When buying or selling real estate, you should carefully consider all the financial and tax implications, and to do so I in advance of any transaction.
For many people, their property or properties are their biggest asset. When buying or selling real estate, you should carefully consider all the financial and tax implications. It is important to do this in advance of any transaction, to ensure you save tax wherever possible and own property in the most effective structures for your situation.
Property ownership structures and capital gains tax is complicated enough in France, but it gets more complex if you are resident in France and own UK property, or vice versa, as you need to take both tax regimes and how they interact into account, and consider the best time to buy or sell.
Many British expatriates continue to own property in the UK. The UK’s Autumn Statement confirmed that non-UK residents will in future be liable to capital gains tax on gains arising on disposals of UK residential property.
This will start in 6th April 2015. In the meantime the government is running a consultation, and we will probably need to wait until it is completed to have details on exactly how it will work. The official documentation refers to “future gains”. Hopefully only gains made from that date will be taxable, but at this stage it is still possible that gains since acquisition will be taxed.
The fact that it does not start for another year at least offers a window of opportunity for you to review your assets and their tax efficiency, both in the UK and in France, and potentially take action now to save tax.
A second measure in the UK Autumn Statement introduces changes to the rules relating to the Principle Private Residence exemption for a person’s main home. Currently if a property has been used as your main home at any point, the last 36 months of ownership can be treated as a period of deemed occupation and benefit from the exemption even if you move into a new home. This period reduces to 18 months from 6th April this year.
This could affect you if you move to France as your UK property stops being your main home. If you do not manage to sell within 18 months and then return to the UK within five UK tax years, you will be liable to tax on the gain. You are also affected if you sell UK property after 6th April 2015 and while resident in France, in which case tax will apply regardless of whether you return to the UK within five years or not.
Under current UK capital gains tax rules, the chargeable gain is taxed at 18% or 28% depending on your other taxable income. There is no taper relief, but each individual is entitled to a capital gains tax exemption of £10,900. Property occupied as your main home for the full period of ownership is exempt from tax. Non-residents can currently avoid capital gains tax if they remain non-UK resident for five UK tax years.
As a French resident, any gain made on the disposal of property is subject to tax, whether the property is in France, the UK or elsewhere. The tax rates currently range from 19% to 25%, depending on the amount of gain. You will also pay 15.5% social charges on top, making a top total tax rate of 40.5%.
The main home in France is exempt from tax and social charges.
France does apply a taper relief system, so that the longer you hold the property the less tax you pay. You get full exemption from tax after 22 years of ownership, while for social charges you need to wait 30, with the reductions weighted to the last seven years of ownership.
If you sell a property before 31st August 2014 you will benefit from a one-off reduction of 25%, against tax and social charges.
British people buying property in France are faced with a process which differs quite considerably from the UK’s. You have to find your way through a maze of different contracts, unfamiliar laws and customs. It is essential to seek thorough advice before you buy. For example, there are various methods of owning a French property. Direct ownership can be done solely or jointly en indivision; jointly under a community marriage contract, or jointly en tontine. Alternatively you can own property through an SCI (Société Civile Immobilière, a French property-holding company) or an overseas company. Explaining how they work is beyond the scope of this article, suffice to say most have advantages and disadvantages, and you need to understand how they would impact your personal tax and succession planning, and establish the best solution before you buy.
You need to use a Notaire when buying or selling property. The Notaire ensures that all requirements of French law are satisfied and also collects and pays all taxes on the purchase – quite different from a UK solicitor’s role. When you add in estate agency fees, costs and taxes can add up to around 10%.
International tax planning involving more than one country is a potential minefield for the uninformed. Headline rates of tax and associated costs can also be very daunting, but you would be surprised what you can achieve with foresight and specialist advice. Timing can be everything when it comes to capital gains tax – you may be able to avoid tax if you get it right, or pay tax unnecessarily if you get it wrong. Moving to France could mean you avoid UK capital gains tax, but you need to plan ahead and carefully.
There is no solution when it comes to property and tax, not to mention estate planning, as everyone’s situation and aims are different. You do need to take expert advice to get it right and save as much tax as possible.
17 December 2013
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.