Are you thinking of buying or selling property in France? Have you been made aware of the process, the tax implications, beneficial steps you can take, and potential pitfalls?
Buying and selling property is a major part of moving to France; likewise, if you move back to the UK or elsewhere. You may feel the time has come to downsize your home, or perhaps move to a new part of France. This article, therefore, looks at frequently asked questions surrounding property, particularly what taxes you could pay.
Is buying property straightforward in France?
The buying process in France is quite standardised, which does make it less stressful.
Your immobilier (estate agent) and notaire (notary) will help it all run smoothly, from the negotiations, to drawing up the compromis de vente (sales agreement), to paying the deposit before the end of the 10-day cooling off period, to signing the acte de vente which gives you legal ownership.
It usually takes about three months from the signing of the compromis de vente to get to the acte de vente, though it can be quicker. You will need to ensure the balance of funds has been transferred to the notaire’s bank account so it’s ready for them to hand over once you have ownership.
What should I think about before buying, selling or downsizing property in France?
The problem that comes up time and time again is underestimating costs. This becomes even more of an issue if you are selling one property to buy another. The combined costs of two property transactions can put a big hole in your budget – which in some cases can negate the reason for moving.
Property is usually one of the most expensive purchases we make, so it’s advisable to exercise a little caution. Be sure the property is what and where will suit you long-term. People often buy somewhere they think they know after spending holidays there, but once resident, they realise the reality doesn’t live up to the dream.
It’s also important to research the ownership methods available in France. These can impact your estate planning options as well as the inheritance tax liabilities, so you’ll want to get this right from the outset. France also has different types of marriage contracts, which can affect how assets like property are owned and in turn succession and taxation; seeking professional guidance would help to better inform you on this.
How does capital gains tax work in France? How does it compare to the UK?
In most countries, when you sell your main home, any gain is usually tax free. This is the case in both France and the UK.
However, if you sell a property which is not your principle private residence or maison principale, there are major differences between the UK and French systems. While the UK charges tax on the difference between your purchase and selling price, you get a reduction (abatement) in France depending on the number of years you owned this maison secondaire.
For the tax element, after the first five years of ownership, your realised gain is reduced by 6% per year. Then further reduced to 4% in the 22nd year, giving you full CGT exemption after 22 years.
Social charges take a little longer. From the sixth year, your liability reduces by 1.65% per year, then accelerates to 9% from year 23 to 30, after which you’re completely exempt. The major reductions are weighted towards the last seven years, which catches plenty of people out.
What’s happening with social charges on property since Brexit?
Earlier this year the French authorities confirmed that, after reanalysing the Brexit Withdrawal Agreement and law on social charges, British retirees continue to be exempt from the CRDS (contribution au remboursement de la dette sociale) and CSG (Contribution sociale généralisée) social charges on rental income, capital gains, and investment income. They only need to pay the Prélèvement de Solidarité (PdS), which means the total social charges is reduced from 17.2% to 7.5%.
This highlights the importance of obtaining an S1, which you are entitled to if you receive a UK state pension. Since you have not contributed to the French health system, your membership is effectively funded by the UK via the S1.
This is a significant bonus for British nationals spending their retirement in France as they can benefit from a considerable tax saving on dividends, interest, and capital gains on stocks shares and other investments.
It was also very welcome news for UK residents selling or renting out French property.
Learn more about French social charges for 2022.
Do I need to worry about wealth tax in France?
Since President Macron was first elected, wealth tax has only been applied to real estate, so after his re-election, it is unlikely the current system will change over the next five years. The nil rate threshold has remained at €1.3 million for over 10 years, and while it might sound high, when you factor in property inflation, it’s much lower than it was in 2012.
Wealth tax applies to worldwide real estate, not just French property, so the cumulative total can easily be surpassed. If you’re buying investment property or holding onto UK property for rental income, be mindful of this extra annual tax liability.
If you have heirs who live in France, consider them too. If you leave them your property when you die, and they already own real estate, will this push them into the wealth tax net?
Also, understand the limitations President Macron introduced for loans. In the past, borrowing money against your property would reduce its net value, helping you avoid wealth tax. The taxman has now closed that loophole, so you could end up paying both bank interest, and inadvertently, wealth tax.
Can I reduce the French inheritance tax liability for my heirs?
When a French resident dies, French succession tax is payable on their worldwide estate. Each beneficiary pays tax on what they receive. There are some exceptions and allowances: transfers to spouses/PACS partners on death are exempt from tax; children receive €100,000 before they start paying tax, and there are some smaller allowances for more distant relatives.
The important aspect of any tax planning is to use what is legitimately available, whether that is allowances or structures. Since property is illiquid there is less flexibility to plan or reduce tax; there are more opportunities to reduce your heirs’ succession tax bills when they receive a capital sum than when they inherit property.
For example, holding investment assets in an assurance-vie is an effective way of eliminating or substantially reducing succession tax. This is especially the case when your beneficiaries are not of your direct bloodline; without any planning, they could easily lose 60% of their inheritance to tax. Assurance-vie can also help ensure these assets are passed to your chosen beneficiaries.
Does owning UK property present additional problems if you live in France?
UK-based assets remain exposed to UK rules, including the freeze the UK has applied to thresholds and allowances over recent years.
As every year passes, the 2015 reform that closed the non-resident capital gains loophole gathers in more and more of your UK property gain. The longer you own a UK property and the more it appreciates in value, the more UK capital gains tax you will pay when you come to sell it. Interestingly, this is the opposite of the French system which discounts the taxation of property gains the longer you own it.
UK rental income is liable to UK income tax. Non-residents currently still benefit from UK personal allowances, but we can’t guarantee this will continue indefinitely (just look at what happened with capital gains tax, not to mention how much the Chancellor would earn if he removed it from non-residents).
Finally, when you die, your UK-situated assets (whether real estate, securities, or cash) are liable to UK inheritance tax. France allows a tax credit for the tax paid in the UK, which ensures tax is not paid twice, however, your beneficiaries will pay whichever rate is higher.
You may consider your residence a home rather than an investment, and not be too concerned about tax, but if you own other property, then the taxation issues become much more relevant and worth taking the time to research and plan for. The succession issues are always important, even with your home. Understanding how it all works helps you take steps now to make life easier and cheaper for your heirs in the future.
Blevins Franks has over 45 years’ experience advising UK nationals who wish to buy and sell property in France, as well as providing holistic wealth management advice for all their financial structures, investment portfolios, and general tax and estate planning. Our teams of dedicated specialists can help you maximise on all the opportunities that are available to you, so contact us today.