Capital gains tax

As many people who own a French property will have experienced, buying a property in France is not always a straightforward process.

Buying a French property requires time, investment and a lot of preparation. Likewise, the sale of a French property requires careful planning and anticipation. One of the most important aspects of the sale that can be easily overlooked by sellers is their tax position.

Ascertaining your capital gains tax liability in advance of the sale and, as far as possible, taking steps to minimise it, has become more important in the last 15 months as successive French governments have significantly increased the rates of taxation on gains. French residents as well as non-residents are affected by these new rules.

I have concentrated in this article on the impact of these new rules on those who are non-residents and have a holiday home in France which they now intend to sell.

selling a property

Let us take the example of John, a UK resident, who bought a little holiday cottage near Perpignan in April 2002 for Ђ120,000. John renovated it substantially and let it out for a few weeks each year while he was not in occupation to meet the maintenance costs. John has decided to sell the cottage and use the proceeds to fund his retirement.

Now, most of you will know the French tax man is the first to levy his dues. To ensure that John does not forget the French Trйsor Public, the notaire has a duty to collect the tax directly from the sale proceeds. Should the tax not be collected at source, the notaire, who is ultimately reponsible for this, will not complete the sale.

If the sale price exceeds Ђ150,000, the French authorities will want a further guarantee of payment of the tax and require John to appoint a tax representative. The legislation allows John to appoint the tax representative of his choice. This could be one of his friends or a relative.

However, his appointee will have to be a French resident and provide sufficient financial guarantees and creditworthiness to be accredited by the tax authorities. In practice, most sellers appoint a professional tax representative who will charge a fee directly proportional to the sale price. John should budget for this additional cost.

Let us imagine that John sells his cottage in May 2013, making a taxable gain of Ђ100,000.

The rules used to be simple: a taper relief of 10% per year of ownership after five years of holding, so that the gain was fully exempt if the sale took place after 15 years of ownership. For those who sold their property before 15 years, the taxable gain - after taper relief - was taxed at 19%. John would have benefited from a 60% taper relief on his gain (sale after 11 years of ownership) so that his taxable gain would have been reduced to Ђ40,000, leading to a French capital gains tax liability of Ђ7,600.

Unfortunately for John, since 1 February 2012 the taper relief rules have been amended so that full exemption is now granted only after 30 years of ownership. Gains on properties sold within five years of their purchase remain fully taxable as before.

However, the rate of tapering relief is reduced to only 2% per year of ownership for properties sold within 18 years of their acquisition. The relief increases to 4% for properties owned for between 18 years and 25 years and then 8% for years of ownership beyond 25 years.

For example, the gain on a property sold after 15 years of ownership benefits from a reduction of only 20% of the gain today. Likewise, the gain on a property sold after 25 years of ownership is exempt for only 60%.

So John benefits from a taper relief on his taxable gain of only 10%, so that his taxable gain increases to Ђ90,000 and his basic French CGT liability at 19% has risen to Ђ17,100.

social charges

In addition, since August 2012 all taxable gains made on the sale of French properties by non-residents are subject to the French social charges at a cumulative rate of 15.5%.

Once again, these charges are levied at the same time, and under the same conditions, as the capital gains tax. John's tax liability has been increased by a further Ђ13,950.

You can imagine John's disappointment to find out that within only eight months, his French tax liability has jumped from Ђ7,600 to Ђ31,050. He will be even more disappointed to find out that his liability in 2013 will be even higher.

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