Many British readers own property here in France but remain resident in the UK. For many of them it is a holiday home, which they may also rent out from time to time. For others it
Many British readers own property here in France but remain resident in the UK. For many of them it is a holiday home, which they may also rent out from time to time. For others it is an investment property. Either way, you need to understand what all your tax liabilities are on the property, bearing in mind that it is your responsibility to declare the property and any income and gains correctly.
With the UK Treasury issuing another warning against hiding assets offshore – including property ? it is worth reminding UK residents what their tax obligations are on their French property, here in France as well as in the UK, particularly since there have been some changes in France this year.
If you own property in France but are UK resident, you need to comply with both the UK and French tax regulations.
As a UK taxpayer, you need to declare any rental income on your annual UK tax return. If and when you sell the property, any gains must be declared and taxed in the UK. If you still own the property on death, it will be included as part of your estate for UK inheritance tax purposes (unless you are non-UK domiciled).
At the same time, since the property is in France, it is potentially liable to income, capital gains, succession and wealth taxes.
Non-residents pay tax on rental income at a flat rate of 20%. There is an alternative option but it is not for everyone and you should take advice.
With effect from 1st January 2012, non-residents now also pay social charges at 15.5% on their rental income, on top of income tax.
When you sell a French property, tax is payable at 19% on the gain, plus (from August 2012) 15.5% social charges. A sliding scale of relief from both levies applies after five years, with the gain becoming tax free after 30 years. Under the 2013 Finance Bill proposals, an extra 20% deduction would apply to the net taxable gain from 2013 (but not to social charges).
The property will be subject to succession tax if you die or give it away as a gift. Tax rates and allowances vary depending on what relation the beneficiary is to you. It can be very expensive for distant and non-relatives. Spouses are exempt.
France and the UK apply their own rules to calculate the tax due in each case, so the taxable amount will be different in each country.
Although tax is due in both countries, you do not have to pay tax twice. Under UK/France double tax treaties you can offset the French tax paid against the UK liability. If the UK tax is higher, further tax will be due there. If the UK tax is lower, you do not get a refund. Note that social charges are actually made up of four elements, only two of which are covered by the treaty.
Besides the above taxes, French property is also subject to annual wealth tax if valued at ?1.3 million or more (probably increasing to ?1.31 million next year). The first ?800,000 is tax free. The UK has no equivalent tax and the full amount is due in France.
It can be hard enough getting tax planning right in one country; getting it right when it involves two countries is even more complicated. You should seek advice from a professional who specialises in the interaction of French and UK tax.
If you bought French property years ago you may now find yourself caught in an unexpected French capital gains and wealth tax trap. You have various options. You could sell it, or rent it, or give it to your children, or keep it till death and leave it to your heirs. You need to carefully weigh up the tax consequences of each.
You could also consider becoming resident in France, a move which may be more beneficial than you realise. It would be essential to get professional advice first to understand all the implications and what steps you can take to set your assets up to be tax efficient in France.
Chief Secretary to the UK Treasury, Danny Alexander, has warned that the government is going after tax dodgers to make sure they pay their fair share. This includes those hiding assets offshore. It is targeting wealthy Britons who own property abroad as it has concerns about owners failing to declare millions of pounds of rent.
Its team of tax investigators is looking through tax return records across different databases and public records, comparing them all and looking for ?oddities?.
For example, HM Revenue & Customs recently launched a successful case against a UK taxpayer who owned and rented out over 10 properties abroad but had not declared any income. The case involved over ?100,000 of unpaid tax.
HMRC had announced that it was targeting wealthy individuals who own land and property abroad last autumn. It applies sophisticated data mining techniques to public information to identify people who own property abroad.
It then uses risk assessment tools to compare the information to that supplied on tax returns. This highlights people who do not appear to be correctly declaring the income and gains, and those who do not have the means to purchase the property.
It is always essential to correctly follow the tax rules of both the UK and France, but this does not mean there are not legitimate ways of reducing your tax liabilities. You do however need to make sure you get your tax planning right to avoid any costly consequences, so seek professional advice from an international advisory firm like Blevins Franks and the sooner the better.
1st November 2012
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; an individual should take personalised advice.