Capital Gains Tax on UK property and new French rules
There is currently much confusion since the UK / France tax treaty changed and one point of confusion is how property is taxed for capital gains. As if this wasn’t enough, the French government’s constant rule changing is adding to the confusion. The purpose of this article is to throw a little light on the subject.
Since the change in the UK / France tax treaty, capital gains from UK property, for French residents, are now taxed in France under French rules.
Some people have been confused by the change to capital gains tax, as article 14 of the treaty, dealing with capital gains on property, states that it may be taxed where it is situated, so the UK, but the UK does not apply capital gains tax to non residents, resulting in no tax. What overrides this is article 24 of the treaty which states that there will be a tax credit for tax paid. Of course, there will be no credit since the gain is not taxed in the UK, thus making it clear that French tax is the only tax that matters.
Capital gains tax in France is currently 19%, but with a further 13.5% (up from 12.30% last year) in social charges for French residents.
Until recently, being taxed in France was not a major problem for many who had owned their property for a considerable time, but the last French budget (or at least its second correction adopted 8th September) has taken off the shine, leaving people with anxieties over any sale. Many people seem to have understood that this is already in force; however, for private individuals, the new rules apply from 1st February 2012.
The original rules were that, after five years of ownership, there was an allowance added every year of 10 percent. This meant that a property owner could sell their UK property, free of capital gains tax, after 15 years. The new rules mean that this is now no longer the case, as is outlined in article 150 VC of the French tax code.
The time of ownership now required to receive 100% relief is double, at 30 years. The details are as follows:
-2% for each year of ownership beyond the fifth year;
-4% for each year of ownership beyond the seventeenth year;
-8% for each year of ownership beyond the twenty-fourth year.
Or to really simplify things:
|Less than 6 years||0%|
|6 & 7 years||2%|
|7 and 8||4%|
|8 and 9||6%|
|9 and 10||8%|
|10 and 11||10%|
|11 and 12||12%|
|12 and 13||14%|
|13 and 14||16%|
|14 and 15||18%|
|15 and 16||20%|
|16 and 17||22%|
|17 and 18||24%|
|18 and 19||28%|
|19 and 20||32%|
|20 and 21||36%|
|21 and 22||40%|
|22 and 23||44%|
|23 and 24||48%|
|24 and 25||52%|
|25 and 26||60%|
|26 and 27||68%|
|27 and 28||76%|
|28 and 29||84%|
|29 and 30||92%|
|More than 30||100%|
Pre-budget, there was also a €1,000 euro allowance applied as part of the calculation under article 150 VE of the French tax code. Although this did not make an enormous difference, this also being removed certainly adds to the cost.
Example : An individual sells 5 May 2012 a second home acquired on 1st October 2000. No additional exemption is applicable. The selling price is € 240,000 and the purchase price was the equivalent of € 91,470.
|a. Calculation of the gain|
|Sale price||240 000 €|
|Purchase price||91 470 €|
|Acquisition costs (flat rate of 7.5%*)||6 860 €|
|Increase the purchase price for the work (fixed allowance of 15%**)||13 721 €|
|Purchase price adjusted||112 051 €|
|Capital gain||127 949 €|
|Allowance for holding period: the length of ownership is 11 years and 7 months, the percentage reduction amounts to 12% (against 60% under current rules)|
|€ 127 949 x 12%||15 354 €|
|Taxable gain||112 595 €|
|b. Computation of Tax|
|Income tax: € 112,595 x 19%||21 393 €|
|Social Charges: € 112 595 x 13.5%||15 200 €|
|Overall tax||36 593 €|
|(Against € 16 019 under current rules)|
* A flat rate of 7.5% may be used when assessing the acquisition cost of the property (Article 150VB 3 of the French tax code).
**Where the taxpayer sells a property after five years of ownership is not able to provide the justification for home improvement expenditures, a fixed allowance of 15% of the purchase price may be used (Article 150VB 4 of the French tax code).
A declaration now needs to be made to the tax authorities within one month of the sale.
Some of you may have read about first proposal (Draft law 3713) made under the first corrective budget which considered having no allowance for time owned, but with an indexation allowance against inflation, however it was considered that years of ownership was a simpler system, dropping the indexation option.
For those with a second property in France, one solution to avoid this tax is to move into the property you wish to sell, completing at least one income tax declaration from that address, making it your principal residence, thus exempt from capital gains tax. It may come down to the size of the bill and how much trouble you are willing to go to, to avoid paying it.
In summary, investing in property, whether in France or the UK, is no longer attractive for French residents and those who are selling property now might wish to achieve their sale before 1st February 2012 as it is likely to be more expensive after that. For those that are looking to move to France and buy a second property as an investment, they may wish to consider other investment options to create an income other than property, as numerous more attractive options exist.