Owning a French Property - Q&A

Q.
We understand that there are several ways to own a property in France. Which is the best method?

A.
There are two main ways of owning a property in France. Personal ownership (in sole or joint names) or corporate ownership, but the best option depends on your circumstances. Most British married couples choose to buy in joint names and sign a French community marriage contract. The main reason for this is to avoid French succession law which can force your French property to pass directly to your children in preference to your spouse. The community marriage contract allows jointly owned property to pass to the surviving spouse on the first death without the intervention of French succession law. But the existence of children outside the marriage effectively blocks this approach unless they agree to renounce their entitlements. Alternatively, you could insert a tontine clause in the French purchase contract which must be done at the time of purchase. This ensures that the property passes automatically to the surviving partner, who is free to dispose of it as he or she wishes. If French succession law is acceptable, you might simply buy jointly en indivision where each half is owned by each owner and can be separately inherited from you. If you are not married or there are more complicated family arrangements (eg children of earlier marriages) an SCI (a form of French property-holding company) may be preferred. An SCI is not subject to French succession law in the hands of non-residents of France, and is treated as transparent for French tax purposes if the property is not let or it is let unfurnished. However, the cost of setting up and administering the company may exceed the cost of any tax saved if that is an issue. Also, if the property is to be let furnished, an SCI is likely to be even less tax-effective.

Q.
What charges will I have to pay on my house in France to the local authorities, eg rates etc?

A.
Local property taxes are known as the taxe d’habitation and the taxe foncière. They are complicated and often higher on second homes than on main residences due to possible discounts for the taxe d’habitation on the main home. A demand for payment is sent each year. The combined total of these taxes is generally a lot lower than UK council tax, although it depends a great deal on the area. It might be as low as perhaps £150- £200 for a small cottage and £800 for a larger house in one area, but could be more than twice that at say £300-£400 and £2,000 in another. The sum claimed must be paid by the specified date which varies from place to place. Failure to do so incurs a 10 per cent penalty. It is probably simplest to arrange for payment from your bank by direct debit. The taxe d’habitation is paid on a residential property by the person who has the use of it on 1 January in any year. If you use or have it available for use yourself, or let it short-term, you will pay; otherwise it is paid by the tenant if you let it longer-term. The taxe foncière is paid by the owner of the property, irrespective of who occupies it. New houses or renovated properties used as your home are spared taxe foncière for the first two years after construction. Renovated properties may, in certain circumstances, benefit from the exemption.

Q.
Are there any other taxes that I will have to pay?

A.
As a non-resident you will be liable for wealth tax annually, based on the assets you own in France as at 1 January each year. Taxable assets include your property and the value of shares in any company which owns real estate in France; as well as furniture, cars, cash in the bank and some other assets. If you become a French resident you will be charged wealth tax on your worldwide wealth. The amount you will pay is based on the progressive scale rates of 0.55 per cent to 1.8 per cent where your taxable assets are worth more than €770,000 (£608,599) (in 2008). The value of an owner-occupied residence may be reduced by 30 per cent for wealth tax purposes if you are resident.

Q.
What about if I sell my property? Is there French capital gains tax to pay?

A.
For a French tax resident any gain on a property which is the ‘actual and habitual’ main home at the point of sale is tax-free. If you sell a property and the proceeds of the sale are no more than €20,000 (£15,807) per owner, then it is exempt from capital gains tax in France. There is a general abatement of €1,000 (£790) per person against a property gain. Otherwise, French capital gains tax is payable on the gain unless you have owned the property for 15 years. After five years of ownership, the net gain is reduced by 10 per cent for each subsequent complete year of ownership. The capital gains tax rate for nonresidents is 16 per cent if resident in the EU, Norway or Iceland, or 33 per cent if resident elsewhere and only applies on gains made on French real estate and certain company shareholdings. UK capital gains tax may be payable if you are a UK tax resident and you have not elected for your French property to be your principal private residence. Any French capital gains tax is deductible against the UK tax payable.

Q.
If I take out a mortgage, will it be tax deductible?

A.
Mortgages can reduce French wealth tax and French succession tax (which is liable on your death). If you let the property, the interest is tax deductible against the rental income if the loan was taken out to purchase or improve the property (although it may be academic if you are using a simplified ‘micro’ approach of tax and accounting). There is no requirement for the mortgage to be secured against the property, so a mortgage secured on another property, or an unsecured loan, should be allowable provided there is clear proof that it was taken out to fund the purchase of the let property.

Q.
So what if I should let my property?

A.
If you let your property and receive rental income you will be liable to French income tax even if you are a UK resident and the rent is paid to you in the UK. If you are a UK resident, you will also be liable to tax in the UK although you may deduct any French tax payable. The tax rate in France is at the scale rates of up to 40 per cent. As in the UK, you can deduct most normal expenses relating to the management of the property as well as mortgage interest although there are also simplified ‘micro’ approaches for tax and accounting. The minimum tax rate for non-residents on French rental income is 20 per cent. A French resident will also have to pay 11 per cent social charges.

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