The new French President proposes to tax French property held by ‘non-residents’
The new French President proposes to tax French property held by ‘non-residents’
With the election of François Hollande as France’s new President comes the proposal to substantially increase French taxes on income and gains on French property owned by ’non-residents’. Changes to the Wealth Tax regime have also been proposed, in particular in respect of any trusts holding French property and/or with French settlors or beneficiaries. Such trusts need to consider the impact of other changes in the Wealth Tax rules.
The “Social Charges” on French Property
On 4th July, the French government announced their intention to make non-residents pay the “social charge” of 15.5% in the same way that French residents currently do. The difference being that a French resident will be entitled to the state benefits funded by the “social charge” but a non-French resident would not. This disparity may result in the changes being challenged and not introduced.
These proposed changes will be applied retrospectively from 1 January 2012 for rental profits and from the end of July 2012 for capital gains.
Rental profits and capital gains on the sale of French properties by UK residents are charged at 20% and 19% respectively before the “social charge”. Including the “social charge” will increase these rates to 35.5% and 34.5% for UK residents.
This will have little impact for rental profits taxed in the UK at the higher rates, but basic rate (currently 20%) tax payers or those taxed on a Remittance Basis who do not remit their income to the UK will be directly affected.
In relation to any capital gains on the disposal of a property, the highest rate of tax in the UK is 28%, which is 6.5% lower than the proposed new French rate. This means that all UK tax payers will be affected adversely by the French tax charge, although there is a form of taper relief available for owners who have held their French property for more than five years and additionally exemption for property held by them for the long term.
Material Changes to the French Wealth Tax
Rate Charges
The Sarkozy government introduced changes to reduce the overall wealth tax bill for 2012 by lowering the rates and reducing the number of bands.
The new Hollande government will change everything back in 2013 to broadly the 2011 rates and bands. However, it is too late to change these for 2012 so, instead, it is proposed that a one off charge will be introduced later in 2012 to ensure that the overall amount paid for 2012 will be equal to what would have been paid, had the rates been changed in time.
The wealth tax affects everyone who has net assessable “wealth” in France valued at or above €1.3m.
For 2012, ignoring the one off charge, wealth between €1.3m and €3m resulted in a levy of 0.25% of the entire net wealth, with 0.5% being applied to the entire net wealth where it exceeded €3m. A “smoothing” mechanism applies to avoid a sudden jump when entering a new band.
For 2013 there will be six different rates between 0.55% and 1.8%, and the starting point will remain at €1.3m.
Assets Held in Trust
Previously French assets within a trust were excluded from the wealth tax calculations as outlined above. However, the changes now mean assets placed in a trust are deemed to be assets of the settlor for wealth tax purposes, irrespective of the terms of the trust. Where the settlor has died, the beneficiaries are deemed to be the settlors, and they will have to comply with these rules.
The trustees must include the value of any relevant trust assets in their Wealth Tax Declaration. For a trust with either a French resident settlor or beneficiaries, the declaration must include worldwide assets. For a trust with a settlor or beneficiaries who are not resident in France, or where either have been resident for less than five years, only French assets need be included in the Wealth Tax Declaration.
Failure by the settlor or beneficiaries to include the assets in their Wealth Tax Declaration will result in the trustees paying an additional special tax of 0.5% of the value of the trust. If the trustees do not pay, any French resident settlor or beneficiary may be required to pay, if applicable.
The French tax authorities have introduced a new disclosure regime to help build a register of trusts with French interests. Under this disclosure, settlors or beneficiaries resident in France or trustees who hold French assets, are to declare the market value of the relevant trust assets as at 1 January each year, with a 15 June annual filing date for the declaration.
Failure to make such a declaration could result in a fine, the higher of 5% of the total assets of the trust or €10,000.
For anyone who owns a French property or who has an interest in a trust with French assets or beneficiaries, we would recommend they should seek professional advice and we would be happy to put you in touch with one of our affiliate firms in France to give advice.
This document is prepared to keep readers abreast of current developments, but is not intended to be a comprehensive statement of law or current practice. No liability is accepted for the opinions it contains, or for any errors or omissions.
