The recent offshore disclosure facility offered by HM Revenue & Customs (HMRC) in the UK is a portentous reminder of the importance of being aware of all your UK tax obligations on income and gains made overseas, including that accrued from property in France, and declaring them as per the regulations.
The UK’s crackdown on tax evasion and reclaiming unpaid tax continues apace. It can have serious consequences for UK residents with offshore bank accounts (including accounts in France) and/or rental income from French property, if they have failed to declare this income, or have declared it inappropriately.
In brief, HMRC launched its offshore disclosure facility (ODF) in April, aimed primarily at UK tax residents who do not declare the interest earned in an offshore bank account. A French bank account held by a UK resident is considered to be offshore, and the income from it is, under the terms of the UK/France Double Tax Treaty, solely taxable in the UK. The facility also covers onshore tax evasion and overseas income other than bank accounts. It has been brought in to encourage people to disclose undeclared tax as far back as twenty years to 1987/88.
Taxpayers have been given a short time span in which to come forward – notice to disclose should be given by 22 June 2007. If the disclosures are accepted, and all back tax and interest (which must be calculated by you, or your advisers) paid by 26 November, the penalty will be cut to 10 per cent from a possible 100 per cent of the outstanding tax due.
HMRC has promised to ‘track people down’ who fail to co-operate with this initiative and launch a full investigation into their affairs, possibly going back 20 years.
It is all too easy for people who buy property in France or who use offshore banks not to pay their due taxes simply because they do not realise that it is the law. So I thought this would be an ideal opportunity to remind readers, who either own French property or are thinking of purchasing, what their tax obligations are, in both France and the UK, when owning assets in France.
Rental Income
French-source rental income is taxable in France, at the French scale rates up to a top rate of 40 per cent regardless of where the payment is received or the currency it is paid in.
There are different rules in France for calculating rental income that depend largely on whether or not the property is let furnished or unfurnished, and depending on the amount of gross income received in the French tax year (the calendar year). Anyone renting out property in France should ensure that they understand the French rules before letting.
A UK tax resident is also liable to income tax in the UK on the same French rental income. However, under the UK/France Double Tax Treaty, any French tax paid is deductible against UK tax on the same income, but if the French tax is more than the UK liability there will be no refund of the difference from HMRC.
UK tax on this rental income is due even if the money is deposited in a bank in France or the Channel Islands/Isle of Man and never brought into the UK. Any interest earned on such bank accounts must also be declared on your UK tax return.
Capital Gains Tax
Properties sold for €20,000 (£13,545) or less, or where the proceeds of sale per property are no more than €20,000 (£13,545) per owner, are exempt from capital gains tax in France. A general abatement of €1,000 (£677) per person (so €2,000 [£1,354] for a married couple) applies against property gains. Real estate includes shares in property-holding companies.
For both French residents and non-residents there is a 10 per cent reduction in the taxable gain for each complete year of ownership after five years. So after fifteen years there is no tax payable.
The first and second sales of un-let French property by an EU resident are exempt if at some time in the past they were resident in France for at least two years. Tax is due at the time of sale for non-residents.
Non-residents pay tax at 16 per cent if resident in the EU, Norway or Iceland, or 33.3 per cent if resident elsewhere and only on gains made on French real estate and certain company shareholdings.
Capital gains on French property owned by a UK resident is also liable to UK capital gains tax but any tax due in France can be credited against the UK tax due.
A mortgage has no impact on the capital gains tax position in either country, because it does not change the amount that the property has gone up in value (the ‘gain’).
Succession tax
French succession tax is a tax on bequests and gifts and is paid by the individual beneficiary. The rates depend on the amount received, and also the relationship between the donor and donee. These range from 5 per cent to 40 per cent for a spouse or child, up to 60 per cent for those who are not related by blood or marriage (ie an unmarried partner or a stepchild). The inheritance or gift is taxable if the donor is resident in France when the asset passes, or if the asset is a French asset, or if the recipient is resident in France and has been so resident for at least six out of the ten tax years prior to the year in which the inheritance or gift is received. However, under the UK/France Inheritance Tax Treaty, inheritances (not gifts) of non-French assets from a UK domicile to a French resident recipient are not liable to succession tax in France, even where the recipient has been resident in France for more than six years.
An inheritance or gift from one non-resident to another non-resident is taxable if the inheritance or gift is a French asset. In other words, if you are a UK resident and leave your French property to your children who are also UK resident, it will be liable to French succession tax.
A UK domicile’s worldwide estate is also liable to UK inheritance tax (IHT) which will include French property, but under the tax treaty, any French succession tax paid will be credited against any UK IHT due on the same asset.
Unlike in the UK, there is no blanket exemption in France on inheritance between spouses. French succession tax will apply over the exemption of €76,000 (£51,473), plus the additional exemption of €50,000 (£33,863) against the estate. There would be no credit against UK IHT for succession tax payable between spouses.
In the UK, IHT is paid by the deceased’s estate while in France succession tax is paid for by the individual beneficiary.
Wealth tax
France levies a wealth tax known as ISF (Impôt de Solidarité sur la Fortune). Non-residents with assets in France are taxed on the basis of their French assets as at 1 January each year, which includes the value of shares in any company which owns real estate in France, whereas French residents are liable on the basis of their worldwide wealth.
Taxable assets include properties, furniture, investments, cash in the bank, jewellery, cars and boats. Artworks or antiques over 100 years old are exempt, though.
There is a tax free allowance for 2007 of €760,000 (£514,730) and any amount over this is taxed at scale rates of up to 1.80 per cent for €15,810,000 (£10,707,754) and over. There is no exemption for French wealth tax for UK tax residents.
Local property taxes in France
For residents and non-residents there are local property taxes:
* Taxe d’Habitation is payable each year, and is generally payable by whoever occupies the property on 1 January each year. If this is a holiday home, or let on a part-time basis, this will be your responsibility. If let on a long-term basis, it is usually paid by the tenant. The tax is raised and spent by the town hall (mairie) of the area where the property is situated and is calculated on the basis of the notional rental value of your property. This is assessed by the land registry (cadastre) to whom you must send notification of any improvements or changes to the property within ninety days. The amount you will be charged will be the rental value multiplied by the tax rate fixed in your locality.
* Taxe foncière is paid by the owner of the property, irrespective of who occupies it. The tax is divided into two parts: tax on the buildings and tax on the land.
The tax on the buildings is paid on any property that is habitable whether or not it is actually occupied. Tax on the land is always payable unless it is used for agricultural purposes.
Local property taxes are paid annually. If the home is a second home your tax bill may be reduced as you are not using as many services. Failure to pay incurs a 10 per cent penalty. The combined total of these taxes is low, perhaps £100 for a small cottage or £400 for a larger house.
Bill Blevins is Managing Director of Blevins Franks International, one of the largest independent financial advisers, which specialises in advising retired expatriates in southern Europe