Friday, July 10, 2009

French property, tax and inheritance

Buying a French property, either as a holiday home or permanent residence, brings you within the ambit of the French taxation system and France's complex laws regarding inheritance and succession.

Tax on sale

The main difference between holiday homes and a permanent residence is that the former is subject to added-value tax if you sell it within the first 15 years. The tax is assessed on the 'profit' from the sale, that is, the difference between what you paid for the property and the price at which you sell it, less certain costs. After five years ownership there is an automatic allowance of 10% per year, until after year 15 you can sell the property without paying any tax.

In the case of a permanent residence, if you are within the French tax system - such as working or retired - and the property is your 'main and principal home', then no tax is payable on sale. There is a general rule that you should have lived in the property for at least two years before selling, otherwise you may be construed as running a business - for example, buying a rundown property, doing it up and then re-selling. If you were to do this on a regular basis, it is almost certain the French fiscal authorities would raise questions.

Property taxes

All French-owned property is subject to taxation, the two principal ones being the 'taxe foncière' and 'taxe habitation'. They are similar to local authority taxes in Britain, and are applied on both principal and second homes. You can check the rates of tax at the time you buy a property, as too high taxes may be a deterrent. For older people, there is relief from part of the 'taxe foncière' after the age of 65 and from 'taxe habitation' if you are on a low income. After the age of 75, neither tax is payable. These apply again if you are within the French tax system, and will be applied automatically as appropriate by your local tax office.

Inheritance issues

French rules on inheritance date back to Napoleonic times and were designed to encourage people to keep property within the family. This entails a concept of 'preferred hereditaries' (children or parents) who automatically inherit regardless of whether you have made a will or not. There are complex rules for children of previous marriages, and when buying a French property as a couple you should seek the advice of the notaire about the best option to protect the spouse when one partner dies. This may involve changing (on paper!) your marriage regime to one recognised in French law, but this is fairly easily done, and will cost an additional 300 to 500 euros. You can do this after the purchase but is generally simpler at the time of buying. In all cases it offers valuable protection for the surviving spouse until his/her own death.

Unfortunately single people are currently heavily penalised under the inheritance laws and if they leave their French property to someone outside the family, he/she will be subject to 60% inheritance tax on the single person's death.

Getting round the rules

Not suprisingly, many people start examining ways to possibly reduce the burden of inheritance tax. One possible way is to buy the property using an SCI. This is a special form of property owning company, in which members of a family or a group of friends purchase a property jointly, owning shares in the company (which is the real owner of the property). If a shareholder withdraw or dies, a transfer of shares falls outside the inheritance rules as they are classed as 'moveable assets' (as opposed to 'immoveable assets' such as bricks-and-mortar).

It is also possible to purchase a French property through an (English) limited company, along the same principles as the French SCI. Shares in the company should normally be regarded as UK assets and subject to UK inheritance rules. But each case can be individually assessed by the relevant tax authorities, so formal professional advice should be obtained before choosing this option. Non-French property companies can be subject to annual taxation in France, and both the English company and the French SCI involve set-up and annual administration, together with the relevant costs.

The way ahead

Currently, the French authorities offer very little relief before inhertiance tax is levied on even low-value properties, and concerns have been expressed that these tax-free thresholds should be raised to reflect the true value of property today. Discussions are also taking place at the Europen level to change current national legislation on inheritance as applied to foreign owners of property - for example, an English couple owning a home in France. Some countries already operate special rules for foreign owners and the suggestion is that these should be extended throughout Europe by way of harmonisation.

Important: These notes are for general information only and are not a substitute for formal legal counsel, which should be sought in all cases particularly when considering atypical purchase options.