Whether moving abroad or repatriating to the UK, Britons often delay selling their home until they have bought a replacement in their new country of residence. While this may seem sensible, it can lead to capital gains tax liability in one – or even both – jurisdictions. By first understanding the tax and main home relief rules for France and the UK, potentially thousands can be saved in unnecessary taxes.
Most people who move or retire to France acquire their new French home before selling their UK Principal Private Residence (PPR). A similar logic often applies in reverse, with those returning to the UK retaining their French property until occupying their new UK property.
Without careful planning, however, these situations can inadvertently lead to a capital gains tax (CGT) liability in one – or sometimes both – jurisdictions.
The UK and France each have their own legislation around main home relief. Depending upon the circumstances these can work in your favour or against you.
A UK home is exempt from UK CGT if it is sold within 18 months of the date it ceases to be the main home. Even beyond this point, only the gain since 6th April 2015 is potentially taxable for non-resident individuals. This sum is then apportioned between qualifying and non-qualifying periods, with only the latter chargeable to UK CGT.
From a French perspective, the sale of the old UK home is exempt from French CGT provided the property was the habitual and actual residence at the time of sale. Alternatively, if the owner left the property without having sold it, the exemption still applies if it is sold within 12 months of moving out, so long as it was put on the market while they were still living there and it remained vacant.
But if they sell the property even one day after the 12-month period, they could lose the relief completely. If this is the case, the full gain is calculated and then reduced through a taper relief system which lowers the amount of tax and social charges due. Full exemption is only received after 22 years of ownership. Before that, the net gain is reduced by 6% per year from the sixth year onwards, and 4% for the last year.
For social charges, it will be 30 years before full exemption. Again, the relief starts from the sixth year, but is weighted towards the last seven years.
France also provides an age-related exemption. Those in receipt of a state pension or holding an invalidity card do not pay capital gains tax on the sale of real estate if:
1. They do not have a liability to wealth tax in the tax year preceding the year before sale;
2. Their taxable income in that tax year was below a certain level. For 2016 gains, the 2015 income limit is €10,686 for the first part of the household, and €2,853 for each additional half part. For a married couple, the income limit would be €16,392.
Under the UK/France double tax treaty, Britons can receive a credit in France for any UK tax paid on disposal, but they cannot offset any UK tax paid against a social charge payment, or vice versa.
Gains on property in France are taxed at a fixed rate of 19%. Surtaxes are currently payable as well, ranging from 2% for gains over €50,000 up to 6% for gains over €250,000. Social charges may also be applied at a rate of 15.5% (potentially rising to 17.2% from 1 January 2018). This makes a total top tax rate of 40.5% (due to rise to 42.2% in 2018).
The main home relief in France should be available even if the property was owned for many years without living in it. It will still be fully exempt from tax if it is the owner’s habitual home when they sell it.
The main home exemption may also apply if the property is held in an SCI (Société Civile Immobilière – a French property holding company), whether the property itself is sold, or the shares of the SCI. This is a specialist area so professional advice should be sought.
UK-residents owning French property are fully liable for French and UK tax on its sale, with reductions for main home reliefs, where applicable. Under the terms of the France/UK double tax treaty, the tax paid in France is offset against that due in the UK. Remember, social charges in France cannot be offset against a UK CGT liability.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.