Second home owners in France face tax hike
- 18 July 2012
- From the section Business
About 200,000 Britons with homes in France will now face a new "social contribution", which is to be levied on all foreign owners of French property.
This contribution, similar in nature to the National Insurance contribution in the UK, is set at 15.5%.
When added to the income tax already charged, Britons will be forced to cough up 35.5% on rental income from unfurnished lettings.
Changes to capital gains tax will also be rising from 19% to 34.5%, meaning that Britons who sell their second homes for a gain will now take home a substantially smaller profit.
Costs and benefit
There are a number of problems with this proposition.
Firstly, UK residents will not feel the social benefit of their contribution.
Just as UK citizens contribute to the NHS in return for access to it, French residents paying their social contributions get access to a world class healthcare system and some of the most generous unemployment benefits around.
As UK residents however, British owners of French property will be unable to claim from this social security system, giving them little reason to want to pay it.
Also note the use of the word "contribution".
Social contributions are not defined as taxes by France and as such are unlikely to qualify for credit under our double-taxation treaty with France, which is designed to stop British people from being taxed twice on the same income.
The UK Treasury is likely to be examining whether treaty relief would still be applicable in this context and looking to challenge any measures considered discriminatory to UK citizens.
But early signs suggest that Britons may end up falling victim to exactly what the double-tax treaty was designed to prevent.
The point of the double-taxation treaty is to ensure that tax paid to the French authorities can be offset against any tax owed to the UK taxman.
However the forthcoming changes mean the UK citizens could end up being taxed twice on the same slice of rental income or capital gain.
Under the old rules, someone who purchased a second home in France five years ago, which was then sold for a profit of 400,000 euros, would become liable to French capital gains tax (CGT) of 76,000 euros (the 19% tax rate).
They would also be liable to UK CGT at 28%, or 112,000 euros, on the same gain.
That assumes that none of the UK's capital gains tax allowances was applicable, which might reduce the CGT bill owed to the UK.
Under the UK/France Double Tax Agreement (DTA), the French tax would then be deducted from the UK liability, resulting in the UK tax charge reducing to 36,000 euros.
Thus the combined total UK and French liability would therefore be 112,000 euros.
Under the new rules, because the effective French CGT charge is now 34.5%, the French tax bill to the UK seller of a French home would rise in this example to 138,000 euros.
But, because the new top slice of this is dubbed a social charge, and not a tax, then as before only 76,000 euros (19%) of the French tax bill could be offset against the UK's CGT rate.
So our seller would still have to pay 36,000 euros to HM Revenue and Customs.
The total CGT bill, to both the UK and France, would be 174,000 euros, thanks to the extra 62,000 euros taken by the new 15.5% social charge.
One complicating feature of all this is that under French rules, CGT on property sales reduces on a sliding scale after five years of ownership and expires altogether after 30 years.
So how much you might owe to the French tax authority depends on more than just the size of the capital gain but also the length of ownership.
Most UK citizens with homes in France are likely to be at least 40% taxpayers.
If they let their properties unfurnished in France, the impact of President Hollande's imposition of a social charge on top of income tax may have a similar effect to that of the CGT change. This would happen if the new social charge is deemed by the UK authorities not to be a tax.
In that case, income tax will be payable in France as before at 20%.
The new - for Britons - social charge of 15.5% will also be payable.
And then the UK authorities will take their 20% income tax as well - being the difference between the French 20% rate and the UK 40% rate.
Thus, for every 1,000 euros of taxable rent, the landlord will be 155 euros worse off.
One way to mitigate such a bill is to ensure that all allowances and expenses are claimed in full against rental income.
The French system of allowances broadly follows the UK system, so expenses such as agency fees, advertising, accountancy fees, repairs, gardening, and so on should all be claimed and receipts kept.
The new social charge will be levied retrospectively, forcing those affected to make payments dating back to the start of the calendar year, and furthermore, the capital gains tax rise will be in effect within the month.
Some might consider a rapid sale to dodge the new CGT charge but it is highly unlikely to prove a realistic escape route given average timelines for a house sale to complete.
Areas such as Normandy, Provence, Brittany and the Dordogne are incredibly popular with Britons but this does look like it might change.
UK residents are not the only ones affected by this either. Around 360,000 houses in France are owned by non-residents.
It is now more important than ever to consider the cross-border implications of both financial and lifestyle decisions and seek specialist advice before rushing into anything.
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