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Some Brits planning on moving to France in the near future may be hanging onto the hope that the sterling/euro exchange rate will improve and move nearer to the level it was 2 years ago. Purchasing a French property now with a less favourable exchange rate may not be quite as appealing as it has been.
However, while some Britons may delay buying a property in France, the weak exchange rate has also forced a number of British expatriates to return to the UK from France because they are receiving less disposable income when their sterling income, such as pension income, is transferred into euros. This is a matter of personal circumstances and opinion, however, because living in France can be cheaper than living in the UK and with the right financial advice, French taxes can be less taxing than many people realise. It may be possible to use financial arrangements, such as an assurance vie, which result in you legitimately paying less tax and which would help compensate for the currency losses.
When the exchange rate was stronger, those who sold their UK homes and bought a French property in euros would have benefited financially. In the current economic climate, selling a French property for euros and bringing the funds back to the UK in sterling will allow them to benefit again, albeit to a lesser degree. However, there will be moving and setting up costs in the UK for those returning from France and also capital gains tax to take into account.
One aspect of capital gains tax that is concerning both these repatriates and UK residents selling French properties – although it has not been an issue for everyone – is that if a profit is made on the sale of their French property, it is the gain in sterling that will be liable to UK capital gains tax, rather than the euro gain, if the gain is taxable in the UK.
The euro sale price is converted to sterling at the spot exchange rate on the day the sale is agreed. For example, a property bought in France on 31 March 2004 for €350,000 at the exchange rate of 0.66660 would have cost £233,485 in sterling.
The property then sold on 31 March 2009 for €395,000, would convert to £367,180 in sterling at that day’s exchange rate of 0.92907.
If the sale price had been converted using the exchange rate on the purchase date (31 March 2004), the converted sale price would equate to £263,307 in sterling, giving a capital gain of just £29,822. However, although the actual euro gain is only €45,000, because of the changes in the exchange rate during the 4 years that the property has been owned, the gain taken into consideration in the UK includes the gain arising on the foreign currency, and is actually £133,695.
Holiday home
A similar scenario will apply if you are a UK tax resident and selling a holiday home in France. You will be taxed at the sterling equivalent of the gain in euros.
The capital gains will only be taxed in the UK if you sell your French property after you have returned to the UK to live as a tax resident. Where the property has been your main home, a portion of the gain should be exempt under the UK Principal Private Residence exemptions. If you owned the property for some years prior to using it as your main residence, there will be a gain accrued during the period of non-occupation.
Any gain arising is subject to UK tax at a flat rate of 18 per cent with an exemption of £10,100 for the 2009/2010 UK tax year. If the sale is made and you are still living in France, you will not be liable to UK capital gains tax if you have not been resident in the UK for at least 5 complete UK tax years.
If you resume UK residence within 5 complete and consecutive UK tax years of departure, UK capital gains tax will be charged on all gains made since departure in the year when you resume UK residence. The date the sale price is agreed is the effective date for calculating the tax, and is the day you made an arrangement to sell the property which cannot be avoided – usually taken as the date of exchange of contracts in the UK. HM Revenue & Customs (HMRC) has the right to see all correspondence, memos, etc., leading up to a contract, and these are often requested if there is dispute about the date of sale.
UK capital gains tax is due on 31 January after the end of the tax year in which the gain was made, or 30 days after the issue of the assessment, if later. Penalties can be charged if the capital gain is not reported within 6 months of the UK tax year of disposal (if you do not normally complete a UK tax return) or your tax return, and interest can be charged on late-paid tax. The tax can be paid in instalments, where the proceeds of the sale are received in instalments over 18 months or more and paying the tax in one sum would cause hardship – although interest on the unpaid tax will continue to run during this period.
A person still living in France when their French property is sold would be liable to French capital gains at a fixed rate of 16 per cent on the disposal of real estate plus social charges of 12.1 per cent, unless the property is their main home at the date of disposal. Non-residents who are resident in the EU, Norway or Iceland, will also pay 16 per cent on real estate gains, or 33.3 per cent if resident elsewhere, with no social charges.
There are also exemptions from French capital gains tax on the first and second sales of un-let French property by an EU resident among others if at some time in the past they were resident in France for at least 2 years. If you have owned the property for 15 years, there is also no French tax liability as for both residents and nonresidents there is a 10 per cent reduction in the taxable gain for each complete year of ownership after 5 years.
If you sell your UK property after you have left for France and become a French tax resident, because of the current UK-France double tax treaty, gains made on the UK property will not be taxed directly in France but will be brought into account indirectly for the taux effectif only, where tax applies at the progressive rates. However, this situation has been rectified in a new tax treaty, which is likely to come into force in January 2010. Under the new treaty, if you dispose of UK property as a French tax resident, the gain will be taxable in France, with a credit for any UK tax paid on disposal. Therefore, if you are planning to sell a UK property in the near future, the sale would need to take place before 31 December 2009, for the gain to escape both UK and French capital gains tax.
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