Letting The French Property & Your Tax Obligations: How do the tax offices know?

Any letting income generated by the French property owned by a resident in France or the UK, no matter where it is paid or received, is always, first and foremost, taxable in France.

INTRODUCTION

The French tax authorities have been targeting owners of holiday homes in France who do not declare the income received from the rent and have been imposing fines and penalties.

Following a French tax office clampdown, the rules on property rentals have been tightened and there is now an automatic disclosure to the French tax office of bookings made by platforms such as AirBNB and Booking.com.

For those property owners this can lead to retrospective "Taxation d'Office" and recovery procedures whereby a tax assessment is issued automatically based on what the local tax office deems as being the typical profit that could be expected to be obtained from seasonal holiday lettings, (ignoring normal allowable expenditure such as mortgage interest), adding late interest charges and penalties, irrespective of the true income and expenses incurred.

If the owner is resident and domiciled in the UK, the income will also always be taxable in the UK. However, through the Double Tax Treaty any tax paid in France may be offset against tax due in the UK applying to the same rental income. If the tax paid in France is more than that due in the UK, then no tax will be paid in the UK.

EXCHANGE OF INFORMATION BETWEEN UK & FRENCH TAX OFFICES

Despite the UK no longer being an EU member and therefore Directives on Automatic Cooperation (DACS) no longer applying, automatic exchange of information will nonetheless continue between HMRC and The central French Tax Office (“Bercy”) as a result of provisions in the double tax treaty and various other agreements, collectively known as “Competent Authority Automatic Exchange Agreements”, established under OECD modelled global Common Reporting Standards (CRS)

The impact of this exchange of information will affect individuals who have not ensured their tax affairs have been properly administered in both the UK and France. This will notably be the following:

UK nationals resident in France being challenged to submit French annual tax declarations.
UK resident French property owners with rental income being required to submit French annual tax declarations for the rent received
UK resident French property owners with rental income being required to submit UK annual tax declarations for the rent received
UK resident French property owners to submit UK Capital Gains Tax declarations on the sale of French property

Whilst all of the above are already mandatory, it is getting far easier for both the UK and French tax offices to obtain information of such situations and we are seeing this starting to happen in practice with increasing regularity.

On the UK side this tends to start with a letter being received from HMRC Individual and Small Business Compliance department asking the taxpayer to clarify whether foreign income or gains have already been disclosed in self-assessment for one or more particular tax year. If the taxpayer claims this has been done, they are invited to show on what part of the self-assessment return the data was supplied. Alternatively, they can admit to the need for a correction (and face the relevant penalties) or claim that no foreign income or gains existed. Bearing in mind that the initial letter is triggered by data supplied by the French tax office, the last option is unlikely to end well!