TECHNICAL NOTES: DISPOSAL OF A FRENCH PROPERTY:

A BRIEF INTRODUCTION TO THE FRENCH & UK TAX TREATMENT OF ANY GAINS

Gains made from the sale of French property owned directly by an individual or individuals are liable to Capital Gains Tax in France. Equally, if the individual is resident or ordinarily resident in the UK, the disposal of the French property will also be subject to UK Capital Gains Tax.

Although a Double Taxation Treaty exists between France and the UK, the purpose of the agreement is not to allow the individual to "choose" in which country to pay the tax, nor is it designed to allow tax to be paid in only one country and not the other. Instead, the treaty simply allows that for a UK resident, any French tax paid will be credited against the UK tax arising from the same gain.

This introductory report does not cover gains made from the sale of a property by an SCI or UK Ltd Company, or gains made from the sale of shares in the SCI or Ltd Company.

Please contact our office, if the sale involves either or both of these entities.

The report is based on legislation current for the UK tax year 2011/2012 and French Finance Act 2011.

FRANCE - BASIC RULES FOR RATES OF TAX AND CALCULATION OF THE GAIN (2011). “REGIME DES PLUS VALUES PRIVEES”

The following summary describes the assessment of gains from the sale of private assets realised on or after 01/02/2012, (Régime des Plus-Values Privées). This does not apply to property which forms part of the assets of a professional business, such as “location en meublé professionnelle”. Please refer back to our office if you believe your property falls within this category.

In general, France applies similar rules for permissible expenses to be deducted from the gross gain, as is applied in the UK. This is the limit of any similarities between France and the UK.

TAX RATE

Currently, for an individual not resident in France, but able to prove they are resident in another EU state, a flat Capital Gains Tax rate of 34.5% is normally applied, irrespective of the amount of the gain, the level of personal income generated in that year and the number of owners. For non EU residents the rate increases to 48.83%.

Illustrative Example: Click here to see an illustrative table Summary of French CGT rates according to the status of the Taxpayer

EXEMPTIONS & TAPER RELIEF

The taxable gain is reduced at a rate which varies according to how long the property has been owned:

The availability of exemptions and reliefs will depend on several factors:

How long the property has been owned.
Whether the owners have at any time been fiscally resident in France and lived at the property as their main residence during that period.
Whether or not the property has been used to generate seasonal holiday lettings and if so, whether the activity is both registered at the Registre de Commerce et des Societes and qualifies as a "location en meublé professionnelle".

EXEMPTIONS:

The sale of a property which was the owners main residence at the time it was put up for sale and the disposal takes place within one year of that date.
When the sale takes place at least 30 years after its initial date of acquisition – this being a result of accumulating taper relief.

TAPER RELIEF:

After 30 full years of ownership, 100% taper relief is acquired, effectively rendering the disposal exempt from French tax. Click here to see an illustrative table Summary of Taper Relief Rates

ALLOWABLE DEDUCTIONS

As well as the basic purchase price, (“prix principal”), ancillary costs of purchase such as notaire’s fees and estate agent’s commissions, will be deducted when arriving at the net taxable gain.

When notary fees can not be justified, (e.g. absence or loss of notaire’s completion account), for French tax purposes, a default value of 7.5% of the prix principal will be assumed.

A limited range of capital works for improvement, enlargement, conversion, construction and reconstruction may also be deducted from the gross gain. When the property has been owned more than 5 years, a default deduction amounting to 15% of the prix principal may be applied when actual capital works fall short of this or cannot be justified satisfactorily.

DECLARATION & PAYMENT : APPOINTMENT OF A FISCAL REPRESENTATIVE

Traditionally the notaire has been responsible for submitting the French tax declaration and making payment by deducting the tax from the sales proceeds.

However, in the case of a non resident seller, whenever a taxable sale arises, (therefore excluding those exempted by virtue of the 30 year ownership rule), a fiscal representative in France must be appointed to act on behalf of the seller and to be responsible for the payment of the tax, whenever the sale price exceeds €150,000

Whilst in principle the fiscal representative may be any individual resident in France, in practice – since the representative themselves will be liable for any additional tax arising from any re-assessment, (which may be made up to 4 years after the sale) – the fiscal representation will almost always be via an appointed professional firm.

THE UK - BRIEF SUMMARY OF RULES (TAX YEAR 2012/2013)

Jointly owned property, unless shown otherwise via the title deeds, is assumed to be owned equally.

The amount of tax due is arrived at by dividing the net gain, (after allowing for purchase and sale costs, improvement costs and taper relief), amongst the owners. Each individual may offset against their share of the net gain their annual personal Capital Gains Tax allowance of £10,600 - assuming that this allowance has not already been used up against other gains made in the same tax year.

For tax years 2010/11 onwards the resulting apportioned gain is taxed at a rate of between 18% and 28%, depending on whether:

Your taxable income for the year is above or below the basic rate band threshold and
The taxable gain, when added to your taxable income straddles the threshold

The tax declaration, (and tax payment), is made via self assessment due no later than 31st January in the year following the UK tax year of disposal.

Meanwhile, the Double Taxation Treaty provides that any French tax already paid or payable following the sale of the French property, will be credited against the UK tax as calculated above, (after being apportioned according to each individual's share of the property in the case of joint ownership).A tax rebate is not available if the French tax paid is greater than the UK tax calculated. In such a case, there would simply be no tax to pay in the UK.

Other than the application of Double Tax relief, there are no special rules applied to the fact that the gain is made abroad. The various permissible expenses and allowances applied when reducing the gross gain to a net taxable gain for disposals realised within the UK are equally valid for the French property.

The only quirk that needs to be taken into account, is the fact that exchange rate gains or losses in respect of the Euro or French Franc to Sterling exchange rates at the time of original purchase and time of sale, may result in a taxable gain arising in the UK when there was no gain made in France, and visa-versa.

Any loss made, (for example as a consequence of exchange rate movement), can be carried forward against any other UK taxable gains made in the same tax year or any future year in the individual's lifetime.