France – the tax friendly property market

It is no secret that now is the best time to buy property in France. This year the French property market has often been in the media spotlight as a result of reduced property prices in France, low interest rates, great mortgage deals and favourable currency conditions – the combination of which means that buyers can snap up properties at prices that have not been previously attainable.

But when it comes to taxation in France, the media has run several negative stories over the years and, no doubt, these can scare people and give the wrong impression. Many of the stories that the Home Hunts team have read are wildly inaccurate and don’t seem to be based on truth, so we felt it was time to investigate.

Media “French bashing” exaggerates tax rates in France

The media often draws attention to the 75% rate of income tax to illustrate the limitations of the French taxation system. Yet in reality this rate was only ever applicable to companies for a short period of time and ceased to exist at the start of 2015. While it is perceived to be a country with high taxes, investing in French property over real estate in other supposedly less expensive locations, can actually prove to be more lucrative in the long term.

“As Home Hunts sells property in France, the UK, America, Switzerland and Monaco we are very knowledgeable about how the various taxation systems work in different countries,” says Tim Swannie, Director of Home Hunts. “Buying a second home is no more expensive here in France than anywhere else, and in many cases – if the right tax schemes are used – it can actually make for a more advantageous investment than anywhere else in the world.”

Average purchase costs

Home Hunts can confirm that the actual purchase costs in France are around 7% of the property’s value. “This includes both the administrative costs and taxation as well as notaire’s fees,” confirms Swannie. “While it can appear that costs are lower in the UK – somewhere between 1% and 7% of the price – for those purchasing prime property a figure of 7% is usually reached, including stamp duty, making France and Britain pretty even for purchasing costs.”

The property costs in other European countries often amount to far more. For example, in Italy it can be up to 15% for non-residents (not including legal costs) and in Spain it is necessary to pay around 10% of the purchase price after a deposit.

Competitive taxation on rental income

In terms of taxation on rental income, the media often leads people to believe that payment involves 20% basic rate plus 15.5% tax for social charges. But this information is simply out of date as earlier this year the European Commission confirmed that from 2 March 2015 these social charges were no longer applicable.

“This was a significant and very welcome change for non-residents wishing to rent out their second homes in France,” says Swannie. “It was ruled that these are practically the same as social security payments which should only be paid in one member state. If you combine this reduction with other costs that can be deducted by law, renting a property in France starts to look very favourable, especially to those buying prime property.”

Swannie adds: “While costs are also deductible in Italy, unfortunately a cap is set at 15% of rental income, and even though the British letting system is popular, when all things are considered it is actually less beneficial than the one in France.”

Banish wealth tax worries

Sometimes famous wealthy celebrities, such as Gerard Depardieu who fled France for Russia after a tax row, have not helped the rumour mill when it comes to the often misrepresented subject of France’s wealth tax.

But President Hollande’s infamous plan to impose a 75% “super tax” on individuals back in 2012 was actually never applied and was eventually declared void by the Constitutional Council that same year. Twelve months later it was reworked to apply to people earning more than €1 million a year and finally left to expire entirely at the start of 2015.

It is important to establish that in France the highest wealth tax rate is 1.5% and wealth tax is due when net assets exceed €1.3 million. “This is far more favourable than in many other countries such as Spain, where it is payable from €700,000 of net assets and the top rate is 2.5%,” says Swannie. “However, it must be said that Italy and the UK are clear leaders in this category as they do not tax assets at all.”

Ways to reduce wealth tax liability

The magic of mortgage finance

A well-advised investor is able to reduce wealth tax entirely when purchasing a French property with a loan that meets certain criteria.

“If you are not going to be a French tax resident, and the property you intend to buy will be a holiday home, then only your net asset position in France is assessed for ISF (wealth tax),” says Tim Yates of The Spectrum IFA Group, independent financial planning advisors in Europe.

“Therefore, if you keep your net asset value below €1.3 million you will have no liability to ISF. This is where using mortgage finance makes a lot of sense because you could buy a property for, say, €2 million, with a mortgage of at least €700,000, and you would legitimately avoid ISF.”

Furthermore, he explains, if you intend to rent out the property when you are not using it, your rental income will be subject to income tax in France, but you can offset some of the interest component of your mortgage payments against your rental income for tax purposes. “This is another reason for using mortgage finance for some of the purchase even if you have the capital to be a cash buyer,” adds Yates.

Plan your purchase

Careful planning could allow parents and their adult children to buy a property jointly through French or Monaco SCIs (to avoid co-ownership) without paying wealth tax. “This is due to the fact that each of them benefit from the €1.3 million tax-free ceiling,” says Cécile Acolas of Rosemont Consulting, which provides tax and estate planning services.

“In addition, should you envisage living in France more than in the UK and become a French tax resident, you can benefit from a 20% allowance on the wealth tax due on your main home,” Acolas adds. “There are also other schemes – involving gifts and loans, which could be used by friends and family, and also the use of SCIs – where wealth tax can be mitigated. Those interested in agricultural land, such as a forest or vineyard, should know that the French civil and tax code provide for specific regime and wealth tax exemptions.”

The truth about capital gains tax

Until recently the capital gains tax due on the resale of a property was 34.5% and this was made up from 19% tax and 15.5% social charges. However, this is no longer the case and is considerably less since 1 January 2015 when the rate was fixed at 19% and made applicable to buyers living inside or outside the EU. This also meant that the length of ownership to achieve a 0% capital gains tax rate shrunk from 30 years to 20 years.

There is, however, an additional 10% tax to be aware of, which can be applicable depending on the level of the gain realised.

“There are also many deductions that can be made in addition, such as 7.5% on purchase costs and 15% on building works,” explains Swannie, adding that, comparatively, the UK tax rate is 28% on property over £32,010 and Geneva’s runs on a sliding scale depending on the length of ownership, which is around 50% for less than two years reaching exemption after 25 years.

“We are happy to sit down and go through all the various additional reductions that can be applied in detail with our clients as it ultimately means that an even lower rate can be achieved overall,” he adds. “We work closely with both Spectrum IFA and Rosemont Consulting and so are able to offer our clients the best advice from market experts.”

More tips on how to reduce capital gains tax

Instead of being influenced by newspaper headlines, it is more effective to find out how French law offers several ways to reduce the capital gains tax of a real estate operation. In fact, the gross capital gain is basically calculated by reference to the property’s sale price – which can be reduced by some expenses – minus the property’s initial purchase price, which can be increased by some expenses.

“The expenses that are allowed to increase the initial purchase price are, for instance, certain works,” says Acolas. “Alternatively to works costs, and after five years of ownership, you will be also entitled to a forfeit of 15%, which is considered to be works and repairs done on the property, even if nothing has been done.”

Swannie adds: “The fact that Home Hunts tries to ensure that clients get expert advice to minimise their Capital Gains Tax exposure shows that the market is moving in the right direction. Whilst some of our neighbouring countries property markets are still in freefall, we are seeing a lot of stability and some price rises in certain areas which has to be a good sign.”

France most favourable country for property investment

It can be seen that the current taxation system in France either makes the overall outcome comparable with that of other European countries or better. As the most visited country and with the most popular capital city in the world, it has a property market like no other, particularly when it comes to offering safe haven investment opportunities for prime property.

“The media likes to put attention on France’s tax rates and doesn’t remind readers and buyers enough that these are always applied to a base and therefore not at all objective,” says Swannie. “In fact, using the current system, and then also applying the various reductions through getting the right expert advice, can mean France is more favourable than anywhere else.”

“At Home Hunts we work hard to not only find the right properties for our clients, but we also ensure that clients get the best possible advice and support from a tax standpoint so they can get the best tax return possible on their investment.”