Unfurnished lets do not allow the owner to use the property, whereas with furnished holiday lets, the property is available for the owners when not let (during the low seasons for example). Of course, there are legal issues to consider too. An unfurnished lease needs to be drawn up by a French-qualified lawyer/notaire, whereas there is far less protection for furnished landlords.
Finally, the tax calculation for both furnished lets and unfurnished lets are relatively similar and they both have a micro’ regime which has far fewer administrative obligations. However, entry into the micro-BIC regime is more restrictive than the micro-foncier, and outside of the micro regimes, the furnished r�el regimes are far more onerous when compared to the unfurnished r�el regime.
The above is only a general overview of the situation and advice should be sought prior to commencing any activity, which is specific to your personal situation. You should also seek advice on tax implications of receiving foreign-source income in your country of residence. UK residents will not suffer double taxation as the UK provides relief for French tax suffered.
The above information on the French tax treatment of rental income is relevant to residents of the UK, excluding Channel Island and Isle of Man residents whose exposure to French tax differs due to the current lack of double-tax treaty between these jurisdictions and France.