When buying a property abroad whether you will be living
there or simply spending holidays or the odd weekend there
and renting it out for the rest of time it is important to
know what your tax situation is so that you don't get hit
with any unexpected tax bills. France is no exception. This
article will run through the main taxes in France and help
explain how they work and if they might affect you.
Tax: If you are domiciled in France you will be taxed on
your entire income whether it be from French or foreign
sources. It does not matter what nationality you are if you
spend more than 183 days per year in France you are
considered as French domiciled and still taxed on your
world wide income. For those not domiciled in France you
are still liable for any income from French sources; this
includes rent from letting out your property and any income
derived from working in the country. The authorities in
both the country in which you normally reside and France
will be interested in your earnings and if it is above a
certain threshold you could be liable in both countries
unless there is a double tax treaty between the countries
as exists between all EU members and many other countries.
However it is very important to notify the authorities if
you are making a permanent move to France before the event
in order to take advantage of this treaty. It should also
be noted that in France taxes are not deducted using the
PAYE system as in England but each individual must fill in
their own self assessment form whereby taxes are paid the
year after which the income is earnt which runs from
January the 1st to December the 31st. To do this you must
first register at the "Centre des Impots" which is the
local tax centre.
Income tax: This ranges from tax levied on "earned income"
which is a progressive tax to tax on "unearned income" such
as investment income based on interest from bank accounts
and property yields. A separate tax is levied solely on
gross rental income if you let out your property in France.
France still strongly favours the family unit and there
are distinct advantages in terms of reduced tax liability
if you are a large family as tax is assessed on a household
basis. If you are married and/or have children in the
family you pay less tax as there are more dependants; this
is called the "quotient familial". There are also other
allowances such as those for childcare and domestic help
all of which go towards making large families in France pay
less tax than anywhere else in Europe. If you are unmarried
or united only by the PACS agreement then you are likely to
pay more tax than married couples not just with regard to
income tax but also inheritance tax.
Property tax: There exits two property taxes in France:
taxe fonciere and taxe d'habitation. Taxe fonciere is paid
by the property owner regardless of whether you live there
or abroad, but there is an exemption for two years for
newly built properties. Taxe d'habitation on the other hand
is paid by whoever occupies the building at the time, hence
if it is rented out it is paid by the tenants. Both taxes
are similar to council tax and are paid the year following
the rental period with special allowances for retired
residents, derelict properties.
Capital Gains Tax: This tax is paid on the profits of any
property which has been sold to include jewellery,
securities, shares and real estate. However, fortunately
there are no taxes to be paid on the sale of your principle
residence but only on sales of additional property. People
who rent their main home are exempt if they sell their
second home as well as those who have owned the house for
15 years or more. If a property is sold within two years
then it is subject to 33.3% capital gains and this falls by
5% a year and multiplied by an index linked multiplier of
the eventual sale price of the property until the 15 years
are up. If there has been some renovation to the property,
however, the cost can be offset against the profits as can
legal and agency fees.
Inheritance tax: The system in France is very different to
that which you might find in England or anywhere else and
it is advisable to talk to a tax advisor BEFORE you buy
your property in France to prevent future burdens on your
family or partner. Whether you are a resident or not in
France you will still have to conform to french succession
law and your family will still be liable to pay inheritance
duty in France upon your death. It is also important to
note that French succession law will not allow for you to
leave out any of your children in favour of your spouse and
will ensure that they get their share. There are however, a
number of different ways to minimise their burden depending
on your situation. Below we outline a number of different
contracts that can be made. A very popular and useful way
of lessening your relatives' inheritance tax if the tax in
France is greater than it would be in your home country is
to form an SCI which is a property holding company. The
property in question can be divided into shares and these
shares can be distributed as you wish with the result that
any future inheritance tax on the property will be subject
to the laws in the country in which you are a resident. It
is also a good solution for those in a complex family
situation living with people who are not members of their
family. Shares can be freely given to a partner or children
whereby inheritance tax will be avoided if done at least 10
years prior to death of the owner of the shares. For
married couples who wish their half of the property to go
to the surviving spouse then the "clause tontine" is a good
option. It is like a joint tenancy agreement and
essentially suspends the ownership of the property until
either spouse dies so that the entire property is owned by
the surviving spouse. They will, however, still have to pay
inheritance tax on half of the property. Another way to
ensure that your half of the property in question goes to
your spouse is to make a change of the matrimonial regime
so that your properties are no longer separated. You must
have been married for at least two years and prepared to
pay some legal charges but it will mean that the surviving
spouse will only pay 1% tax on the property as
"registration duty". This system can get complicated if
there are children involved from current or past marriages
as they still retain certain rights to the property and
legal advice should be taken. In 1999 a new contract called
PACS was also brought in under French law giving certain
benefits to same and different sex couples which were not
previously available. These inheritance and fiscal rights
are not as beneficial as those available to married couples
but are certainly an improvement on the previous situation.
Wealth tax: This is a tax levied on assets that exceed
720,000 Euros and covers a wide range of assets to include
your property and bank balances amongst other things. If
you are resident in France but not domiciled there then you
will only be taxed on what you have in France. If domiciled
there as well then the tax applies to your entire fortune
all over the world.
----------------------------------------------------
Nick Dowlatshahi is Managing Director of Leapfrog
Properties and is an Expert on the French Property Market.
Leapfrog Properties is a French Property agency that
specialises in Property for sale in France.
http://www.leapfrog-properties.com
