Since settling into his first term in the Elysée Palace, France new President François Hollande has wasted little time in following up on manifesto promises to make substantial changes to the tax regime in France.

The recent amendments to the capital gains and income tax on rentals are just two more in a string of changes over the past year or two, a number of which will affect British second homeowners in France, as highlighted by Matthew Cameron, a partner at the French department of law firm Ashton KCJ: “There are several instances where tax rates and allowances are changing, in relation especially to inheritance and capital gains calculations. In summary, the main changes of relevance are to inheritance tax, capital gains tax, some areas of income tax, and wealth tax.”

The personal allowance for inheritance tax purposes available to children when inheriting an interest in a French asset from a parent reduces from the previous rate of €159,325 to €100,000. “This means,” continues Cameron, “ that overall, the burden of inheritance tax may increase, although this depends largely on the value of the French estate and the number of children. It is also important to note that the same rules apply to gifts of French property.”

Capital gains tax for private individuals is changing, on the basis that the period over which the total gain can be exempted is being reduced from 30 years to 22 years. This tax has been much amended over the past few years, having been something of a political football. The result is that we are now returning – in principle – to the same regime that we knew several years ago. The new regime is in reality much simpler than the previous one (which itself commenced only a few months ago); it works on the basis that after the first two years of ownership, the net gain is reduced by 5% per complete year of ownership. It follows from this calculation that after twenty-two years, there will be a complete exemption to the tax.

This is not, however, the only change. In addition to the capital gains tax, a further 15.5% will be charged. This is in reality the social charge contribution: the equivalent of British National Insurance. It is strongly argued that UK resident people should not be required to contribute to French healthcare, and it remains to be seen whether such a situation will remain in force. It is suggested that President Sarkozy previously considered and rejected a similar plan. One wonders whether the French constitutional court would cut this down in the future, but it appears that it will pass into law in the first place.

Both the new tax regime and the additional social charge will come into effect for all sales commencing on the date the law comes into force. It is likely that this would be early September.

Income tax is being amended on rental property. The change is similar to the second amendment on capital gains tax, as mentioned above. That is to say that on top of the standard rate of income tax for non-French residents of 20% (in most cases), the social charges at 15.5% are being added. The difference though, is that this new tax rate will apply as from 1 January 2012.

Changes to wealth tax will probably not affect the majority of people who own French property. However, for people with assets situated in France with a net value of more than 1.3 million Euros, there will be some amendments. The result is that for people with a taxable estate a wealth tax return will need to be filed, in October, under the new scale. Subsequently a complement may be payable in accordance with the tax scale for 2011.

This may sound somewhat complex, and indeed it can be argued that a simpler method would just have been to renew the entire tax scale.

These tax rates will clearly have a greater impact upon wealthier people. There will still be many families whose estates in France will not be impacted at all, certainly at the time of the death of a family member.
In considering any French tax liability, UK residents must always ensure they are aware of whether there will be any consequent liability in the UK. This will often be the case, although in general the double tax treaty that exists between the UK and France will generally mean that the same tax is not paid twice.

For details of properties for sale in France visit the French listings on Rightmove Overseas. One way to save money when buying in France, or moving there, is to use a currency exchange specialist when transferring your pounds into euros. For more information on this, visit the Currency Zone or contact Smart Currency Exchange.

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