2.French Mortgage or Remortgage ?
- 2.1. Currency Risk
2.2. Mortgage Tax Relief
2.3. Level of Interest Rates
2.2. Tax Relief on French Mortgages
Even if you are able to buy your French idyll on a cash basis, you should consider whether it might be in your interest to take out a mortgage on the property.
The cost of capital in France is lower than in the UK, and it may be in your interests, for reasons of taxation, to retain a loan against the property.
In the first place, mortgage tax relief is available on the purchase or construction of a main home, for the first 5 years of the loan.
The relief is granted at the rate of 40% of interest incurred in the first year, followed by 20% of interest paid for the remaining four years.
The amount of relief is capped at €1500* per person in the first year, and €750* for the remaining four years.
Thus, a couple with no children are entitled to maximum tax relief of €3000 in year 1, with a cap of €7500 tax relief over five years.
If you do not pay income tax in France (as is the case with around 50% of the population) then you would be granted a tax credit, in an equivalent sum to that you would otherwise have received in tax relief. In other words, the taxman would send you a cheque!
Strictly speaking, at the time of purchase the property must comply with the basic standards of habitation, so you may well not be able to benefit if you are buying a ruin for complete renovation.
You do not need to use a French lender to obtain access to the tax break, as the use of a lender based anywhere within the EU is equally valid. Conversely, you will need to be resident in France, or buying with a view to becoming resident.
*These amounts are doubled where at least one of the mortgagees in the household is registered disabled.
Secondly, loan interest on a property is (French) tax deductible against rental income.
Accordingly, if you purchased a property in France with a view to renting it out, you are able to charge mortgage interest costs against rental income.
If you are from the UK, this advantage only applies if you are resident in France, as the UK authorities do not allow mortgage interest against liability to UK income tax on rental income.
Finally, debt on a property is deductible against liability to inheritance tax.
Whether you are resident or non-resident, if you are likely to face inheritance tax liability, then a mortgage could be used to reduce your tax exposure.
However, French lenders require that you take out life insurance to cover the repayment of the mortgage in the event of your death, so this will only be a viable option for those able to find an international lender who does not impose this condition.
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Finance & Taxation