Letting a French property
What your client needs to know
An increasing number of French property owners choose to let their property, to at least cover the annual running costs.
There are both legal and tax issues that your client ought to be informed of before starting to rent out his property.
Many people are not aware that even if the rent is taxable in the UK, country of their residence, it is also taxable in France, country of the location of the property. If there is a tax liability in both countries, tax relief can be claimed via their UK self-assessment tax return, but the rent still remains fully taxable in France.
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This article summarises the main French tax rules and reporting obligations all French property landlords ought to know.
French law makes an important distinction between furnished lettings and unfurnished lettings.
Furnished holiday lettings are very popular amongst British nationals as it allows letting during part of the year without depriving the owner from personal use of the property.
This type of letting is regarded, for French tax purposes, as a business activity.
The reporting obligations and taxation vary depending on the amount of rental income generated each year.
If the annual gross rental income is below €32,900 (current threshold), the reporting obligations are fairly straightforward as they are limited to the declaration of the gross annual income on the landlord’s French income tax return. There is an automatic tax deduction at a flat rate of 50%, deemed to represent the allowable expenses incurred by the landlord, so that your client is effectively taxed on 50% of his letting income only. This is called the Micro-BIC rule.
The minimum rate of income tax applicable for a non-French resident taxpayer is 20%, hence a general income tax liability of 10% of the gross rental income.
If the property is accredited in France as a furnished holiday let (Meublé de Tourisme) the flat rate deduction is increased to 71%, so your client will be taxed on 29% of his gross rental income only.
If your client has expenses exceeding 50% of his gross annual rent, he may want to opt out of the Micro-BIC regime and deduct instead the costs actually incurred. This is referred as the régime réel simplifié d’imposition. These rules will also apply automatically if your client’s annual turnover exceeds the €32,900. In addition to his own personal French tax return, your client must file a separate rental business tax return including a balance sheet and profit and loss account, albeit in a simplified format. All deductible expenses are to be justified. If the expenses exceed the rent, the loss can be carried forward against future taxable income. A French accountant may have to be instructed to produce the required returns and financial documents.
Many landlords are not aware that a furnished letting, being regarded as a business activity, may also be subject to the business tax called Contribution Economique Territoriale or CET. This tax is based mainly on the rental value of the property and levied on an annual basis. It is separate to other local taxes applying (Taxes foncières – a land tax and Taxe d’habitation – property tax payable by the occupant). There are however some important exemptions which may be available for your client, notably:
- Those who let their residence on an ad-hoc basis or very occasionally only. This exemption covers those who retain the use of their property throughout the year, albeit not being their main residence, but, for a few weeks per year or exceptionally only, let it furnished. If lettings become periodical or regular, the CET What is regarded as occasional letting can be very subjective and it seems that the French authorities are now keeping a closer eye on the frequency of the rental activity in France.
- Those who let their property as an accredited tourist furnished holiday let (meublé de Tourisme). This exemption supposes however that the property is let periodically and has been accredited by the local tourism authority, which means that it complies with various criteria of comfort, equipment supplied and availability throughout the year. These properties are also likely to be subject to the taxe de séjour, calculated on the number of nights of occupation in the calendar year and at a rate which varies with the level of classification of the property. In practice, only a few local authorities do not apply this exemption.
Your client may also be required to declare his furnished letting activity to the local authority (Mairie), albeit on an ad hoc basis. This type of letting is not allowed in every village or town. Paris and Nice have recently initiated a restriction of the amount of furnished holiday lettings or any other forms of short-term lettings. All landlords are now required to declare their activity and obtain prior agreement from the Mairie to carry on their letting business. The sanctions for failing to report or obtain appropriate accreditation are dissuasive as offenders risk a fine of up to €25,000 plus late payment penalties. The main purpose behind this new legislation is to free up some properties on the long-term rental market to remedy the current shortage of main residence accommodation in these cities. Some other French cities may follow if it proves a successful exercise. It is unlikely that it will extend to rural areas of France.
As an alternative, your client may want to consider instead a long-term letting agreement that isn’t caught or some other accredited activities such as furnished lettings to students (9-10 month contracts). The downside is the lack of availability of the property for the landlord for all or a significant part of the year.
This will be more convenient for those who have a buy-to-let investment.
Traditionally the rental agreement is signed for a period of three years renewable automatically. The property is the tenant’s home so the landlord doesn’t have to pay the local Taxe d’Habitation, although Taxes Foncières must still be paid by the owner.
The taxation rules and reporting obligations vary again depending on the gross rental income made in the tax year.
For rent not exceeding €15,000 per annum, the landlord is only required to report his gross rental income for the year. There is no need to justify expenses as the allowable costs are deemed to represent 30% of the gross annual rent, so the landlord is taxed on 70% of his gross annual rent, at a minimum income tax rate of 20%. This is called the Micro-Foncier regime.
If the annual income exceeds €15,000 or if allowable expenses exceed 30% of the annual rent, he is taxed under the actual costs base rules referred as régime réel d’imposition, whereby he can deduct all allowable expenses incurred and evidenced.
Unfurnished lettings are also subject to the French social contributions, called prélèvements sociaux at a cumulative rate of 15.5%.
A year ago, while writing a previous article for LawSkills [I will link to this] on the application of French capital gains tax, I was full of hope that the application of these social surcharges to UK residents on their French rental income and capital gains would be short lived. It seems, however, that the goal posts have been moved.
The European Court of Justice’s ruling of February 2015 was very encouraging as it confirmed that French social surcharges levied on French income, irrespective of the EU country where the taxpayers are affiliated to a social security system, was against the EU legislation, and more particularly the EU principle of affiliation of each EU national to one social security system only. In strict line with the ECJ’s ruling, the French Administrative High Court ruled, in July 2015, that EU nationals, who are already affiliated to a social security system of another EU State, could not also be subject to the French social surcharges and were eligible for a refund. If your clients paid prélèvements sociaux on their French rental income for the tax years 2013 and 2014, it is not too late for them to claim a refund of these taxes. They will have to justify that they are affiliated to the UK social security system and pay National Insurance Contributions in the UK.
That was the good news. Unfortunately, the French Government refused to give up and diverted the proceeds from these taxes towards non-contributory welfare funds that are not regarded as part of the social security system under EU legislation. This redirection applies from 1st January 2015 so that all rental income received in 2015 remains subject to the additional 15.5% social contributions, with no possibility to claim a refund. Whether this budgetary trick will be sufficient to avoid further ECJ scrutiny remains to be seen.
If you have clients who let or intend to let a French property:
- Ensure that they are aware of their tax obligations in France and correctly report their French rental income on an annual French income tax return. With the automatic exchange of information agreement between France and the UK now fully applicable, it is increasingly important to ensure accurate tax reporting. Payment of French income tax may lead to a claim for a foreign tax credit in the UK, possibly retrospectively;
- Enquire about the type of letting activity and, if furnished lettings, whether the local authority has been informed and all required agreements obtained, especially in big agglomerations where a shortage of accommodation exists and some additional restrictions may apply;
- Ensure that your clients have claimed the refund of any French social contributions paid in previous tax years. They may not be time-barred yet to obtain a refund, although, following the changes included in the most recent Finance Act in France, they will still have to pay these surcharges for 2015 and future years.
For those who are at the initial stage of contemplating letting their French property they should get all necessary legal and tax advice and make all required disclosures in advance of the start of the letting.
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