Sale of French properties: Franco-British Capital Gains Tax considerations
With sources reporting at least 200,000 secondary residencies owned by British nationals in France, about 400,000 British citizens living permanently in France and a similar amount of French citizens living in the UK, it is not surprising that cross-border tax issues have increased considerably in the last decade.
One major concern of our UK based clients is the level of taxation on gains made on the sale of their French holiday home. The methods of taxation, both in France and in the UK, are often unknown or misinterpreted, which can lead to failure to declare or miscalculation of the taxable gain. Enquiries by the tax authorities on either side of the borders are also increasing.
Conversely, French based clients should be made aware of the forthcoming taxation of non-UK residents on gains from the sale of their UK property. Whilst it is outside the scope of this article, I would highlight the need to consider the Finance Bill 2015 which extends the scope of taxation of UK property disposals to non-UK residents and restricts the availability of principal private residence by imposing tax residence and/or occupancy conditions, applying as from 6 April 2015.
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Sale of a French property by a UK resident
France, as the country of situs of the property, will be given the primary right to tax the capital gain. It is also taxable in the UK as UK residents are taxable in the UK on their worldwide income and gains.
- Sellers are taxed in France at a scaling rate of capital gains tax of 19% for gains of €50,000 or less, increasing up to 25% for gains in excess of €250,000.
Non-residents have also been subject to French social contributions (prélèvements sociaux) at a cumulative rate of 15.5% since August 2012. However the application of these social contributions to EU nationals who are non-French resident is currently being challenged at EU level. Notably the French Upper Administrative Court has referred to the European Court of Justice for a ruling on the application of the social contributions to French income received by EU citizens who already contribute to the social security system in another EU member State. The ECJ’s Advocate General recently concluded there was a direct infringement of the EU principle of unicity of contribution to a social security system by EU nationals in one EU country only. The ECJ’s decision is expected in 2015. Although the ECJ is only to decide with regard to social contributions applicable to French source income, it is anticipated that the repeal of French legislation will be for both income received and capital gains made by non-residents who satisfy the requisite conditions.
UK residents who paid social charges on the sale of a French property in 2013 or 2014 may want to consider filing a claim with the French tax authorities to secure their entitlement to a refund should the legislation be repealed later this year. Timeframes for filing a repayment claim will need to be followed.
The taxable gain is determined under the same rules as for French residents:
- French law allows legal acquisition and disposal costs as well as building work expenses to be deducted either for their actual amount or as a fixed portion of the purchase price.
- A rebate is granted for each year of ownership after the 5th year, so that the gain will be totally exempt from French CGT after 22 years of ownership. However full exemption of social charges, where applicable, is only granted after 30 years of ownership.
- The French tax liability is paid directly from the sale proceeds by the Notaire who deals with the sale. Non-French residents who sold a French property for a price exceeding €150,000 were required to appoint a tax representative whose responsibility was to file the CGT return and pay the related tax liability. The additional French Finance Act for 2014 repeals this obligation from 1st January 2015.
- In the UK, the gain is reportable on the seller’s self-assessment tax return for the year of sale. If the gain exceeds the annual allowance (£11,000 for 2014/2015), the rates applicable at 18% and 28%, depending on the level of income of the taxpayer in the same year.
If double taxation arises, the double tax agreement between France and the UK allows the seller to claim a foreign tax credit in the UK via his self-assessment tax return to offset the French capital gains tax against his UK CGT liability.
If you have a client looking to sell their French property:
- Initial illustrative French and UK CGT computations will enable him to budget for his tax responsibilities;
- He should locate all documentation relating to works carried out at the property to ascertain deductible expenditure, and also the initial purchase deed and associated documents to calculate the deductible acquisition costs;
- He should be aware of the pending ECJ decision regarding the payment of social charges on gains;
- If a sale is likely to occur close to the end of a tax year, consideration should be given to the most appropriate tax year of disposal for the client, if indeed this can be dictated. The trigger date for French CGT is usually the date of completion, whereas the disposal date for UK CGT is the date when all conditions in the contract are fulfilled;
- He should consider obtaining a UK tax residence certificate from HMRC in case this is required to evidence that no fiscal representative is required.
- In light of the Finance Bill 2015, concerning the restriction of the availability of principal private residence relief, particular attention should be given where an election has been made.
If you have a client who has recently sold their French property at a gain:
- Might he be within the time limits to make a repayment claim for French social charges paid on the gain? If a fiscal representative was appointed s/he may have automatically made the claim on behalf of the client. This should be checked.
- Has the gain been correctly included in his self-assessment tax return submitted to HMRC, and any available double tax relief credit claimed?
It is worth pointing out that there is no French CGT charge on the gift of a French property, and there is a free CGT uplift on death, similar to UK CGT laws.
As with anything cross-border related, we cannot concentrate on the legislation of one country only, but we must raise the awareness of the client to the consequences in the other applicable jurisdiction. With the automatic exchange of information agreement between France and the UK now applying, it is increasingly important to anticipate all the tax consequences and obligations.
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