Tax issues in France
1. Sales cost
In France, the notary is a third party in all property transactions. He is a government officer who checks all of the documents provided by the developer and ensures a safe transfer of the ownership.
The amounts of the sales costs owed to the notary varies depending if it is a new build, a complete or light renovation or a resale.
New build/complete renovation cost: 3% of the inclusive Vat purchase price
Resale/light refurbishment: 7% of the inclusive Vat purchase price
If you are financing your acquisition via a French mortgage, there is a mortgage registration tax added to the sales cost. The rate of this tax is generally of 0.5% to 0.75% of the amount borrowed.
2. Tax on the income in a lease-back scheme
As a non-resident, owner of a furnished rental property in France, you will be required to have a tax address in France. This can be acquired through an accountant in France, who will also manage your VAT statements and tax returns.
Your rental income will be subject to 25% tax by French Tax Authorities. Depending on your country of residence, there may be a Tax Treaty with France, thus avoiding a double taxation of revenues, which is the case with the US.
In order to decrease or cancel taxable revenue declared from your property, you are allowed to deduct interest on your mortgage (only if the mortgage is contracted through a bank in France) and you may also amortize the price of the apartment and furniture and fittings.
Amortization as follows: The Tax Authorities will consider about 15% to 20% of the price to represent the price of land, which cannot be amortized. If you take 80% of price of apartment, you can then apply either 5% per annum over 20 years or 4% per annum over 25 years as amortization of the property.
Furniture and fittings can be amortized at 10% per annum over 10 years.
The amortization is considered as being deferrable, which means that for so long as you have sufficient interest and other charges to deduct, you do not require using it.
Notary fees may also be deducted over the first 3 years. Rates which are payable annually can also be deducted
One return journey from your home to your holiday property can also be deducted, (based on the official French Tax Authorities tariff).
Accountants’ fees are also deductible. (About € 270 per year)
Rental income can thus be considerably decreased or even cancelled out completely by the offsetting costs rendering your income net of tax over a long period.
However, a negative balance cannot be stocked to off-set income in coming years.
3. Tax on the capital growth
The rate of CGT for both French and non-French residents, who are residents of an EU country, is 16% + 12,1% ‘prelevements sociaux’ of the net gain on the property (the property has to be held for at least 5 years otherwise it is treated as income and is taxable under income tax rules). The gain can be reduced by a flat rate 7.5% to account for the costs of acquisition (or the actual amount if higher) when calculating the CGT payable. There is also a 15% deduction for any enhancement expenditure. The 16% tax is reduced by 10% for each year of ownership after 5 years -
Therefore if the property is held for 15 years no CGT will be payable.
4. French VAT on Leasebacks
Under the leaseback scheme, where the property is used as holiday accommodation for at least 20 years and leased continuously during that time, investors are entitled to a VAT refund on the purchase price of the property. In some cases, the developer will assume the burden of reclaiming the VAT by selling the property to the investor net of VAT. Alternatively, they will sell the property at its gross price in which case the investor must claim the VAT rebate of 19.6% (VAT rate for new build) of the purchase price.
5. French Wealth Tax or I’impôt sur la Fortune
Non-residents of France who own assets located in France, currently valued at over €790,000 on 1 January of the taxation year, are liable to Wealth Tax on those French assets, including the value of shares in any special purpose company which owns real estate in France, like a Société Civile Immobilière (SCI). However, loans to the individual (or the SCI) specifically attached to the French assets may be deductible against the asset value to reduce the wealth tax calculation (ie only the equity in the property is considered part of the taxable value). As a general rule, taxable assets are valued according to their current market value.
Also, you benefit from a discount of 150 euros per child on the total ISF.
The wealth tax rates for 2011 are:
GROSS FRENCH ASSETS OF HOUSEHOLD
€790,001 to €1,290,000
€1,290,001 to €2,530,000
€2,530,001 to €3,980,000
€3,980,001 to €7,600,000
€7,600,001 to €16,550,000
6. Inheritance tax
The threshold has tripled up to €159,325 per parent per child in 2011.
Foreign owners of French properties will benefit from the changes whether they are resident or not, as under the country's tax rules any asset in France is taxed in the country even if its owner lives and dies overseas.
The move has been made by recently elected president Nicolas Sarkozy after property price rises dragged more ordinary citizens into the net of inheritance tax.
It means that a couple with three children owning a French property worth €900,000 (approximately £776,100) should be able to pass it on tax-free if each child was given an equal €159,000 share.
For example, in the UK each person has an inheritance tax allowance for assets passed on after their death, whereas in France there is an allowance per parent per child, meaning larger families will be able to pass on more expensive homes without incurring tax.
Inheritance tax in France varies depending upon the amount above a threshold inherited and ranges from 5% at up to €8,72 to 40% above €1 805 677.
During the lease, as you understood, everything is sorted out for you. The only tax that remains at the expense of the owner is the land tax (Taxe Fonciere). Everything else is covered by the management company.
After the end of the 18 year lease, if you decide not to renew the lease for another 9 years, the management company will not anymore cover the fees mentioned:
Ø Land tax (taxe fonciere) averaging €10-15/m2
Ø Council tax (Taxe d’habitation)
Ø Charges de co-propriete averaging €30 – 40 /m2 (co-ownership charges which covers the maintenance of the common parts)
Ø EDF –GDF bills
Ø Renovation works
Ø Your mortgage will be fully paid off
Of course if you decide to rent out yourself your property after breaking the lease, those charges would be paid by the tenants who occupy your property.
Overall, this needs to be considered as a long term investment with an additional revenue, and a secondary home for the whole family.