From 2018 French wealth tax only applies to property. Shares, bonds and assurance-vie polices are no longer liable to this tax.
The biggest, and most controversial, measure of France’s 2018 budget is the wealth tax reform. In fact, wealth tax as we know it has been repealed and replaced by a tax on real estate. This is very good news for savers and investors, but property investors will feel hard done by – property is the big loser of this reform.
Is it worth investing in bricks and mortar now? Obviously there various different aspects to consider, but from the tax planning angle, property now compares rather poorly to investing in movable assets like shares, bonds and cash.
Let’s compare taxation of property with other savings and investments under the new rules starting from 1st January 2018. Note that the information below is based on the presumption that the reforms outlined in the budget are approved without changes.
Tax on property
Real estate will be subject to the new wealth tax l’impôt sur la fortune immobilière (“IFI”). If you are resident in France, it is based on all the properties your household owns worldwide. If you are not resident, then only real estate in France is liable.
If your total property is valued at less than €1,300,000 you are exempt. But if your property portfolio is over this limit, you will pay wealth tax at rates of 0.5% to 1.5%, though the first €800,000 is exempt.
For French residents, rental income from local property is added to your other income for the year and taxed at the scales rates of income tax. These range from 14% for income over €9,808 to 45% for income over €153,783.
Rental income from UK properties is taxable in the UK. Although not directly taxed in France you still need to include it as part of your taxable income for the year. You receive a credit for the French tax and social charges applicable, but this may push you into a higher tax bracket.
Rental income from a French property is additionally subject to social charges, which will be 17.2% next year.
When you come to sell your property, the gains are taxed at a fixed rate of 19%. You currently have to pay surtaxes as well, ranging from 2% to 6%. When you include the 17.2% social charges, this makes a total top tax rate of 42.2%. The main home is exempt, and for other property there is taper relief system that lowers taxation and social charges the longer you own the property (so that it is exempt from tax after 22 years and social charges after 30).
Tax on capital investments
From 2018, securities like stocks and shares, including those held in assurance-vie policies, are no longer liable for impôt de solidarité sur la fortune (ISF) – the current wealth tax. So whether your investment portfolio is €100,000, €1,000,000 or €10,000,000, it will no longer be liable for any form of wealth tax.
Income from investment policies worth over €150,000 (per person) will be taxed at a new fixed rate of 30% – and this includes social charges. Those with lower policies can continue to apply the scale income tax rates.
Note that this new 30% fixed rate also applies to assurance-vie policies which are set up after 26th September 2017. Policies held for more than eight years will continue to benefit from the €4,600 allowance (€9,200 for married couples / PACS partners).
The fixed rate does not apply to rental income.
When it comes to capital gains on capital investments, these are taxed as investment income as described above. Capital gains made on investments within an assurance-vie are not taxed if they roll up within the policy. So if you sell some shares to buy new ones, there is no tax to pay on the gains, unless you take a withdrawal.
Note that the 2018 tax treatment described above will not be confirmed until the budget is finalised at the end of the year.
Contact Blevins Franks for specialist tax planning advice.
Other considerations when buying investment property
Investment property can be profitable, especially if you can hold it for a long period of time. But besides the tax considerations, there are others you should think about before buying new investment property.
Liquidity – There can be various reasons why you may need to cash in an investment. You can usually sell shares and bonds quickly, but it can take some time to find a buyer for real estate. Also, if you only need to release a smaller amount of cash, with property you still have to sell the whole asset, while with capital investments you just sell what you need to.
Diversification – Being overexposed to an asset type increases risk, especially if the assets are all in the same country. A good portfolio spreads risk across asset types, regions, sectors and currencies to limit exposure in one area. If you already own property, buying another one may make you overweight in this asset class. It is much easier to have good diversification with assets like shares and bonds than with property.
If you wondering whether to invest in property or capital investments, Blevins Franks would be happy to talk you through the pros and cons of each and compare the tax implications for you. Please contact us to arrange a consultation with your local adviser in France. Find your nearest office.
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; an individual is advised to seek personalised advice.