Like many new leaders wishing to draw a distinction with their predecessor, Francois Hollande, the newly elected French president has wasted little time in introducing several new law changes. As a current or future owner of French property some of these changes could affect you; notably an increase in the capital gains tax and income tax on rental earnings.
While on the surface these changes may seem troubling, according to Aideen O’Brien, Managing Director of Chez Riviera (one of the leading real estate agencies in the South of France) “there are further facts you need to be aware of before being overly concerned. For example, those of you already owning, or planning to own rental property in France will only be affected by this tax increase if your property is rented unfurnished. Since the vast majority of overseas owners elect to rent their property furnished, this change will impact only a small percentage”. The tax on rental income has been raised from 20% to 35.5% (a 15.5% social charge has been added to the previous rate of 20%). This change is retroactive, effecting transactions from 1st January 2012 onwards.
The capital gains tax rate is dependent on where you reside. Effective from 17th August 2012, it has increased from 19% to 34.5% for EU and French residents (this is comprised of 19% capital gains plus 15.5% social charges), and 48.3% for non-EU residents (capital gains tax of 33.3% plus the social charges). If you are based in a tax haven that does not have a tax treaty with France the applicable rate is 50% plus the social charges.
Aideen O’Brien notes that “the good news is that there are several tax exemptions”, namely:
- Primary Residence – there is no capital gains tax on your primary residence.
- Length of Ownership - the minimum period you need to own a property to avoid capital gains tax has jumped from 15 to 30 years. However after 5 years the tax rate diminishes e.g. between years 6 and 17 there is a 2% allowance per year; from 18 to 24 years a 4% allowance per year; and between 25 and 30 years, 8% per year.
- Renting Primary Residence – those who are tenants of their main French home, but own a property located in France, are granted exemption.
- Elderly & Disabled - French residents of retirement age, or registered disabled, are exempt provided their annual income is below the threshold obviating them from payment of the habitation tax.
- Divorced or Separated - there is an exemption for those couples in the midst of separation or divorce, where one of the parties stays in the property until it is sold, then both benefit from capital gains tax exemption.
- Allowable Deductions - the capital gain is determined by the difference between the sale price (less eligible expenses such as agent fees and other mandatory costs) and the purchase price (plus eligible expenses such as notaire costs, stamp duty, improvements).NB. only those building works carried out by a building professional registered in France along with valid invoices will enable tax relief on the costs.
In summary, it is important to realise that these tax increases were expected as EU residents previously paid significantly less capital gains tax and rental income tax than their French cousins, therefore these new laws will simply create a more equitable situation between French and EU residents and will no doubt prove popular with the French constituency!