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.

Impact of the Capital Gains Tax Increase on the Sale of a Business

Business owners and management teams that are contemplating a sale of their company are now evaluating the impact that the 'timing of sale' has on the net proceeds received, as a result of the upcoming 33% capital gains tax increase. Many business owners have seen a decline in revenue and profit over the last several years and are expecting an improvement in the future. Since most business valuations are derived, largely in part, by the earnings the company generates, the general consensus is that a higher value will be obtained by delaying the sale. Achieving the highest business valuation is often the sole concern with little consideration to the net after tax dollars. Many business owners are now re-evaluating this thought process given the significant capital gains tax increase that will take place on January 1, 2011.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law on May 28, 2003. Among other things, this 2003 tax law created lower dividend and capital gains rates for all investors. Under this Act, the maximum net capital gains tax for assets held for more than one year was lowered from 20% to 15% (and from 10% to 5% for taxpayers in the 10% or 15% tax bracket). The Tax Increase Prevention and Reconciliation Act of 2005, which extended the 15% capital gains tax rate, "sunsets" on January 1, 2011. The term sunset is a time phase-in provision which means that without further Congressional action, the previous law, including the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), will go back into effect. Therefore, the top 15% capital gains rate will revert to its former pre-May 6, 2003 level of 20%, effectively a 33% increase.

This tax increase should be one of many factors that are considered when evaluating the optimal time table for a business sale. For those owners or management teams that do not plan to sell for 5-10 years this event should not become an inducement to rush out and sell the company. For those owners that are considering a sale over the next few years, the impact that this tax increase has on the after tax dollars received in a sale could be very significant and therefore, a thorough evaluation should be performed by the owner to assess the actual effect between selling a business now or years in the future. By analyzing the net after tax proceeds from a business sale in years 2010 thru 2013, the business owner or management team will recognize that even with a 10-15% growth per year, and maintaining consistent earnings with a constant exit multiple, the incremental value attributed by the growth in income and revenue, in most cases, would be completely negated by the increase in capital gains taxes. Therefore, while the value of the business is anticipated to be higher in years 2011 and beyond, the net after tax proceeds, could be considerably less.

There are many considerations involved in the sale of a privately held business and this article is written with the intention of helping business owners understand the potential impact that the 2011 capital gains increase will have on the sale of their privately held business. Understanding the effect of the impending capital gains tax increase enables business owners to make informed decisions as it relates to maximizing the net after tax dollars through the intelligent structuring and timing of the business sale transaction. The tax implications will vary for every business based upon the type of assets being sold and the structure of the transaction and it is strongly recommended that a business tax advisor be involved in the process.

Predicted Capital Gain Tax Increase and Its Impact

For the past couple of years the financial sector has been going through a rough time them and their business owners. The long list of people that are affected by in terms of limited credit wonder if there is a good long term plan in mind ready to be put in place.

When it comes down to reasons for getting a merger and acquisition they are many. One of the main reasons for this is that it improves economic indicators, the heavy balance sheets of strategic buyers and also funds raised from private equity group are very important in getting the full confidence of both the public and private sectors. And also for some potential sellers it is wise to think about the risk of valuation which will occur in the coming year. The act which was signed in 2001 was the economic growth and tax relief reconciliation act; this was crated by president bush and was created to reduce capital gains.

The rules of this act were that the new rate for capital gains and qualified dividends would be 15% as the two lowest categories. The original date for this tax plan to expire was 2008, but it was then extended by the bush administration for another two years which will be the end of 2010. And when this low tax rate ends it will be back at the rate of 2003 which was 20%. The increase in the rate of capital gains are at 33.33% higher, this could lead to more people making sale before a certain prescribed time which would be better for them.

2011 Capital Gains Tax Increase and the Impact on Business Owners

The last couple of years have been difficult for business owners and financing markets, to say the least. Limited credit, economic uncertainty among businesses and consumers, and poor financial performance across industry sectors contributed to curtailed growth prospects, and have some wondering what their long-term strategy might entail. As we head into 2010, however, there are many reasons for optimism that merger and acquisition activity will increase, including improving economic indicators, cash heavy balance sheets of strategic buyers, better than expected fund raising by private equity groups and Key Take Aways increased confidence in the private and public sectors. For potential sellers, 2010 is also an important time to consider valuation risks now versus future years due to the scheduled increase in the capital gains in 2011.

Originally signed into law in 2001, the capital gains tax rate was reduced as part of President Bush's Economic Growth and Tax Relief Reconciliation Act. Under the reduced rate, long-term capital gains and qualified dividends were taxed at 15% for the lowest two income tax brackets. The lowered rate was set to expire in 2008; however, reduced rate was extended in 2006 under Bush's Tax Reconciliation Act and is scheduled to expire at the end of 2010, at which time the rate will revert to the 2003 rates, which were 20%.

Given the capital gains tax rate increase represents a 33.33% higher effective tax rate, there is significant motivation for owners and shareholders already considering a potential sale in the near-term to consider action in 2010. Beyond avoiding a higher tax rate on long-term capital gains, sellers also need to carefully plan the timing of a potential exit in 2010 in order to secure the most attractive buyer and preserve leverage in the negotiations of the purchase agreement.

While owners and shareholders may be hesitant to pursue an acquisition without greater economic certainty, there are multiple indicators suggesting that 2010 is likely the right time to at least consider a potential a sale, given favorable terms. The capital gains tax increase serves as motivating factor; it is by no means the only one.

The following are key points for understanding the impact of the capital gains tax rate increase on M&A activity in 2010:

Consider the overall economic picture.

There are signs at the corporate level that are encouraging to mid-size firms considering being acquired. Over the last three months through January 2010, deal flow is up 16.8% over the same period a year before. Of course, last year was the one of the worst years in our economic history. However, major deals are being completed, which can cause a "bandwagon effect." In addition to corporate confidence, many private equity groups with a strong track record continue to raise money. In 2009, the average fund size raised by private equity groups was $1.5 billion, the second highest on record. This indicates more private equity groups than expected will have cash in 2010 and will need to put it to work. With a return in confidence to the markets and increasing signs of an economic stabilization, 2010 is likely to see a number of buyers enter the market with cash on hand seeking good deals.

Understand your long-term growth realities.

While the economy is expected to undergo further recovery in 2010, many mid-size firms are simply not going to be able to grow at the same rates experienced in the 2003-2008 period. Given modest growth expectations, overall business growth in the next three to five years will not be significantly higher than its current state in 2010.

It is projected that the economy will grow at an average rate of less than 3.5% for the next 3-5 year, which will mimic the growth of most industries. (There are, of course, exceptions to every rule.) Given this outlook, a company should consider a realistic growth projection as part of their calculations for keeping their business or selling it now or five years from now. This is especially so considering what will most likely be a higher capital gains tax rate in 2011 and beyond.

Think critically about timing.

Early in 2010, the market will be more favorable to sellers, who will have a range of potential buyers to choose from. Moreover, the capital gains tax rate increase puts buyers not paying all cash at a disadvantage, since the increased tax rate will apply to deferred payments at the time the payment is made. Deferred payments are likely to continue into 2011 and beyond for non-cash buyers. Therefore, sellers are more likely to find buyers with cash in hand earlier in the year.

In addition to increased choice of buyers, owners are in a better negotiating position earlier in 2010. As potential buyers know that sellers have a range of options and varying deal structures to minimize tax obligations, they are more likely to agree to terms favorable to the seller. As 2010 progresses, the buyer will be able to use the impending tax increase as leverage in deal negotiations, aware the seller has significant motivation to close before 2011. In fact, if negotiations are still ongoing in 4Q10, buyers are likely to try and discount the purchase price by 1% to 5% or seek tougher terms in the purchase agreement, knowing the seller will try and avoid paying the higher tax rate.

While not appropriate for all owners, those considering a sale in the near-term future are likely to experience favorable conditions 2010 as closing before year end avoids paying higher capital gains taxes. Additionally, early movement will prove advantageous for sellers by yielding a greater range of potential buyers and a strong position in deal negotiations. Overall, 2010 is likely to experience a significant revival in M&A activity, attracting a number of interested buyers to the market.

Tax Increase Or Tax Relief: It Is Your Choice

Pondering today's current economy and the likelihood that capital gains and income tax rates will increase next year ignites fear and confusion for countless numbers of Americans. For many taxpayers, the future appears to be downright frightful, resulting in a new wave of terror that strikes their hearts. They may even take an impaired view and see only one result when they read the letters I...R... and S. Have you ever noticed that the words "The" and "IRS" when coupled together spells "THEIRS!"?

The reality, though, is that those who view the current circumstances from this perspective are only victimizing themselves. The trick in maintaining sanity during this time of economic and tax upheaval is to forget about what you cannot control and focus on those things you can. The fact is you can manage your taxes and most likely win out in the end.

Solving Tax Problems and Gaining Greater Benefit

To illustrate, concerns about capital gains and other taxes may be troublesome. You may have owned an apartment building for several years and now would like to sell, relax and enjoy the equity and income benefits your hard work has earned you. Your CPA, however, has reported that you would be obligated to pay substantial capital gains taxes if you sold your property. What do many property owners do when they get this news? Unfortunately, they do nothing, except remind themselves of what their accountant told them: "Nothing can be done but to pay the taxes." Right? WRONG!

Before you list your property for sale, it is important for you to learn what tax planning alternatives are available to meet your specific needs. If you search them out, you will discover that tax law does offer some pretty great solutions. You may, for example, be able to defer the taxes for up to 30 years or eliminate them entirely. If your mortgage to be paid off is greater than what your basis is for the property, you'll learn that the taxes for "debt relief" can be solved. And at close of escrow, you may find that it is possible to enjoy greater income than what you had by owning the property you sold. But you will never know unless you take charge of your circumstances and learn your options. You must become proactive and find out the right solutions for you. Here is what one real estate investor experienced:

Troubled about her real estate portfolio valued at $800,000, this 54-year old lady wanted to sell the properties, replace the income she received from the real estate and reduce her income taxes. She was stunned to learn, however, that, according to her CPA, she would be obligated to pay more than $200,000 in capital gains and other taxes if she sold her properties and little, if anything, could be done to lower her income taxes. Discouraged, she mentioned her concerns to a friend who suggested that she seek a second opinion diagnosis of her circumstances by a qualified tax planning advisor. She did this and was delighted to discover that her financial condition was far different that what her CPA had thought:

1. Rather than paying $200,000 in taxes when she sold her properties, she would pay no taxes at all.

2. Her income would significantly increase above what she was receiving by owning the properties.

3. Instead of paying excessive income taxes, she would receive an immediate refund of taxes that she unknowingly overpaid; and,

4. She discovered other tax-saving opportunities that she could take advantage of about which her CPA was unfamiliar.

How could her CPA be so wrong? As is true of many accountants, he was never trained in the discipline of tax planning. In fact, according to CPAs with whom I have spoken, candidates for the Certified Public Accountant designation are not required to take tax planning courses to earn this title--and most do not bother doing so. Consequently, although they can become very skilled in identifying tax problems, few of these professionals acquire the experience and know how to solve them. They can be viewed as being "financial historians" who take what a client has done after-the-fact, filter that information through the required tax codes and generate, hopefully, an accurate tax return. This is great accounting but it is not tax planning. You are always better served when you meld together the advice of a trained tax planning professional with that of your CPA or accountant.

If you want to find the most appropriate resolution to your tax concerns, it is essential that you first learn what your true tax problem is and then search out the most viable options available to eliminate, defer or reduce the taxes for the year of sale. After you identify potential solutions and understand how each can be tailored to your specific circumstances to meet your objectives, the last step before implementation is to validate them under tax law through independent tax and legal authority. Following this approach will prepare you to be better informed on how best to approach the sale of your property and maximize your profit and income at close of escrow. Once this is done, you can confidently move forward to sell and then enjoy the benefits of the plan you implemented.

Finding effective tax remedies can be more easily achieved by following the advice of an experienced tax planning specialist who will guide you through a simple step-by-step process that works. Your tax-planning advisor facilitates the tax solutions; tax attorneys and your CPA or accountant jointly validate the solution you choose and its structure; and your real estate professional guides the sale of the property. It is a synergistic team effort that is focused on benefiting you in the most effective ways possible.

Whatever the new tax laws might be, we all should prepare ourselves to take full advantage of them. How? By plotting out a common-sense approach to tax planning through which we can:

1. Gain the foresight needed to confidently pay less in personal income taxes; and,

2. Significantly reduce, defer or eliminate the capital gains, depreciation recapture and other potential taxes you would otherwise be obligated to pay when you sell your appreciated real estate or other assets.

Here is the Good News

Taxes can dramatically cut away at any chance for you to successfully meet your financial goals and objectives. It makes no difference how old you are, if you are working or now retired. If you earn enough money or want to sell appreciated assets such as real estate, you will probably be obligated to pay taxes. The good news is you have choices.

We have all learned from childhood that it is prudent to get a second opinion if we are diagnosed with a serious illness. Wouldn't you agree that paying more in taxes than you are legally required is a serious threat to your financial health? If you have appreciated real estate or other assets that you would like to sell but are concerned about paying taxes, doesn't it make sense for you to learn what options are available to you to solve them? If you do, you will find out that you, too, have choices that can help achieve your dreams in spite of a wavering economy and changing tax law.