Buying a home in France is a dream that many Britons are making a reality. Regardless of whether it is a holiday home or a place to live permanently, it is important to look beyond the price tag and understand how French capital gains tax works.
As is usual in France, there are two sets of tax to pay: capital gains tax and social charges, although the rules, rates and allowances differ for gains made on movable and immoveable assets.
French capital gains tax
The standard capital gains tax rate on the sale of real estate is 19%. Progressive surcharges are added for gains over €50,000, starting at 2% and rising to 6% for gains over €260,000.
This makes a potential top tax rate (including full social charges) of 42.2% – but there are various reliefs and exemptions to prevent most people having to pay this much tax.
French social charges
The standard social charges rate for investment income, including property gains, is 17.2%. It is possible to benefit from a new lower 7.5% rate if you are covered under the health care system of another EU/EEA country. This applies to residents in France who hold Form S1 (includes UK nationals who are in receipt of the UK State Pension), and non-residents with gains or income arising in France.
Main home exemption
For those who own one property that is their family home, tax exemptions usually mean there is no tax is payable on the gain. Care must be taken to follow the rules correctly, however, and to be aware of the differences in rules from one jurisdiction to another.
In France, the main home is exempt from capital gains tax and social charges provided it is the habitual and actual residence at the time of sale. This also applies to a home held in an ‘SCI’ (French property holding company).
In the UK, principal private residence relief (PPR) apportions any gain between qualifying and non-qualifying periods. France has no apportionment – just qualification or non-qualification. You could lose this relief if you sell after you have moved out of the property, regardless of how long you previously lived in it.
The exemption can, however, be extended by one year after you vacate your home, provided you put it on the market and it remains empty. You may be able to extend this period if you can prove you are doing your best to sell it, but on a strict basis the entire relief could be lost if more than 12 months have passed.
This one-year extension will not apply if the owner leaves France and becomes tax resident elsewhere, though from 2019 the main home exemption will apply until the end of the year you leave France.
Older residents may escape tax and social charges if they receive a state pension (or invalidity card) and they did not have a wealth tax liability in the year before the sale, and their taxable income that year was below a certain level (the reference period for determining income is two years prior to the sale). The 2016 income level for 2018 gains was €10,815 for the first part of a household, and €2,888 for additional half parts.
You may also be exempt from tax when selling a property if you did not own a main home the previous four years and you re-invest the proceeds into one.
French nationals living abroad, and residents of EU countries, Norway and Iceland (or another state if the tax treaty allows it) may not have to pay capital gains tax if the sale is completed within five years of leaving France and they had been tax resident for at least two. This is not limited to the main home but is only available once and only for gains up to €150,000. It does not apply to property held in an SCI.
The longer you hold the property, the less tax you pay
Those who do not benefit from the main home exemptions in France can benefit from a taper relief system that reduces tax and social charges.
From the sixth year onwards, capital gains tax is reduced by 6% per year (4% in year 22). This means there are no tax to pay after 22 years.
It is harder to escape social charges. From year six they are reduced by 1.65% per year (1.6% for year 22), then from year 23 the reduction increases to 9%. This give you total exemption after 30 years.
Calculating the gain
The taxable gain is the difference between the purchase (or probate value if inherited) and sale prices. You can deduct 7.5% acquisition costs; actual improvement expenses (with conditions) and qualifying loan interest not relieved against income. Taking advice here is sensible, particularly for anyone selling a let property, as deducting loan interest can be complicated.
Paying capital gains tax
A notary must be used when selling real estate. They will calculate the tax due, withhold it at time of sale, then pay the tax for you.
Where property is sold by a non-EU, Iceland or Norway resident, they must use a tax representative accredited by the French Tax Authority to make a capital gains tax declaration.
If a main home is in France, a UK home may be regarded as a second home and therefore taxable. While this means French residents selling UK property are liable to tax in both countries, they will receive a credit in France for tax paid in the UK.
The sale of the previous main home in the UK, once residence has been taken up in France will mean the sale will be assessed according to the French main home tax rules. There remains the potential for full French taxation if the property is sold more than 12 months after vacating it.
French wealth tax
Another property tax to consider is wealth tax, which now only applies to the worldwide real estate of French residents (it was abolished for investments such as shares and bonds) from January 2018. Liability arises where total property is worth more than €1.3 million.
When moving from one country to another, it pays to examine the potential tax liabilities in both jurisdictions to establish when it is most tax-effective to sell and buy property. Timing a sale or a move could pay dividends.
As always with tax matters, things can be more complicated than they first appear, particularly where two countries are involved. Taking specialist, personalised advice can help establish what the tax liabilities are and the tax saving opportunities available.
The 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; individuals should seek personalised advice.