You come out of the notary’s office, clutching a set of keys feverishly in the one hand and an “attestation” in the other. The attestation is the formal letter from the notary acting in the transaction, stating that on such a date the property was sold by A to B. It is good proof of title and is usually produced to transfer utilities, insurance etc. The originals of the purchase deed, once stamped and registered, are kept at the notary’s office. A few months after completion, the notary sends out a “copie authentique” of the deed to the buyer, and any mortgagee also receives a special copy.
At this stage you are bursting with enthusiasm and plans for pools, extensions and the like. Surely, you need not yet think about tax! In fact, it is vital to think now about your capital gains tax (“CGT”) liability for the future.
CGT and keeping proper records
In France, we have the principal residence exoneration for CGT on a sale, but otherwise CGT issues will need to be addressed, and proper preparation, even at this early stage will mean the maximum deduction of costs for works, in the future. So, be sure to keep every relevant piece of paper: not just the estimates, but proper bills made out in the name of the owner of the property, not the chap keeping an eye on the works. Keep a copy of every cheque written regarding works and also note up and keep your bank statements showing payments out. It should go without saying that anything paid for “black” will not be deductible. Not only is such a payment unlawful, and leave you without any recourse in law for faulty work, but it will not be deductible. If any payments are made legitimately in cash, make sure the withdrawal is shown from your account, and a receipt obtained from the recipient. Don’t buy materials yourself. Only those billed by the fitter can be deducted, so it may seem cheaper to buy your marble in Italy, but it may not be deductible in the long run. The administration obviously fears that material might be bought and not used on the property against which the deduction is sought.
Armed with the above, when time comes to sell, you will have a neat and thorough file to hand to the Fiscal Representative. The appointment of a Fiscal Representative is required when a non-French resident is selling, even if there is no evident capital gain to pay. Such an accredited representative will stand in the vendor’s shoes for three years after the sale, to guarantee the tax position. Of course, a fee is charged for this, which can be up to one per cent of the sale price. One small consolation is that the fee itself is a deductible charge against CGT!
At the end of the day only the cost of major works can be deducted from the gain. However, note that in any event, on a sale after the fifth anniversary of purchase, the vendor can apply a “forfeit” of 15 per cent of the original purchase price, to be deducted from the sale price, in lieu of producing any of the above proof of works.
In addition, for every year of ownership after the fifth year, 10 per cent is deducted from the gain, so that after 15 years there is no tax to pay whatever the gain made.
The rate of CGT to be paid in France will be 16 per cent as a European Community resident, provided that this residence is proved by a letter from the tax authorities in the UK to confirm that status. Otherwise, the rate is 33.33 per cent.
Value added tax (“VAT”) can give rise to nasty surprises. The purchase of a new build, or the first sale of a new build within five years, puts the duties paid into the regime of “frais reduits”. This means that instead of the six or seven per cent duties, the buyer pays around three per cent. But within the price paid for the property, 19.6 per cent is to be handed over in tax by the vendor. In such a sale contract, it needs to be clear that the price agreed includes VAT, and it is not added on top. Check the drafting.
If you bought off plan, and are selling within five years of completion of the build, VAT does need to be addressed. On completion, you will pay over, via the notary, 19.6 per cent of the sale price, less any VAT you paid at the outset. Note that the VAT you pay on sale is deducted from the proceeds of sale, before the calculation of capital gains tax.
Wealth tax is an annual tax, due in respect of assets in France, if you are a non-resident. It is levied on world wide assets if you are a resident in France. Usually five per cent is added on to the value of the asset here to represent the chattels in the property. In brief, if the real estate you own here is in your name, with a net worth over 790 000 euros, wealth tax is due. The tax starts at 0.55 per cent and rises on a sliding scale to a maximum of 1.8 per cent on the slice above 5,460, 000 euros.
Those figures represent the NET value of an asset, so any loan used for your purchase for example is set off.
The tax is due mid-year to reflect the ownership of assets as at 1 January of any year. It is tax that should be declared spontaneously. At the outset, no declaration is sent out to be completed. But the Revenue in France are now sending out letters of request to owners who have bought for a value over the threshold.
Death and inheritance tax
It should be noted that certain classes of relatives cannot be over reached, by mere will. Children always have a reserved share of their parent’s estate, no matter what a will says. The size of the share will depend on how many children the deceased had.
Inheritance tax will be due in France, on real estate in France, owned by non-French residents. The amount of tax due depends on the degree of relationship between the deceased and the beneficiary, as well as the net value of the legacy. Each child has an allowance, from each parent, of 156,974 euros and then tax starts at five per cent, rising on a sliding scale to a maximum of 40 per cent. Siblings have an allowance of 15,697 euros, then tax starts at 35 per cent. Nephews, or nieces, each have an allowance of 7,849 euros. Third parties, with whom there is no blood tie, have an allowance of 1,500 euros and then tax is due at 60 per cent on the balance of the legacy.
This whole subject is worthy of its own article as there are some solutions to consider, but there is one interesting recent development that is worthy of immediate note.
Since 2007, there is no inheritance tax between husband and wife. This has just been extended to apply also to those linked under a UK civil partnership, which has finally been assimilated to a French PACS agreement. Note that this jurisprudence, dating only from the end of last year, means that any surviving civil partner who paid inheritance tax since 2007, should be entitled to a refund. Indeed, if an inter vivos gift was made between two civil partners, but taxed as a gift between strangers as opposed to spouses, application for reassessment should be made, and a refund applied for.
Anyone in this position should seek specialist advice on the subject. It could result in a substantial refund from the Revenue.
Simone Paissoni, Consultant, Nice, France.