French CGT update

Further update for French Property Owners

Beware of the new French Capital Gains Tax rules

In these times of belt tightening, the French Government, like many other countries’ governments, is exploring every possible way to find the money needed to make up France’s budget deficit.  One of its favoured ways since the last Finance Act has been to increase taxation for French property owners.

After the increase of the capital gains tax rate from 16% to 19% on 1st January 2011, and the attempt in July to introduce a new tax based on the rental value of properties, which was due to have affected properties held by non-residents (this tax proposal has now been shelved), the French Government announced at the end of August the removal of the capital gains tax exemption currently available for properties held for more than 15 years.

The exemption has applied since 2004 for sellers of secondary residences or rental properties.  A 10% allowance is granted for each year of ownership from the sixth year, thereby giving a total exemption for a sale after 15 years ownership. If the gain is not fully exempt, a fixed allowance of €1,000 is granted per seller.

Initially announced to take place immediately, the implementation date for the reform has been partially postponed by the French Parliament until 1st February 2012, and the initial harsh full removal of the exemption has been diluted slightly. The new law was passed by the French Parliament on 21st September 2011 and the rules are now as follows:

• The current tax rules remain applicable until 31st January 2012, except for transfers of properties to a company (SCI) for which the new rules apply from the date of announcement of the reform that is from 25 August 2011. Also, the fixed allowance of €1,000 per seller is removed with immediate effect, that is from 20 September 2011.
• From 1st February 2012 a full capital gains tax exemption will apply only for properties sold after 30 years of ownership.  No exemption will apply for properties held for 5 years or less.  From the sixth year of ownership, taper relief will apply per year of ownership, at an increasing rate of 2% (from the sixth year to the 17th) 4% (from the 18th to 24th year), and 8% (from the 25th to the 30th year).

For example, a gain of €100,000 on a property bought on 1st September 1996 and sold on 1st October 2011 remains fully exempt.  However, if the same property is sold on 1st February 2012, only 20% of the gain would be exempt (taper relief applicable over 10 years at 2% per year), that is an  additional tax of €15,200. The tax liability will be even higher if the seller is a French resident, as social contributions (currently at 12.3%, going up to 13.5% from 1st October 2011) will be payable.

You must not forget that you may be liable also to capital gains tax in another country, with the possibility for double tax relief to apply (for example UK capital gains tax will be chargeable for a UK tax resident seller selling a French property).

If you are considering selling your French property, or you want to understand how the changes might affect you in the long term, we can help you understand the impact of this reform.

This could also mean that we will see a buyers’ market before the new rules come into force.