France's holiday homes tax grab: How much more tax will UK owners have to pay on French property?

By Simon Lambert 09:59 06 Jul 2012, updated 17:54 09 Jul 2012

British owners of homes on the Continent have had plenty to worry about in recent years – and France’s new leader Francois Hollande’s decision to hike taxes has just added to their fears.

The glory days of a place in the sun are gone. Now the owners of property in France, Spain and other popular hotspots for holiday homes and expats are more likely to be nervously looking over their shoulders, fearing more attacks from Europe’s cash-strapped nations on their wealth.

Those concerns can be added to the jitters they have already been suffering in recent years, over matters ranging from the pound’s level against the euro, to the stability of the eurozone itself.

But is this really a soak-les-rosbifs tax grab? We take a look.

French homeowners: Do Britons need to worry about a tax grab from Francois Hollande?

Taxing the foreigners

France’s newly-elected socialist president Mr Hollande made sure that he grabbed himself headlines across the channel with this week's soak-the-rich budget, as he almost doubled potential capital gains tax and substantially hiked income tax on rent for French homeowners who live outside the nation but in the EU.

The hikes have come as France decides to impose the ‘social charge’ element of the taxes onto those living outside the country.

On paper the French tax hikes look swingeing. Capital gains tax has gone up from 19 per cent to 34.5 per cent, while the tax on rental income has risen from 20 per cent to 35.5 per cent. The former arrives from the end of the month, while the latter will be retrospective and backdated to 1 January 2012.

In reality, France’s complicated capital gains tax allowances, which can dramatically cut bills, combined with the limited amount of people renting out homes and the relatively low income they get, will mean few of the estimated 200,000 British owners of French properties will end up with substantially bigger tax bills.

What is more concerning for those French homeowners is the statement of intent of tapping them up to help France out of the financial crisis.

And the reaction is likely to be keenly watched by owners of properties in other indebted European nations, such as Spain, worried by the implication that they too could end up on the hook.


How hard will the French tax hikes hit

The first thing for British owners of homes in France to remember is that for many years they have had a better deal than the French on capital gains tax and income tax on rent. (That also applies to anyone owning a home in France and living elsewhere in the EU)

As in Britain, for French residents main homes are exempt from capital gains, however, the tax levied on the sale of a second home differs depending on whether you live in France or not.

Until Mr Hollande’s proposed changes come in, capital gains tax on second homes is imposed at 19 per cent across the board, but crucially French residents pay an extra social charge on top of this of 15.5 per cent (as of 1 July 2012, previously 13.5 per cent).

That has meant a situation where French residents pay capital gains tax of 34.5 per cent (previously 33.5 per cent), while those owning property in France but living elsewhere

in the EU pay 19 per cent.

To the same extent tax on income from rent has also been paid at two levels: the basic typical level is 20 per cent, with an extra 15.5 per cent added in social charges.

The reasoning behind this has always been that social charge goes towards improving the French lot, thus those living outside the country do not benefit from it and so don’t pay it.

Mr Hollande has called time on that. As far as he is concerned, the social charge is something all French homeowners should be paying and it’s high time that the British – and others – stopped skimping on their dues.

That somewhat unsurprising decision from a man who rode to office on an old-fashioned left-wing ticket, means potentially bigger tax bills for les rosbifs and other non-French residents, with capital gains tax at a standard 34.5 per cent and rental income at 35.5 per cent.

French property

Will you pay more tax?

There are a few factors that muddy the waters here.

Firstly, France’s complicated capital gains tax involves a form of taper relief, which has the power to dramatically bills for those who have owned property for some time – or plan on keeping it for a while – and other cost allowances that can also cut it. There are also allowances to reduce the rental income you need to pay tax on.

Complicating matters further, capital gains tax and its taper relief was only recently changed in February this year.

Previously, you paid full capital gains tax for the first five years, after which taper relief took it down to zero by the end of the fifteenth year of owning the property.

Now, owners pay the full amount for the first five years and then get a deductible allowance stepping up two per cent a year to Year 17, then four per cent a year to Year 24, then eight per cent a year until Year 30, when they get a 100 per cent deduction.

But even if you do get let off all your capital gains tax by the French taxman, you should still be paying the rest in the UK.

Our flat rate capital gains tax is levied at 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers, however, as your profit is added onto your income, anyone making a decent sum from a property in France is likely to pay the 28 per cent rate.

This means that at best the new French rules would only involve a Briton paying an extra 6.5 per cent in capital gains tax (the difference between our top 28 per cent rate and France’s new 34.5 per cent).

French property specialist Athena Advisors also points out that the new social charge contributions on income only applies to unfurnished rental properties, which fall into the Revenu Foncier system.

It says that the more tax-effective furnished letting tax system Benefice Industriel et Commerciaux (BIC) is more relevant to most Britons who rent out property, and that: 'allows you to amortise your property and offset the charges related to a property’s rental income'.

Camille Letuve, partner at Athena Advisors said: 'The new proposed tax on French rental property is only applicable to non-furnished rental properties and very few British and international investors own one of these.'

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Category: Taxes

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