Is it more tax-efficient to invest in property or shares and bonds when living in France? We explore the tax liabilities and other implications.
Is it more tax-efficient to invest in property or shares and bonds when living in France? We explore the capital gains, wealth and succession tax implications as well as some key investment considerations.
Many people who have capital to invest will automatically look at securities such as shares or bond funds. Others are attracted to property, considering bricks and mortar a more solid, tangible asset. But which is right for you if you are living in France?
Rather than trying to predict which investment would give you the best returns – the best performing asset class varies year by year and is notoriously difficult to forecast – we explore the various aspects you need to consider when weighing up these options.
Capital gains tax in France
If you sell a property that is your habitual residence at the time of sale, the gains are exempt from capital gains tax in France.
Otherwise gains made on the sale of real estate are taxed at a flat rate of 19%, plus surtaxes, plus 17.2% social charges – a maximum of 42.2%. The surtaxes kick in for gains over €50,000 and range from 2% to 6%.
Capital gains tax and social charges are reduced for the length of ownership. For tax the reductions start after six years of ownership, with full exemption after 22 years. Social charges also start being reduced after six years, but the reductions are weighted towards the last seven years, with full exemption after 30.
If you are resident in France and the property is in the UK, you are liable for capital gains tax in both countries, though charges for non-UK residents only apply to the gain from April 2015. The gain will be taxable in France, with a credit for any UK tax paid on disposal.
See more about the tax costs of UK property
Gains made on the sale of moveable assets, such as shares and other financial assets, are treated as ‘investment income’ in France and taxed at a flat rate of tax of 30%, including social charges.
Tax on rental income in France and the UK
Net rental income is added to your other general income for the year and taxed at the scale rates of income tax, currently starting at 14% for income over €9,964 and rising to 45% for income over €156,244. You will additionally pay 17.2% social charges.
If you earn rental income from a UK property, the income will be directly taxed in the UK, as that is where it arises. Although this income is not directly taxed in France, you must include is as part of your taxable income for the year and then a credit equal to the French tax and social charges applicable is allowed.
While investment income is taxed at the 30% flat rate in France as mentioned above, this applies to interest earnings, dividends, capital gains on shares etc. It does not apply to rental income.
French wealth tax
French residents are taxed on the value of their household’s worldwide real estate assets as at 1 January each year. This includes all residences (though the value of a main home can be reduced by 30% for wealth tax purposes), holiday homes and investment properties, whether owned directly or indirectly.
Non-residents are liable on French real estate, including any rights over property situated in France.
However, you will only pay wealth tax if your total taxable property assets are worth €1.3 million or more. There is a €800,000 tax-free allowance, with rates then ranging from 0.5% to 1.5%.
In contrast, with effect from January 2018, capital investments, bank accounts etc. are no longer liable to wealth tax.
French succession tax
If you are resident in France when you die, your worldwide estate is liable to French succession tax – each beneficiary has to pay tax on the amount they receive. Spouses and PACs partners are exempt on inheritances.
In this case, whether they receive investments, property or other assets makes little difference, as the tax is calculated on the value of their inheritance.
However, there are more opportunities to reduce the succession tax liability for your heirs on capital investments – for example, holding equity and bond funds within an assurance-vie – than there are for real estate.
While it is certainly worth weighing up the tax implications, there are other important factors to consider.
How long will you be able to hold the asset before you need to sell it? How easily could you retrieve your capital, should you need it earlier than expected?
While property can be a solid investment, it locks your money away in a highly illiquid way. If you need to release funds, you may not be able to sell quickly, or for the right price. And if, for example, you just need €20,000, you cannot sell just part of a property.
In contrast, if your portfolio includes equity and bond funds, you can usually sell them fairly quickly, and just the amount you need, not the whole investment.
While both shares and property have the potential to provide good returns over time, there are always risks with investments. The key to reducing risk is diversification.
By spreading across different regions, market sectors and asset types – including equities, gilts, corporate bonds and cash, as well as property – your capital has the chance to produce positive returns over time without being vulnerable to any single area under-performing. If you already own one or two properties, buying another could make you overexposed to this one asset class, increasing risk, especially if you do not own many equity or bond holdings.
For most people, it is easier to obtain effective diversification though capital investments (which can include shares in property funds), than with bricks and mortar. Financial assets also offer more flexibility to change strategy in line with market or personal developments.
See more about the pros and cons of investing in property
Ultimately, successful investing is about having a strategy specifically based around your circumstances, time horizon, needs, aims and risk tolerance.
So when you are thinking of buying a new asset, first consider whether this is a suitable investment for you and how it fits in with the rest of your portfolio. And yes, understand and weigh up the tax implications.
With personalised, cross-border advice, you can reduce your exposure to risk while ensuring you hold all your assets – in France and elsewhere – in the most tax-efficient way possible.
Contact Blevins Franks for a tax and financial planning review
This article should not be construed as providing any personalised taxation or investment advice; you need to take personalised advice, in writing. 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.