French Property Tax13 June 2017
French Wealth Tax on Property
Non-residents with property in France are only liable for wealth tax on assets physically situated in France (therefore excluding purely financial investments).
Wealth tax only applies on net assets, so if you are borrowing, wealth tax only apply on the equity in the property.
The taxable amount of the property can be reduced by 10% if you acquire through a SCI structure (Societe Civile Immobiliere) and by 30% if the home is a principal residence.
|Fraction Taxable||Rate of Tax|
|€0 - €800,000||0%|
|€800,000 - €1,300,000||0.50%|
|€1,300,000 - €2,570,000||0.70%|
|€2,570,000 - €5,000,000||1%|
|€5,000,000 - €10,000,000||1.25%|
Working example 1 — financing the purchase
A property costs €6m, you acquire it through an SCI and borrow 70% (€4.2m).
The actual taxable amount of the property in this example is €5.4m as you can reduce the taxable amount by 10% when purchasing through an SCI.
Furthermore, as there is 70% of debt in the property the amount of equity in the property is €1.2m and therefore falls under the threshold of €1.3m.
Working example 2 — a couple with children above 18
The property costs €6m, the couple, acquire it through an SCI using cash only for the purchase and they have 4 children above 18 years old.
Again, as the property is being bought through an SCI the overall taxable amount can be reduced by 10%, to €5.4m.
The wealth tax threshold of €1.3m applies on each taxable ‘household’ (called ‘foyer fiscal’ in France). The term household applies to the owner (or ‘owners’ if married) and any children under 18. In this example, the couple has 4 children over 18.
In France when your children are above 18 they are no longer deemed part of your taxable household anymore and are officially adults. As a result, most parents then decide to make their children shareholders of the SCI so that the net wealth value within the SCI can then be divided amongst more shareholders, thus reducing the overall tax exposure.
So in this example the married couple would keep 20% of the SCI shares and the 4 children would have 20% each — 20% of the €5.4m asset = €1.08m which is under the €1.3m threshold.
French Inheritance Tax
A threshold system applies to inheritance tax with French property. In the UK each person has an inheritance tax allowance for assets passed on after their parent’s death. However in France the rules which apply to both resident and non-resident owners are different. There is an allowance per parent per child, meaning larger families will be able to pass on more expensive homes without incurring tax.
In France the inheritance tax allowance threshold is €110,000 per parent / per child.
This means that a couple who has 3 children and owns a French property worth €550,000 will be able to pass it on tax-free.
- Parent 1: 3 children x €110,000 each = €330,000
- Parent 2: 3 children x €110,000 each = €330,000
- Total allowance: €660,000
For values above an individual or couple’s calculated threshold, the inheritance tax rate varies depending upon the amount inherited.
|Fraction taxable||Taxe rate|
|Up to €8,072||5%|
|From €8,072 to €12,109||10%|
|From €12,109 to €15,932||15%|
|From €15,932 to €552,324||20%|
|From €552,324 to €902,838||30%|
|From €902,838 to €1,805,677||40%|
Ways to reduce or even avoid inheritance tax: setting up SCI
One of the most frequent reasons why an SCI is established is to manage the gradual transfer of family wealth to children. The shareholders can progressively transfer or donate the shares to their heirs. In the latter case, the donor retains the life interest (usufruit) which lowers the inheritance tax as the value is calculated on the ‘reversionary interest‘ and not on the entire freehold.
French Capital Gains Tax
As of 1st September 2013 the ownership period which applies to the rate of 19% CGT was reduced from 30 years down 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.
New Taper Relief System
Decrease of 6% per year between year 6 and year 21 Decrease of 4 % in year 22 This means that after 22 years of ownership the property is exempt from any CGT.
Update — Social Charges on CGT & Rental Income
As of March 2015, the infamous ‘social charges’ of 15.5%, which were levied on top of CGT and Rental Income were found to be illegal by the EU courts. The courts concluded that ‘the tax violates EU law because a resident of a member state must contribute to the social security system of one member state only’ i.e. those no living in France as a resident and not permanently benefitting from social services should not have to pay the social charges.
Those who sold their property in 2014 can now make a claim to the French tax authorities to receive a rebate on the social charges, although there are deadlines for these claims. For properties sold after 2014, the social charges no longer apply.
French Rental Income Tax
As a non-resident owner of a furnished rental property in France, your rental income will be subject to income tax by French Tax Authorities. With France being the most visited country in the world, tourism is very important for the French economy.
French government is therefore incentivising purchaser that will rent out their property on a short term basis by proposing a very tax advantageous tax regime that offers many ways of decreasing taxation on their rental income.
There are two main ways of reducing your tax liability on your furnished rental property:
1) Offsetting any tax and deductible costs relating to the property
2) Amortising the ‘paper’ value of the property A brief guide on property taxation in France
1) Tax deductible costs
There are many types of costs which owners of furnished properties in France have to pay which can be offset against their tax. These include:
a. The notary fees paid at the title deed signature stage can be deducted over the first 3 years of ownership (Notary fees are calculated at around 2% of the purchase price)
b. All charges related to the property (co-ownership charges) can be deducted from the taxable amount
c. Land taxes are also deductable
d. The cost of one return journey to your French property (based on the official French Tax Authorities tariff)
e. The annual interest on the mortgage
f. Accountants’ fees are also deductible, approx €270 per year
2) Amortising the Property
In the realms of property tax, amortisation can be a troublesome concept for some buyers and investors to grasp simply as it isn’t a system which is widely used in their own country (i.e. the UK).
Amortisation is the simple process of depreciating the ‘paper’ value of your property. Just to be clear, nothing is being done to the actual value of the property; this will remains in line with the local market.
The French tax authorities consider about 20% of a property purchase price to be of land, which cannot be amortized. The remaining 80% of the property can be amortised (‘on paper’) by either 4% per annum over 25 years or 3.33% over 30 years (3.33% x 30 = 100%).
The amortisation can be offset against your rental income allowing you therefore to reduce or even cancel your income tax liability.
Any furniture costs can also be amortised over 10 years or 5 years meaning even less tax is applicable as it gives you another cost which can be offset against your rental income.
Example of amortisation:
- You buy a property costing you €100,000 + €10,000 for furniture
- You receive a rental income of €4,000 every year
- You can amortise the €80,000 (80% of the €100k property value) over 25 years which equates to €3,200 every year. The €10,000 furniture costs are also amortised and over 5 years this would equate to €2,000 per year.
As a result, in this example you would have €5,200 worth of amortisation every year (during the first 5 years). As your rental income is €4,000 you will use only this amount of your €5,200 amortisation value leaving you with €1,200 which you can carry forward to the next year.
Only use amortisation when you need to…
Amortisation can be started whenever an owner chooses. For owners who have bought a property using a mortgage, the mortgage interest value and other off-settable costs can often be enough to cancel the rental income tax liability altogether which means there is no reason to start using your amortisation value to offset your tax. Instead you can start using your amortisation only when you need it (for example when the mortgage interest isn’t enough to offset 100% of your rental income).
At the moment, with French mortgage rates at historic lows, most buyers opt to finance their purchase. When finance is used, during the first few years of property ownership, the mortgage interest and other deductable costs can normally offset the entire taxable figure on rental income. This means the amount of tax you pay on your rental income is negligible or nothing at all.
Once the mortgage interest is paid off or is no longer enough to offset 100% of the rental return, or if the purchaser bought using cash, then the amortisation can begin, meaning the tax on rental income can still be significantly reduced or in most cases completely eliminated.