French property owners face big rise in tax charges

Bill could hit thousands of Britons with second homes

writes James Charles

SECOND-HOME owners with properties in France could be hit with a new annual tax bill costing tens of thousands of pounds after a clampdown on non-residents by the French government.

Changes to the French wealth tax will force France's 360,000 non-resident property owners to pay more tax from January 2012. Dermot Callinan, head of the private client practice at KPMG, the accountant, said: "These are significant changes and Britons with property in France should look at them carefully to see how they are affected."

What has been announced?

France is raising its annual wealth tax thresholds and reducing the rate, but is clamping down on avoidance of this tax by closing a loophole used by wealthier property owners. It will also levy a 20% tax on the rental value of second homes from next year.

Which loophole is being closed?

At the moment, foreigners using cash to buy French property worth more than €800,000 can use a holding company, known as an SCI, to avoid wealth tax, currently tapered from 0.55% on assets worth between €800,000 and €l.3m to 1.8% for more valuable assets. The buyer lends the money to the SCI, which buys the property. At the top end, this would mean that someone with a €10m villa in the south of France, for example, could avoid annual wealth tax of €113,210.

How much will they have to pay now?

The wealth tax thresholds and rates are changing: from 2012, net assets (the value of the property minus the value of any loan secured against it) worth more than €l.3m will be taxed at 0.25%, rising to 0.5% for assets worth more than €3m. Therefore, the owner of the €l0m villa can expect to pay €50,000 a year in wealth tax from January.

David Anderson, of Sykes Anderson, solicitors in international law, said: "Non-residents can opt to borrow from a bank to finance the purchase of a property, thereby reducing their taxable equity in the property."

If you own a property worth €1m with a €300,000 mortgage, you pay tax on the remaining €700,000 only. At 0.25%, this means an annual bill of €1,750.

On top of the wealth tax, second-home owners already pay two local property taxes, the taxe fonciere and the taxe d'habitation, which are based on the "cadastrale" property value — similar to council tax banding in the UK.

Expats who live in France are considered residents and pay these local taxes as well as the annual wealth tax and income tax, the top rate of which is 41% for those earning more than €70,830 a year.

How will the 20% property tax work?

This applies to second-home owners only, whatever their nationality. The government is also planning to introduce a new property tax for non-residents who own second homes in France that are not let out. The tax will be 20% of the property's "valeur locative cadastrale", a theoretic rental value. Most homeowners should have a record indicating the cadastrale value of their home. You can also search for your address on cadastre.gouv.fr. For example, a nine-bedroom villa in Saint Tropez worth €5m has a cadastrale value of €25,000 a year, so the 20% tax would be €5,000 a year. At the lower end, a two-bedroom flat in Deauville, Normandy, worth £350,000, has a cadastrale rental value of €3,401, so the 20% tax rate would be €680 a year.

Can I avoid it?

Property owners may have to ensure that their homes are available for rent for the whole year with a local letting agent to avoid the charge.

Callinan said: "if it is permanently let or permanently advertised for rent, the 20% tax should not be due. The law does not specify how the 20% tax should be determined when the property is rented for part of the year and used by its owner at other times."

For the next five years, it will not apply to non-residents who have been living in France for at least three of the past 10 years. However, experts think the tax could be challenged. Caroline Cohen, a solicitor at the French Law Practice based in London, said: "This new 20% tax is likely to be challenged under European law since, in practice, it will discriminate against foreign owners of holiday homes."

THE SUNDAY TIMES 22.05.11
thesundaytimes.co.uk/money