France braced for austerity

French government introduces new rafts of legislation

Changes to the capital gains tax on sales of second homes and land form part of proposed new legislation from the French government.

President Sarkozy’s government has developed a raft of measures designed to slash France’s deficit by €12 billion over two years as France looks to cut its public deficit from 7.1% of GDP in 2010 to 5.7% this year and then 4.6% in 2012.

Among the measures is the plan to impose an extra tax of 3% on annual incomes exceeding €500,000, and a new way of taxing the sales of second homes and land. Those resident in France will no longer get a 10% reduction on tax gains per year of ownership. Instead, the tax on a second homes will now be calculated on the sale price minus the purchase price originally paid, plus an allowance for inflation. The tax rate is 19% plus social charges of 13.5%, giving a total of 32.5%.

David Anderson, of Sykes Anderson Solicitors, says: "These measures will affect high net wealth individuals who are, or intend to become, French resident. Imposing additional taxes on wealthy individuals is the wrong way to deal with France’s deficit. High taxes make France unattractive for mobile high net wealth people who will go elsewhere. It will also encourage aggressive tax planning as wealthy individuals seek to avoid tax.

"For UK residents who own French property, neither the introduction of the additional 3% on income tax nor the removal of the taper relief will have much impact. UK residents will be subject to capital gains tax in the UK, which is likely to be higher than that in France and a credit for any French capital gains tax paid will be given to them. In short, all that will happen is that the French Revenue will take some of the share of the tax the UK Revenue would previously have taken. France is however far more efficient at collecting capital gains tax than the UK as the tax is deducted by the notaire on sale. In the UK it is assessed much later on and there is accordingly more opportunity for evasion in the UK by people who simply do not declare the sale of a French property.

"Those who own second homes with considerable latent gains could crystallise these gains by transferring their property to a different entity before the new rules come in force."

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The proposed measures come as newly released figures from France’s statistics agency INSEE show that the country’s economy had stalled in the second quarter of the year, delivering zero growth, against predictions of a 0.2% rise. There has also been talk of France’s sovereign debt being on the verge of losing its AAA status.

However, French bank BNP Paribas has launched a robust response, saying: "There have been all kinds of rumours regarding the eurozone and France. Competent authorities made it clear that they were unfounded. In particular, Standard and Poor’s, Moody’s and Fitch have successively indicated that rumours regarding a downgrade of France’s AAA rating were unfounded."

BNP Paribas goes on to say: "In the same vein, various rumours have circulated on French banks. On this issue, the governor of the Banque de France has just underlined their financial stability and their capacity for resistance, as shown since the beginning of the crisis’. He said the banks confirmed their financial solidity’ when they announced their financial results for the first half of 2011, and that this was thanks to vigorous risk management and a universal-banking model based on diversified activities’."

David Franks, chief executive of Blevins Franks, says: "French banks have had a tough time as they are among the largest holders of Greek debt and are also highly exposed to the Italian market. There have been rumblings that French government debt was at risk of a downgrade because the sovereign would have to bear the costs of any French bank troubles. The three main ratings agencies were however quick to reaffirm France’s AAA rating in August. President Sarkozy has also been very vocal in his assurance that France would continue and intensify its fiscal discipline in the medium-to-short term. This includes more tax rises for France’s wealthiest taxpayers, though I doubt it will raise significant sums relating to France’s annual public expenditure."

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