Capital Gains Tax the rules and rates that apply on the sale of a French property

Wednesday, 2 March, 2022

Technical Notes: Disposal of A French Property

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

Please note that this page represents the situation since 01/01/2021.

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 – that is recognised by HMRC as a tax - will be credited against the UK tax arising from the same gain.

Business Assets:

This guide describes the tax as it applies to directly owned property held as a private asset. It does not cover the business asset regime, which may apply in France if the property qualifies for business asset treatment, for example because it generated rental income via holiday lettings sufficient to render the activity as Location en Meublé Professionnelle / “LMP” and the taxpayer is French tax resident. It equally does not explain the UK situation if the property qualifies as a business asset, for example because the letting of the property met the conditions defined for a Furnished Holiday Letting/ “FHL”.

SCI

Regarding the sale by an SCI (Société Civile Immobilière) the information below explaining the French tax treatment is also valid. However, the UK tax position is different. The explanation of the UK tax treatment and consequences of sale by an SCI is found in our note SCI VOLUNTARY DISSOLUTION.. Alternatively, contact our office for an information pack

Other Company Structures

This introductory report does not cover gains made from the sale of a property by an SARL, UK Ltd company or any other company taxed under the regime des Impôts sur les Sociétés, or gains made from the sale of shares in the Ltd company.

Please contact our office, if the sale involves a business asset, and SCI or any other company structure.

The report is based on legislation current for the UK tax year 2021/2022 and French Finance Acts of 2022.

Part 1 FRANCE - BASIC RULES FOR RATES OF TAX AND CALCULATION OF THE GAIN (2022).

“REGIME DES PLUS VALUES PRIVEES”

The following summary describes the assessment of gains from the sale of private assets realised on or after 01/01/2019, (Régime des Plus-Values Privées). This does not apply to property which forms part of the assets of a professional business. The description also does not apply to the disposal of a property by a UK ltd company or any other commercial company.

Please refer back to our office if you believe your property transaction falls within any of these categories.

In general, apart from both jurisdictions applying tax on the gain and identifying the gain as the difference between the sale price and the purchase price plus enhancement costs, there is very little similarity between France and the UK as to what constitutes the net taxable gain.

1. TAX RATE SINCE 01 JANUARY 2021

1.1 IMPOT SUR LE REVENU

This is levied in all cases at a flat rate of 19%

There is no annual allowance – the rate is applied from the first Euro - but instead a taper relief is applied to reduce, (and potentially exempt), the gross gain,

1.2 SUPPLEMENTARY TAX CHARGE ON LARGER GAINS

When the taxable gain exceeds 50.000€ per owner a supplementary tax charge will apply on the whole gain at the following rates shown in the table overleaf.

Click here to see an illustrative table Supplementary Capital Gains Tax : Basic Rates and Transitional Reliefs

1.3 PRELEVEMENTS SOCIAUX

As with Impôt sur le Revenu (“I.R.”) there is no annual allowance – the rate is applied from the first Euro - but again a taper relief is applied to reduce the gross gain, albeit at a slower rate than the taper relief for I.R.

The default position is that PS will be charged at a flat rate of 17.2%, comprising 3 components:

Contribution Sociale Généralisée (CSG) levied at 9.2%
Contribution au Remboursemnent de la Dette Sociale (CRDS) @ 0.5%
Prélèvement de Solidarité @ 7.5%

Total 17.2%

But for technical reasons, the default charge rate can be reduced to 7.5% – with the taxpayer being exempt from the CSG and CRDS components – if they can prove that they are, at the time of disposal, not subject to a French obligatory national insurance scheme and instead subject to the National Insurance legislation of another EU or EEA member State or of Switzerland.

Post Brexit, from 01/01/2021 through to the end of February 2022, UK residents have, in the meain, been subject to the 17.2% charge rate. In January 2022, however, the French Tax office updated their guidance to state that UK residents who are subject to a UK NI scheme and are not otherwise subject to a French compulsory NI scheme can also benefit from the 7.5% rate. Whilst this is now being applied in practice to sales from March 2022, the provision is backdated to be effective from 01/01/2021. CONSEQUENTLY THOSE WHO SUFFERED THE 17.2% RATE ON EARLIER SALES ARE NOW INVITED TO PRESENT APPEALS FOR RECOVERY OF THE EXCESS.

If you have already sold and paid PS at a rate of 17.2% we would be happy to consider whether you qualified for the exceptional treatment and if so can then present an appeal for recovery of the excess payment on your behalf. Do contact our French office if you would like us to look into this.

2. EXEMPTIONS & TAPER RELIEF

2.1 EXEMPTIONS

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

Other, substantially less frequently occurring exemptions are also available. When assessing your file, we will consider whether or not your case qualifies for any full or partial exemption.

2.2 TAPER RELIEF

Unlike the UK, taper relief is still available in France to offset the impact of inflation in increasing the gain. Relative to the state of play before 01/09/2013 taper relief has been accelerated for the Impôt sur le Revenu and Supplementary tax elements of the overall tax charge, but has been back-end loaded for Prelevements Sociaux.

Click here to see a Summary Table of Taper Relief Rates

Special rules apply to the disposal of building land and the sale of shares in an SCI (Société Civile Immobilière) or other form of civil company. If your disposal concerns either of these scenarios contact our office for more details.

After 22 full years of ownership the gain is exempt from Impot sur le Revenu, but is still exposed to Prélèvements Sociaux. It is not until 30 full years of ownership have been achieved that 100% taper relief is acquired across the board, effectively rendering the disposal exempt from French Tax.

2.3 ALLOWABLE DEDUCTIONS

In addition to the basic purchase price paid for the property (or its construction) there are a number of limited allowable deductions which may be applied before arriving at the pre tapered gain.

2.3.1 Ancillary Acquisition Costs

As well as the basic purchase price, (“prix principal”), ancillary costs of purchase such as notaire’s fees and estate agent’s commissions can be added to the base purchase cost prior to arriving at the pre- tapered gain.

When these fees cannot 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.

2.3.2 Acquisition Enhancement Costs

Similarly, subject to meeting strict rules on definition and justification, capital works for enlargement, improvement, conversion, construction and reconstruction may also be added – so reducing the pre tapered gain.

When the property has been owned more than 5 years, a default allowance amounting to 15% of the prix principal can be applied when actual capital works fall short of this or cannot be justified satisfactorily. Unlike in previous years, however, this allowance is not automatic. The taxpayer must be in a position to either self certify or provide evidence that at least some qualifying works took place: which route is taken applies will depend on the view of the Fiscal Representative involved in the sale.

Often the works carried out far exceed this 15% sum, which then leads to the challenge of persuading the Fiscal Representative of their qualifying nature and that the justifying documentation meets the standards laid down by tax office statement of practice and case law.

We have a separate guide on what constitutes allowable improvement works and the documentation ultimately needed to supply when claiming them as an allowable cost.

Do contact our French office if you would like a copy of the guide.

Special rules apply when the sale relates to a land and construction project.

2.3.3 Costs of Sale

Meanwhile, the net relevant sale price may be reduced to account for a limited range of sales related costs:

- Estate Agent commission

- Cost of diagnostics

- Land Registry fees (but not bank admin fees or penalties) for discharge of a Mortgage deed

- Fiscal representative charges

2.3.4 Furniture

The price of any furniture forming part of the sale, may be deducted from the sales price, subject to meeting a number of stringent criteria, which – in principle at least – involves the presentation of an inventory, with itemised values, (signed off by a registered auctioneer prior to signature of the Compromis or Promesse de vente). Otherwise it will be included in the sale price used to compute the French gain.

We have a separate guide on furniture. Please contact our French office if you would like a copy

2.4 Declaration & Payment

Traditionally, a non resident seller is obliged to appoint a fiscal representative in France to be responsible for the calculation of the taxable gain and tax due but for sellers resident in the EU or EEA, it is the notaire who is responsible for drafting the French tax declaration as well as making payment by deducting the tax due from the sales proceeds.

2.5 The Impact of Brexit – The Return of the Fiscal Representative

Since 01/01/2021, as the UK has left the EU, the requirement to appoint a fiscal representative for UK tax residents has been reintroduced.

Apart from bringing in an extra cost to the sale, our experience suggests that the main issue is in the raising by several notches the burden of proof needed for improvement works to be accepted in the computation.

Proof of payment is a standard Fiscal Representative requirement when, prior to Brexit, it was not always demanded by notaires

Compliant invoices will also be needed. In line with the general tax office statement of practice as to the interpretation of legislation, receipts for purchase of materials for work done on a DIY basis will prove unacceptable.

It is now even more important than usual to dig out the correct paperwork on the works completed, chase down contractors to fill gaps in documentation and obtain copies of banking records as far as possible.

Having an adviser / interlocuteur, such as Charles Hamer, equally knowledgeable of the legislation and fighting your corner could save 1000’s of Euros in tax.

We have a number of correspondent Fiscal Representatives who have proved willing to accommodate our arguments, resulting in outcomes that justify paying our fee.. When we are not needed to justify the validity of improvement works, we are negotiate discounts from these correspondents to ensure better terms than are usually offered by the representative proposed by the notaire.

Part 2. THE UK - BRIEF SUMMARY OF RULES (TAX YEAR 2021/2022)

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

A primary consideration that is often initially overlooked is that the computation of the costs and acquisitions must be expressed in £ at the exchange rate experienced at the time of the outlay or the receipt.

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 £12,300 - assuming that this allowance has not already been used up against other gains made in the same tax year.

The resulting apportioned gain is taxed – prior to any double tax relief - at a rate of between 18% (basic rate tax) and 28% (higher rate tax), depending on:

Whether or not your taxable income for the year is above or below the basic rate band threshold and
Whether or not the taxable gain, when added to your taxable income straddles the threshold

For disposals of shares in an SCI the tax rates are reduced to 10% and 20% respectively

The tax rate is potentially reduced to 10% if the property qualifies as a business asset, (e.g. it qualified for Furnished Holiday Lettings tax treatment).

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.

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.

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.

The Impact of Currency Movement

In light of the 30% depreciation in £ against the € over the past 19 years or so, then depending on when the outlay occurred, this factor can often give rise to a considerable taxable gain in the UK even if there has been no change in the € denominated value of the property itself.

1. DOUBLE TAX RELIEF FOR FRENCH TAX PAID

Double Taxation Treaty provisions allow for some but not all of the French tax already paid or payable following the sale of the French property, to be offset against the UK tax as calculated above.

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.

1.1. HMRC INTERPRETATION OF PRELEVEMENTS SOCIAUX & CURRENT TREATMENT FOR TAX RELIEF

Prélèvements Sociaux (PS), as they stood prior to the French changes in January 2019, were excluded from the charges for which credit was allowed against UK Capital Gains Tax.

They were also specifically excluded as an allowable tax in the current double tax treaty, but HMRC have also previously clarified that they don't qualify for unilateral tax relief, (which might otherwise be claimed under TIOPA [Taxation International and Other Provisions] Act 2010.

In the case of PS levied from 2019 onwards however, because of funding objective changes made in the 2019 French Finance acts, our view is that 7.5% out of the overall 17.2% levy can be claimed as a credit against corresponding UK tax (by reference to TIOPA 2010).

Meanwhile, most people who are within scope of UK tax will benefit from the reduction in the PS rate to 7.5% as a result of the January 2022 change of heart by the French tax office described above.

1.1.1 Impact of the January 2019 French changes

The legislation behind 2019 changes to PS suggests to us that the Prélèvement de Solidarité component of PS – the 7.5% element – now takes on the nature of a tax.

Whilst not expressly catered for in the double tax convention between the UK and France, we therefore believe it reasonable to expect this component, along with the supplementary tax charge – when applicable – to be claimable as a credit against the gross UK tax arrived at on the same transaction.

The basis behind this conclusion is that:

a).Prélèvement de Solidarité and the Supplementary tax charge for gains over 50.000€ both correspond to UK taxes in their nature, (they both get credited to the general national tax account)

b).Foreign tax, even if not expressly mentioned in any double tax treaty is claimable as a tax credit either unilaterally – i.e. by reference to UK legislation alone – or by reference to the general provisions mentioned in the UK/France treaty regarding the introduction of new taxes[1][2]