British owners of holiday homes in the Dordogne tend to think that French tax is irrelevant to them. It can come as a surprise when they're told on a sale that French capital gains tax will be payable. It comes as a further surprise when they learn the conditions for deductible capital expenditure. But the real sting in the tail is paying someone else to validate the figures they produce.
The basic principle
Capital gains tax is levied on the difference between the purchase and sale prices, less allowable capital expenditure. The purchase price is increased by the agency commission and notarial fees in order to give the true cost of purchase. The sale price is reduced by expenses incurred in connection with the sale - principally the survey costs associated with the obligatory "seller's pack".
The difference between these two figures will produce the gross capital gain.
Deductible expenditure
A vendor will be able to deduct from the gross capital gain certain capital expenditure - subject to conditions.
First, the expenditure must relate to "construction, reconstruction, enlargement or improvement". Construction, reconstruction and enlargement are easily understood: they will cover the extension or rebuilding of a house or building. "Construction" will extend to the installation of a swimming-pool.
The deceptive term is "improvement" - the French word used is "amelioration". You would have thought this broad enough to cover replacement kitchens and bathrooms. However, "improvement" is defined as installing equipment or raising the level of comfort without changing the structure of the property. Installing an elevator, central heating or air-conditioning are recognised as improvements, as would be the installation of a new bathroom. The refurbishment of an existing kitchen in that Dordogne home of yours may however not qualify.
Secondly, the work concerned must have been carried out by a French-registered tradesman. You cannot deduct materials you have purchased yourself - even if they are for use by the tradesman.
Thirdly, you must be able to produce supporting evidence of the expenditure in the form of invoices from the workmen concerned, and bank statements showing the payment.
If you are unable to meet these conditions, you can use instead a lump-sum allowance for expenses of 15% of the original purchase price, net of agency commission and notarial fees.
Deducting allowable capital expenditure from the gross capital gain brings you to a net figure.
Period of ownership
There is then a further allowance depending on the period of ownership. For every complete year of ownership after five years the gain is reduced by ten per cent. This means that if you own the property for fifteen years or more no capital gains tax will be payable in France.
Lump sum allowance
Once you have calculated the net capital gain you are allowed to deduct from it a fixed sum of 1,000 euros per individual owner - i.e. if the vendors are a married couple they will be able to deduct 2,000 euros.
Sting in the tail
Some of our British clients, selling their Dordogne homes, find the conditions for deductible expenses not only baffling but difficult to comply with - particularly where they have imported foreign labour or undertaken work themselves. Or they may simply not have retained the records needed by way of proof.
But the real sting in the tail comes with the requirement to appoint a French-resident tax representative in the case of all sales above a threshold of €150,000 - even if you are making a capital loss.
The tax representative assumes personal liability to the French tax authorities for the correctness of the return. And it goes without saying that he will charge a fee. In a recent straightforward case that we have had, a vendor selling at a considerable capital loss has had to pay the tax representative close to €1,000. If non-residents resent the system in the first place, the cost of a tax representative adds salt to the wound.
