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Tax and costs on buying residential property in France

Frequently asked questions

David Anderson solicitor and Chartered Tax Adviser has an imaginary conversation with an English couple in their fifties about to take early retirement in France financed by letting their English home until they take their pension.

Notaries' costs

Why are the notaries' fees so high?

They are fixed by statute and broadly break down as to 6.3% stamp duty and land registry fees and 1% as legal fees. There is no price competition. In addition to the fixed charges notaries can charge extra when dealing with complex cases and acting for foreigners. You should ensure you are being charged the same as a French person without this supplement.

What is the best way to get a good deal out of a notary?

Forget about knocking him on fees. Instead agree the fee put forward but insist that a will and if applicable a marriage contract are thrown in - see below.

Why are notaries generally not forthcoming about tax planning?

They are appointed by central government and are effectively tax collectors. Their duties extend beyond conveyancing to maintaining registers for the French government. When it comes to taxes they are definitely not on your side. Remember also that many senior positions in the French Land Registry are held by French Tax inspectors who monitor sales and purchases and may query suspiciously low prices.

What tips do you have when selling?

The notary calculates any Capital Gains Tax and is under a duty to withhold the tax. Make sure you are dealing with a notary who is aware of the tax rules and exemptions for non-residents. Also notaries may charge you a fee (around £500) for discharging your mortgage and get confirmation in writing he will not charge you this if he handles the sale and purchase. Sellers are often not told about this charge and it is simply deducted from the net sale proceeds.

Owning taxes

What are the annual local taxes on property?

Local taxes are levied on a calendar year basis and are determined by the local authority. Notaries are under an obligation to collect them on sale and will deduct unpaid local tax from your net sale proceeds.

What is the annual wealth tax?

This is an annual tax payable on worldwide assets if you are French resident. If you are not French resident it is payable on your assets in France. You start paying the tax on net assets over Euro 720.000 at 0.55% and it goes up in bands to 1.8%.

Are there any deductions?

Yes you can deduct debts and some business assets are exempt.

Can you legally reduce it further or avoid it altogether?

Yes this can be done easily and cheaply and dealt with in England. However this planning needs to be put in place before you buy the property and before you submit your first tax return in France. Remember that the annual return will disclose all your assets to the French Revenue and planning at the outset is essential, especially if you intend to become resident in France.

Buying in the name of a UK company or trust

Can you buy the French property using a UK company?

Yes. You can use any UK entity, which under UK law has capacity to own land.

What advantages does a UK company have?

You have a structure you are familiar with. The shares can be transferred easily without involving a French notary. If you do not become French resident then the shares are outside the French Inheritance Tax net but within the UK Inheritance Tax net. This means that say gifts by will to a surviving spouse, which may be taxable in France, are not normally taxable in the UK. You can also put the shares into an English or offshore trust though this area requires specialist advice. This route is likely to be better than the use of a tax haven company owning the property direct for the reasons given below.

What are the disadvantages of a UK company?

The UK company will be taxable in the UK on any capital gain you make. You will have potential additional tax liabilities when you distribute the net sale proceeds from the company or liquidate the company. It is unlikely to be a suitable vehicle for most people buying a second home. Buyers are normally reluctant to buy shares in a company and normally insist on the property being transferred from the company to them.

Can an English trust or an offshore trust buy the property?

Yes however French law does not however recognise trusts. The trustees will be viewed for tax purposes as owning the property outright or as a partnership or possibly as a company. Because of French unfamiliarity with trusts and the consequent unpredictability of the way the tax authorities will view them it is generally not advisable to buy French property using a trust. If tax planning or structuring the transaction requires the use of trust money it is likely to be better to structure it as a loan from the trustees to the beneficiary.

Buying in the name of a tax haven company.

Can you buy the French property using say a newly formed Jersey or other tax haven company?

Yes.

Why is it not advisable to buy French property using a tax haven company?

Generally such companies are assessed annually to French tax on a deemed income equal to 3% of the value of the property. It does not matter whether the property is rented or not. You cannot offset any mortgage or other costs against this deemed income.

Are there any other useful offshore angles?

Yes, severa -l but you need specialist advice. This is not normally worth considering unless your assets exceed £1 million, as the costs of advising seeing up and maintaining an offshore structure are high. Remember that if anything goes wrong the property is situated in France and will be security for any French taxes claimed. In practice if you need to sell the property the notary will not release the sale proceeds to you until the tax authorities are satisfied all French tax has been paid. This is very different to the UK position in which the solicitor is not under a duty to obtain a clearance from the Inland Revenue.

Buying in the name of a French company

What type of companies are available?

There are a range of French entities you can use with different tax regimes. For straightforward purchases of second homes by a couple it is however best to buy in your own names. If you are buying a property with other people then a French company may be worth considering.

Renting the property

Does it make any difference whether you rent the property furnished or unfurnished?

Yes. If it is furnished you are taxed on running a commercial business.

How is a UK resident owner taxed on the income?

You pay French income tax on the profits after deductions for repairs and mortgage interest.

Are there any traps?

Yes. Non-residents can be deemed to be in receipt of rents equal to three times the rental value of the property (usually calculated as 5% of the property value). There are various exemptions.

What forms need to be filled in and which tax office do you deal with?

Form 2042N/2044 obtainable from any French tax office or at the French Inland Revenue web site www.impots.gouv.fr. It needs to be completed before 30th April in each tax year. Care needs to be taken when completing this form especially for the first time and professional help is advisable. English residents deal with Centre des Impots de Non Residents, 9 rue d'Uzes, 75094 Paris Cedex 02. Tel 01.44.76.18.00. If you become resident in France you deal with your local French tax office.

Renovating the property.

Can I get out of paying VAT if an English based architect invoices me?

Yes. The English architect does not have to charge VAT either in England or France. You should ensure his invoice specifically refers to work in connection with your French property. An architect based in France will have to charge VAT if registered for VAT. Similar planning may help avoid VAT on other services.

Other income.

I am retiring to France. How is my pension taxed?

If you pension is derived from employment in the UK Armed Forces or for the UK Government it is taxed in the UK and is exempt from French tax. All other UK pensions are taxed in France and not in England. France will tax your English "tax free lump sum" commonly taken on retirement. If you are planning to take your pension after you are resident in France you may want to reconsider and take your lump sum whilst you are still an English resident.

How am I taxed on rental income from a rented property in England?

The rental income is subject to UK tax. The tax is deducted at source though you can normally reach an agreement with the UK Revenue to receive the income gross and account in the usual way.

I plan to rent my English home for a number of years and then sell it. Will I have to pay UK Capital Gains tax?

No. Under the UK French double tax treaty the UK has the right to tax the sale proceeds but you will not be taxable in the UK if you are not UK resident. There may be a tax liability if you are not resident in the UK for at least 5 years.

Are there any tax angles on the lump sum from the sale of my English property or any other assets normally liable to UK CGT?

Yes. It is normally not a good idea to remit the money to France. If you are selling when you move if you time your move correctly you can be resident nowhere for a short while. This is because the UK tax year runs from 6th April to 5th April and the French tax year runs on a calendar basis. If you simply go on holiday (anywhere but not France) in the meantime you may be able to dispose of assets with large gains into a discretionary offshore trust free of Capital Gains Tax. This needs to be done after you leave the UK and before you take up residence in France. Timing is very important and professional advice essential. Provided the offshore structure is set up correctly when you become French resident you will not own the assets and so will not pay any tax on them.

Selling the French property.

If I never become French resident and sell the house what tax do I pay?

You are liable to French Capital Gains Tax. The notary calculates the CGT and may refuse to pay the sale proceeds to you until you have appointed a French Tax Agent to agree your tax liability with the French Inland Revenue. This is generally an unattractive option as most of the tax agents have very close connections with the French Revenue and may require you to deal with fairly exhaustive enquiries. You can, through the notaire, apply to the French Revenue for a dispensation before you complete the sale.

What happens if I become French resident?

Provided you are resident in France for one tax year gains on your main residence are exempt from tax.

Forced heirship.

What is the forced heirship problem in France?

Under French law you cannot disinherit your children. They are entitled to a share of your estate. This is widely misunderstood in England because we do not have marriage contracts as in France. In France most couples marry under a community of property contract. This means they are treated as owning three pools of property. Property belonging to each of them and community property. The forced heirship rules only apply to property owned by each of them. Most houses bought by French couples are owned as part of the community and pass to the surviving spouse as the community is liquidated on the death of the first. The forced heirship rules will bite on the death of the second spouse.

So how does the problem arise for English couples?

English law does not have the concept of community of property and everyone from England is in French eyes married under separation of assets i.e. each spouse owns their part and there is no community. This means the forced heirship rules bite on the first death. It also means that French Inheritance Tax is payable on the first because France taxes gifts passing between spouses. This is not normally the case in the UK.

What is the solution for English couples?

Make a marriage contract in France under which you hold French property including the house as part of the community of property. The notary who conveys the property for you can also deal with this. Try to have it included in the price as making one later costs around £750. On the death of the first the community will be dissolved and the deceased's spouses half share in the property will pass automatically to the survivor. You have to pay a registration fee of 1%. The notary draws up the marriage contract and various formalities are required. There are complications if there are children by earlier marriages.

Does the French marriage contract affect the position in England?

We don't know. This is a complex area on which there are no clear precedents. It is likely to result in a contentious probate test case in the future. The best way to avoid the problem is to have a marriage contract which states that it only applies to your French property.

What about single people who do not want children to inherit?

The simplest solution is not to die in France. Sell up and move back to England in good time. Alternatively purchase the property in the name of an English company and bequeath the shares not the property. The shares will be deemed assets situated in England and you will be liable to UK Inheritance Tax on them. No French Inheritance Tax will be payable. The shares will not be French property and so the French inheritance rules do not apply to them.

What is buying "en tontine"?

This is similar to English joint ownership and has a superficial attraction as the surviving spouse inherits the deceased's spouse's half share automatically. It is however generally tax inefficient because the deceased spouse is deemed to make a gift of the half share which is taxable if the half share is worth over Euro . Making a marriage contract under community of property is usually more sensible. Very few French couples buy en tontine. It is probably best to avoid this structure.

Social Services and charges

Will I have to pay French National Insurance?

If you are retired and over UK retirement age then you generally will be covered under the UK scheme and will not make payments. If you are under retirement age you may be required to contribute about 8% of your income from whatever source. French National Insurance contributions are higher than in the UK. Benefits are generally better.

What about running a small business such as a B & B?

French national insurance is very high. You can expect to pay 20% of turnover in NI contributions. This coupled with high French income tax rates can be unattractive. Fortunately simple planning using a UK company can legally avoid or substantially reduce your liability. If you employ staff your employer's NI can exceed 50%.

How can a UK company help?

Your customers contract with the UK company, which then enters into a contract with you to provide the services in France. The UK company makes a profit, which reduces the profit you make in France. The UK company can make up to £10,000 pa free of tax. You need specialist advice to set this up. You also need to consider how you draw money out of the company. More sophisticated planning may involve paying small amounts of National Insurance to the UK to preserve pension and other benefits both here and in France.

This article is written and provided by David Anderson, a Solicitor specialising in taxation. This is intended only as a general guide and should not be relied upon without professional advice on the facts of your particular case. He is a Chartered Tax Advisor and has extensive experience in setting up tax effective structures for investment into France.

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David Anderson can be contacted at Sykes Anderson Solicitors on +44-207-702-1914 or fax
+44-207-481-2840. Or by email at: solicitors@sykesanderson.com

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