UK budget: UK CGT on foreign buyers could push international investors south of the channel19th March 2014
Today’s budget revealed that from April 2015 foreign property investors will now have to pay capital gains tax (CGT) on UK properties which are not considered their main residence. Such a move could see more foreign investors choose prime markets across France, instead of those in central London.
“This move is likely to make many investors look south of the channel, which is ironic really as France has normally been Europe’s whipping boy when it comes to property tax,” said Nicholas Leach, Partner at Athena Advisors. “From a CGT perspective, France could now become a better option for investors as unlike the UK, French CGT has a taper relief system which reduces exposure the longer you own the property.”
In the UK CGT on the sale of second homes ranges from 18% to 28% depending on the owner’s tax band and from April 2015 non-resident owners will be exposed to this tax. In France, the picture is very different with a flat CGT rate of 19%. As of 1st September 2013 the taper relief term on this was reduced from 30 years to 22 years for any capital gains made since 17th August 2012. A new taper relief system for the 22 year period was also put into effect.
French CGT taper relief system on the 19% CGT over 22 years:
Under 6 years of ownership: No reduction
6th to 21st year of ownership: 6% annual reduction
22nd year of ownership: 4% annual reduction
After 22 years of ownership: The sale of the property will be exempt from CGT
“Foreign investors with short term views are likely to stick with London, but those long term plans may switch targets to Paris,” adds Leach. “Under French CGT rules, if you’ve owned a property for 15 years the 19% CGT is reduced by 60%, which represents a huge reduction in exposure. Even with the addition of any social charges, France still remains favorable as social charges also have a taper relief system in place.”
“From a French perspective the timing of this announcement couldn’t be better,” continued Leach. “Prices are soft in prime residential locations and commercial property prices are also competitive. Combine this with cheap lending and you have a market which is very attractive to international investors.”
Additional French CGT benefits - VAT Differential on tourism properties
With properties built to cater for tourism – i.e. ‘Residences de Tourisme’, also known as Leaseback Properties – there is also an additional benefit which revolves around the 20% VAT. With Residence de Tourisme properties the government offers foreign investors a rebate of 20% as they are technically helping them with their tourism accommodation shortage.
When selling a tourism property the CGT only applies to the increase in capital gain from original price including VAT and the resale price, even though you bought the property at a price excluding VAT. This immediately provides a good base for capital appreciation which is less exempt from CGT.