There are pros and cons when weighing up real estate vs capital investments. Many people who have capital to invest look at securities such as shares or bond funds. Others are attracted to real estate, considering bricks and mortar a more solid, tangible asset. But which is right for you?
This article does not attempt to predict which investment would give you the most returns. The best performing asset class varies year by year and is notoriously difficult to forecast. Instead, we look at various aspects you need to consider when weighing up these options.
While you should not ‘let the tax tail wag the investment dog’, as the saying goes, in France you certainly need to consider the tax implications.
Real estate vs capital investments | Capital gains tax
If you sell a property that is your habitual residence at the time, the gains are exempt from capital gains tax.
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 significantly 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 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.
Gains made on the sale of moveable assets, such as shares and other financial assets, are treated as ‘investment income’ and taxed at a flat rate of tax of 30%, including social charges.
Tax on rental income
Net rental income is added to your other general income for the year and taxed at the scale rates of income tax, starting at 14% for income over €10,225 and rising to 45% for income over €160,336. You will additionally pay 17.2% social charges.
Rental income from a UK property is directly taxed in the UK. Although it is not directly taxed in France, you must include it 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 mentioned above, this applies to interest earnings, dividends, capital gains on shares etc. It does not apply to rental income.
Wealth tax implications
French residents are taxed on the value of their household’s worldwide real estate assets 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, since 2018 capital investments, bank accounts, etc., are not liable to wealth tax.
Real estate vs capital investments | Succession tax
If you are resident in France when you die, your worldwide estate is liable to French succession tax – each beneficiary pays 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 factors to consider as well.
Liquidity – How long will you be able to hold the asset before you need to sell? What if you need the capital 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 you only need a certain amount, you cannot sell just part of a property. In contrast, if your portfolio includes equity and bond funds, you can usually sell them quickly and just the amount you need.
Diversification – 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, government and corporate bonds, cash and real estate – 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 a single asset class, increasing risk, especially if you don’t own many equities or bond holdings.
Real estate vs capital investments | Conclusion
For most people, it is easier to obtain effective diversification though capital investments (which can include shares in real estate funds), than with bricks and mortar. Financial assets also offer more flexibility to change strategy in line with market conditions or personal developments.
Ultimately, successful investing is about having a strategy specifically based around your circumstances, time horizon, needs, aims and risk tolerance. 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 your portfolio. And yes, understand the tax implications.
Blevins Franks provide personalised advice, allowing you to reduce risk exposure while ensuring all assets are held – in France and elsewhere – in the most tax-efficient way possible.
Contact us today to speak with one of our specialist advisers
This article should not be construed as providing any personalised taxation or investment advice.