French tax reforms trouble brewing for holiday home-owners?

Posted by admin at 15:51 on 13 Feb 2017

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Update: Please note the French government have now decided to drop the below legislation. 21.06.11

Julian Brooks, Tax Consultant at the Tax Advisory Partnership highlights the possibility of a 20% tax on French properties owned by UK residents being introduced.

As a firm of UK tax advisors, we are generally concerned with changes to the UK tax regime, but occasionally an announcement elsewhere affects our domestic clients. Often these involve Europe and the latest again centres on France.

UK residents owning a holiday home in France face the worrying prospect of a new 20% annual tax charge based on the cadastral value of their property, and very few of the estimated 250,000 Britons owning a home in France will know of this potential change.

If passed, the new rule will apply to non-French residents generally, including some French citizens who have emigrated, although those renting out their properties and professional expatriates would appear to be exempt.

The new tax will doubtless be a concern for many, and the move is perhaps surprising given the appreciation in the value of the Euro over recent years, and the subsequent pressure on tourism. Nevertheless, the draft regulations have received French government approval and are expected (by the French at least) to become law from 1st January 2012.

As currently drafted, the new tax will apply to non-residents owning French property directly or indirectly, so that socit civile immobilire structures (which are common for non-French residents) would also appear to be caught. If re-structuring is required, those with a UK connection may well need to navigate around UK tax pitfalls and should seek specialist tax advice as appropriate.

Looking at the finer details, the tax is to be applied at a rate of 20% to the cadastral value of the home. This is typically much lower than market value, but the current cadastral values date back to the 1970s and are due to be increased in the near future.

Another aspect of the reforms which may soften the blow, however, is an apparent relaxation of the French wealth tax regime, with the threshold increasing to €1.3m (from €800k), and the top rate reducing from 1.8% to 0.5%. Whilst this should benefit those at the top end, the changes may be detrimental to those of lesser wealth as the tax shield, which limits the combined French income tax and wealth tax burden to 50% of an individual's income, is to be abolished.

On a more positive note, it remains to be seen whether the new homeowners tax will be compatible with EU law. The existing tax treaties with France (including the agreement with the UK) may offer another line of defence for those living in relevant jurisdictions.

If these changes do get through, however, other EU countries may look at introducing a similar charge, particularly as most are looking to balance their books under the weight of huge budget deficits. From a UK perspective, a similar charge in Spain or Portugal where Britons' holiday homes are most concentrated would no doubt be a significant concern.

For the time being, however, those with holiday homes in France should keep a keen eye on the progress of the proposals and take tax advice to adapt as appropriate.

The RM2 Partnership is pleased to recommend the services of the Tax Advisory Partnership.

If you wish to discuss the issues raised in this article, please contact Julian Brooks at julian.brooks@taxadvisorypartnership.com.