Buying and selling property is a major part of relocating from one country to another, or perhaps the time has come to downsize your home or move to a new area. Here, we address frequently asked questions on property in France.
What should I think about before buying, selling or downsizing property?
Many people underestimate the costs involved. If you are selling one home to buy another, the combined costs of two property transactions can make a significant dent in your budget, which may even negate the reason for moving. Before you buy a home, therefore, carefully consider if it is in the right location and will suit you long-term.
Research the ownership methods available in France. These can impact your estate planning options and inheritance tax liabilities, so get this right from the outset if possible. Likewise, different types of marriage contracts can affect how assets like property are owned and in turn succession and taxation, so you need professional guidance here.
How does capital gains tax work in France?
The main home is exempt from capital gains tax (CGT) – provided it is your principal residence at the time of sale. There is a 12- to 18-month grace period, but you need to watch the timing of the sale and don’t rent it out in the meantime.
When selling other property, the gains made are taxed at 19% plus progressive surcharges of 2% to 6% starting with gains over €50,000. They are separately liable to social charges of 17.2% for those without Form S1 and 7.5% with the form.
Both levies are reduced the longer you own the property. After the first five years of ownership, tax on your realised gain is reduced by 6% per year, then 4% in the 22nd year, giving you full CGT exemption after 22 years. Social charges take longer. From the sixth year your liability reduces by 1.65% per year, then accelerates to 9% from year 23 to 30 when you’re completely exempt. The major reductions are weighted towards the last seven years.
I live in France and own UK property. Where will I pay CGT?
You are assessed for tax in both countries. The double tax treaty prevents you paying tax twice, but you will pay the higher amount.
With regards the UK liability, only the gains made since April 2015 are taxable. The capital gains tax annual exempt amount has dropped from £12,300 to £3,000 over the last two years; we now wait to see if any CGT reforms are included in the Labour government’s first budget at the end of October.
Does wealth tax impact me?
France’s wealth tax – Impôt sur la Fortune Immobilière (IFI) – impacts you if the combined value of your household’s real estate assets amounts to over €1,300,000. This includes all residences (the main home is reduced by 30%), holiday homes and investment properties, owned directly or indirectly.
If you are resident in France this covers worldwide property, though you may be exempt on property outside France for your first five years of residence. Non-residents are liable on local property.
If you meet the threshold, wealth tax rates start at 0.5% for the value between €800,000 and to €1,300,000, rising progressively to 1.5% for assets over €10,000,000.
Be aware that if you leave property to heirs living in France, their inheritance may push them into the wealth tax net.
What tax do I pay if I rent my property out?
There are two types of rental income in France: revenus fonciers is for income from land or unfurnished lettings, while furnished lettings are treated as commercial income. A French tax accountant will guide you through the regimes.
Taxable rental income is calculated on the ‘arising’ basis, i.e. income and expenditure pertaining to the year in question are taken into account. The net income is taxed at the scale rates of income tax from 11% for income over €11,295 to 45% for income over €177,106 (for 2023 income), plus 17.2% social charges (reduced to 7.5% for S1 holders).
French residents renting out property in the UK, and UK residents renting out French property, are liable to tax in both countries. You should get a tax credit to avoid double taxation, but the UK does not give credits for French social charges.
What tax do I pay on a French holiday home?
You will have pay both the annual local property taxes applied in France. Taxe d’habitation is paid by the occupier; while it is no longer payable on the main residence, this doesn’t apply to holiday homes. Taxe foncière is paid by the owner, irrespective of who occupies it. Rates vary across France.
Holiday homes do not benefit from the principal residence exemptions or deductions applied with capital gains, wealth and succession taxes.
Any income from renting it out or gains made if you sell it will be assessed for tax in both France and the UK (for UK residents). You pay the higher amount. Your beneficiaries on your death will be subject to both French succession and UK inheritance tax rules.
Is the main home subject to French succession tax?
Yes, anyone other than your spouse/civil partner will face this tax. If the property is also the main home of the beneficiary, they get a discount of 20%. This usually only benefits spouses/PACS (civil) partners, who are exempt from succession tax on inheritances anyway.
Your beneficiaries’ tax liability will depend on who they are and varies significantly. Rates start at 5% for children but non-relatives pay a flat 60%; allowances range from €100,000 down to just €1,594.
You can use a usufruct (usufruit) to give away assets to children while retaining a lifetime right to live in the property and/or to the income, which helps maximise the allowances and lower tax rates. But take advice to carefully analyse the pros and cons and suitability for you.
What about succession law in France?
Children are protected heirs in France and must inherit between 50% and 75% of your estate. You can only leave the ‘freely disposable’ part to your spouse/PACS partner (though for jointly owned properties, the survivor has the right to continue living in it).
You can use EU succession regulation Brussels IV to elect for your UK succession law to apply to your estate instead of French law. However, under a 2021 French law, if assets located in France pass under the provisions of a country without forced heirship – such as England and Wales – protected heirs can claim the share they are entitled to under French succession law. The European Commission is seriously reviewing this ‘possible breach’ of EU rules.
There are various things you can often do to leave your assets according to your wishes. For example, the type of matrimonial regime you have can have an impact, or inserting a tontine clause into the conveyance when buying property can be solution for partners.
I’d like to expand my property portfolio, what do I need to think about?
Carefully weigh the tax implications of owning property investments against owning capital investments. Currently only real estate assets are liable for wealth tax. Even if this changes in future, there are compliant investment structures available in France that can significantly reduce taxation on savings and investments.
Rental income is not eligible for the flat 30% tax (including social charges, so 20.3% if you have Form S1) that is available for other investment income.
Also remember that any property owned in the UK falls into both the French succession tax and UK inheritance tax nets if you are French tax resident.
From an estate planning point of view, you have more control with capital investments than with property. Arguably the best succession strategy is to hold investment assets in the popular French savings vehicle, assurance-vie. These policies stand outside succession law and assets generally pass directly to your nominated beneficiaries, making their lives much easier and cheaper.
Moving away from tax and succession, remember that property is illiquid. You need to sell the whole investment if you need to release money, and it can be hard to find a buyer at the right price and right time. From an investment point of view, it is impossible to predict long-term returns, but a good portfolio will spread risk across different asset types, regions and market sectors to limit exposure to any one area. Given the purchase costs involved, it is very hard to get this level of diversification with property investment, unless you invest in real estate funds.
You may not be too concerned about the tax implications when buying a home, but if you own other property, then the taxation issues become much more relevant and worth taking the time to research and plan for. And the succession issues are always important, even with your home. Understanding how it all works helps you take steps now to make the inheritance process much simpler and tax efficient for your loved ones.
Blevins Franks has offices throughout France, and our advisers live locally. We have a deep understanding of the tax rules around French property and residency, and can help you and your family make a tax-efficient, stress-free transition.
Contact us now.
