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 a UK Ltd Company, or gains made from the sale of shares in a Ltd Company.
Please contact our office, if the sale involves a Ltd Company.
Regarding the sale by an SCI 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.
The report is based on legislation current for the UK tax year 2016/2017 and French Finance Acts of 2016.
Part 1 FRANCE - BASIC RULES FOR RATES OF TAX AND CALCULATION OF THE GAIN (2018). “REGIME DES PLUS VALUES PRIVEES”
The following summary describes the assessment of gains from the sale of private assets realised on or after 01/01/2018, (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”. 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 2018
For an individual not resident in France, a flat Capital Gains Tax rate of 36.2% is normally applied, irrespective of the level of personal income generated in that year, and the number of owners.
For the time being at least, the basic flat charge comprises 2 distinct elements: “Impôt sur le Revenu” and “Prelevements Sociaux” . Their nature and the scope of their application differ in two substantial ways both for the purpose of calculating the taxable gain in France and the claim for double tax relief in the UK.
These differences and their impact are explained in Section 2.2. and Part 2 Section 1.1 below.
1.1 TAXABLE GAINS IN EXCESS OF 50.000€ : SUPPLEMENTARY TAX CHARGE
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
When added to the basic rates, an unlucky taxpayer could therefore now find themselves paying a tax rate as high as 96.5% on any sale made from 01/09/2014.
Even for an EU resident the tax charge could be over 40% of the taxable gain.
2. EXEMPTIONS & TAPER RELIEF
The availability of exemptions and reliefs will depend on several factors:
In principle, for the non French resident there are 5 main potential exemptions:
- 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".
Other, substantially less frequently occurring exemptions are also available, peculiar to the circumstances of the sale and the taxpayer. When assessing your file, we will consider whether or not your case qualifies for any full or partial exemption.
In practice, however, more often than not, the difficulty lies in being able to justify to the notaire and/or tax office, entitlement to the 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 an illustrative table Summary 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 disposals concerns either of these scenarios contact our office for more details.
After 22 full years of ownership then, 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 taperd 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 deduction amounting to 15% of the prix principal may be applied when actual capital works fall short of this or cannot be justified satisfactorily.
Often the works carried out far exceed this 15% sum, which then leads to the challenge of persuading the notaire responsible for making the CGT declaration to accept the actual costs of improvement.
In practice there is a great deal of variation between notaires as to what they accept as qualifying improvement cost, to the extent that this, in our experience, is the biggest area of dispute between the seller and the notaire when arriving at the taxable gain.
Part of the problem is that there is very little in the way of a statutory definition of what is an improvement (as opposed to major repair or maintenance, which is not allowable). Rather the definition relies heavily on case history, which at best is not clear and downright ambiguous in many instances.
Consequently, the notaire's interpretation tends to err on the side of caution.
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:
The sale of a property which was the owner’s main residence at the time it was put up for sale and the disposal takes place within one year of that date.
The taxpayer was French tax resident for at least 2 consecutive years at any time prior to the sale which in turn represents their first sale of a French property since 01/01/2006 and the sale takes place before the 31st of December of the 5th year following the termination of their French tax resident status. This exemption is limited to the first 150.000€ of post tapered taxable gain.
The taxpayer was French tax resident for at least 2 consecutive years at any time prior to the sale which in turn represents their first sale of a French property since 01/01/2006 and the sale takes place at any time following the termination of their French tax resident status and the property has been reserved for the vendors personal use for the whole of the period running from the 1st of January of the year prior to the sale all the way through to the date of sale itself. This exemption is limited to the first 150.000€ of post tapered taxable gain.
The taxpayer is in receipt of a state pension and is of modest means. For a single person, for 2014 this means having worldwide income of less than 10.225€ and net assets below 1.3€ million. For a married couple the income ceiling is 15.684€.
When the sale takes place at least 30 years after its initial date of acquisition – this being a result of accumulating taper relief.
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), or justified by copy invoices.
2.4 DECLARATION & PAYMENT :
Since 2005, a non resident seller has been obliged to appoint a fiscal reprsentative in France to be responsible for the calculation and payment of the tax, whenever the sale price exceeded €150,000.
Following directions from the European Commission, from 01/01/2015, all sales by residents in the EEA (with the exception of Lichtenstein), can now do away with the need for a Fiscal Rep. Instead it will be the notaire who is responsible for submitting the French tax declaration and making payment by deducting the tax due from the sales proceeds.
Only when the seller (or shareholder of an SCI) is non EEA resident does the requirement for a fiscal representative remain in place.
Part 2. THE UK - BRIEF SUMMARY OF RULES (TAX YEAR 2014/2015)
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 £11,100 - 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:
Estate Agent commission
Cost of diagnostics
Discharge of a Mortgage deed
Fiscal representative charges
The tax rate may be 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.
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 are currently excluded from the charges for which credit is allowed against UK capital gains tax.
They are specifically excluded as an allowable tax in the current double tax treaty, but HMRC have also clarified that they also don't qualify for unilateral tax relief, (under TIOPA : Taxation [International and Other Provisions] Act 2010).
Despite the French Administration determing that Prélèvements Sociaux are taxes rather than social charges, when applied to unearned income and gains, HMRC currently take the view that they are social charges, not a tax, and therefore not available for offset against UK capital gain tax.
Resolving the Anomaly
Fortunately, the first steps in resolving this divergence of views via an approach to the ECJ (European Court of Justice) were made in late 2013 and their preliminary judgement regarding the nature of Prélèvements Sociaux and their scope of charge is due at the end of November 2014.The latest indications - via the opinion of the advocate general responsible for the case, published at the end of October - suggests that the ECJ will identify prelevements Sociaux as being subject to European Social Security Legislation
Assuming that the judgement is accepted and its findings implemented without challenge then we envisage two potential outcomes:
If Prélèvements Sociaux truly are social charges, (as appears to be the more likely judgement), then their scope for application in the first place would be down to the taxpayer's National Insurance status - whether they are subject to UK or French National Insurance legislation.
In this case, if the taxpayer is not within the scope of French NI legislation, then Prélèvements Sociaux will not be chargeable on the gain - with the potential existing for those taxpayers who have already suffered the charge to make a claim for recovery. This in turn would increase the gross UK tax charge since Prélèvements Sociaux will no longer represent a cost of sale.
If, however, Prélèvements Sociaux are identified as a tax then they should be claimable as a credit / offset against UK Capital Gains Tax.
In either case then, for those who have already sold and submitted a UK tax return disclosing the gain, the outcome of the ECJ judgement will result in an amended return needing to be made in the UK.
Please refer to our latest bulletins for update on the situation
1.2. HMRC INTERPRETATION OF AN SCI FOR UK CGT PURPOSES.
In our experience to date there is currently a great deal of confusion over the correct UK tax treatment of the gain whenever an SCI is involved. In any event, the involvement of an SCI complicates matters in the UK considerably and - contrary to regular practice - requires balance sheets to be maintained and approved by the shareholders (along with other processes) if any interpretation of the sales proceeds adopted by the UK resident shareholder in their UK self assessment return is to stand up to enquiry by HMRC.
The position is reasonably straightforward whenever the French transaction concerns the sale of the SCI shares rather than the sale of the property by the SCI - any French tax on the gain is available as a credit against corresponding UK tax assessed on the gain attached to the sale of the shares.
The situation is less well understood, however, in the more frequent instance of the SCI selling the property. In these circumstances we encounter a double tax problem arising from the fact that HMRC treats the SCI as a separate and opaque tax entity - taxable in its own right - whereas in France the SCI is semi transparent for tax purposes, with the gain being charged to the shareholders and calculated according to their legal status and proportionate interests in the SCI.
According to HMRC :
If the SCI is deemed UK tax resident, then the gain on the sale of the property is assessable to UK corporation tax in the name of the SCI. In this instance a tax credit can be claimed against the UK tax for the corresponding French tax paid by the shareholders by virtue of the UK and French tax arising from the same gain.
When the SCI is not deemed UK resident, however, there is no scope for UK Corporation tax to be charged on the sale itself.
However this is not the whole picture :
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
Because of HMRC treating the SCI as an opaque structure, with its own legal entity separate to that of the shareholders, there is then a secondary UK assessment to tax on the subsequent allocation of the sales proceeds to any shareholders who are UK tax resident at the time. This is true whether or not the SCI is UK resident.
The nature of the UK assessment will then depend on how the sales proceeds are allocated:
If the funds are paid out as a result of a process of liquidation and dissolutin of the SCI, then the UK tax will be assessable under UK CGT rules against the shareholders on any change in the value of their share capital, (the value paid out net of any loans being repaid).
If the funds are paid out without a corresponding liquidation and dissolution of the SCI, the payout cannot represent a disposal of shares. For the purposes of tax interpretation, bearing in mind that the proceeds of the sale technically belong to the SCI - as a separate entity - rather than the shareholders, the transaction must therefore represent something other than a share disposal. Failing any justifiable evidence to the contrary, HMRC may wish to treat the payment as a distribution (dividend), as remuneration, (salary), or a combination of both, depending on the capitakl structure of the SCI. All of this would then face a charge to income tax, without any corresponding relief being available for any French capital gains tax paid.