New Capital Gains Tax on Holiday Homes in France

As of the 1st of February 2012 the laws regulating the capital gains calculation on secondary homes and holiday homes in France will change.

The new law will most likely have an effect on the French property market, especially in sought after areas for international buyers and investors.

Today’s Situation

Today the capital gains (French: “plus values”: the difference between the sales price and the purchase price) tax today is applicable in its entirety during the first 5 years of a property’s existence, thereafter from year 5 to 15 there is a 10% discount resulting in a tax free sale after 15 years of ownership. The tax rate for the first 5 years is as follows:

1) For French residents (French tax payer) the applicable capital gains tax rate is 31.3%
2) For EU residents (not France) the applicable capital gains tax rate is 19.0%
3) For residents outside the EU (Iceland and Norway not included) the applicable capital gains tax rate is 31.3%
4) For residents in a tax heaven with no tax treaty with France the applicable capital gains tax rate is 50.0%

The New Tax Law


The French government has estimated an income of €180 million in 2011 and €2.2 billion in 2012 from the new capital gains tax alone.

The capital gains tax is still going to be applicable in its entirety during the first 5 years of a property’s existence, then between year 5 and year 30 of ownership (same owner) the tax will gradually be reduced as follows:

- 2% annual deduction between year 5 and 16 of ownership
- 4% annual deduction between year 16 and 24 of ownership
- 8% annual deduction between year 24 and 30 of ownership

The new tax system will apply to all property transactions (signature of the “Acte de Vente”: the final deed) taken place as of the 1st of February 2012. Any transaction prior to this date is subject to the existing taxation.

The new tax rates will be:

1) If resident in France (French tax payer) the applicable capital gains tax rate is 32.5% up 1.2%
2) If EU residence (not France) the applicable capital gains tax rate is 19.0% no change
3) If resident outside the EU (Iceland and Norway not included) the applicable capital gains tax rate is 31.3% no change
4) If resident in a tax heaven with no tax treaty with France the applicable capital gains tax rate is 50.0% no change

The French property market will most likely feel the effects of the new tax law as vendors, especially for non-EU residents, who would save an important amount by selling their property before the 31st of January 2012.

Example

A property bought by a UK resident for €500.000 in 1996 and sold 15 years later for €1.000.000 would under today’s tax regime not pay any capital gains tax on the €500.000 profit (remember that all capital gains should be reported to the Inland Revenue and might be taxed by them). The same property sold after the 1st of February 2012 would only get 20% of the profit tax free (€500.000 – 20% gives a €400.000 tax base) and then a 19% tax charge on the €400.000 tax based amount. This would result in a €76.000 tax bill (€400.000 - €79.000 = €321.000 + €100.000 = profit after tax of €421.000).


Fredrik Lilloe, CEO of Estate Net France SAS, a luxury property agent on the French Riviera says: “There are no doubts that the property market will be affected by the new tax law, we have already seen evidence of reduced prices on properties owned by non-French residents wanting to sell before Christmas in order to avoid the extra tax-bill”.

There will however not necessarily be a rush of fire-sales according to Mr Lilloe: “The new law will only affect a small number of vendors who find themselves in a situation where a sale is more financially interesting now than after the 1st of February 2012. For the remaining majority of the market, the law will have no real financial consequence”.