French Capital Gains Tax Increase For Home-Owners

All sales of French second homes completing after 1st January 2011 will be subject to capital gains tax at the new rate of 19% instead of the existing rate of 16%. This is part of the French government's attempt to raise extra revenue to resolve their national indebtedness.

There have been debates in the French Parliament relating to other reforms of the capital gains tax regime, but it does not so far appear that they are to be implemented. This means that the existing regime will be continued, under which the taxable capital gain is reduced by 10% for each complete year of ownership after five years, resulting in a sale being tax-free if a property is owned for fifteen years or more.

Deductible Capital Expenditure

Capital expenditure that can be set against the gain remains limited to expenses arising from building, rebuilding, enlargement or improvement. The improvement category is restrictively interpreted. It relates to expenditure intended to raise the comfort level of the property without changing the structure of the building, such as the installation of a lift, central heating or air condition and work improving insulation. It is unlikely that replacement of items such as an existing kitchen or bathroom will be covered. On the other hand, the installation of a new bathroom probably would be.

To be deductible, expenses have to be supported with both invoices from registered French tradesmen and evidence of payment of the same in the form of bank statements showing the payment concerned.

UK Capital Gains Tax Liability

UK residents will also have to account to the Inland Revenue for capital gains arising, and will be able to set off French tax paid. Since the French rate of 19% will exceed the UK base rate of 18%, no UK tax will be payable. However, where the higher UK rate of 28% becomes applicable, local advice needs to be taken about the ability to set off capital expenditure disallowed under French rules, as well as the French tax paid.

Tax Representative

To add insult to injury, non-resident sellers of second homes for a price in excess of €150,000 will also have to appoint a tax representative, at a cost of at least €1,000, even if they are making a loss.