5.1. Reliefs and Allowances on French Capital Gains Tax
Capital gains tax in France is called impôt sur les plus values and is payable on the sale of land or buildings, on shares, and certain other property.
Capital gains tax on land and buildings is that aspect of the tax that will be of greatest interest to the international community and is called impôt sur les plus values immobilière.
There are a number of important reliefs and allowances against liability to the tax:
- 5.1.1. Principal Residence in France
- 5.1.2. Fifteen Year Rule
- 5.1.3. Building Works
- 5.1.4. Former Residents of France
- 5.1.5. Professional Landlords in France
- 5.1.6. Low Value
- 5.1.7. Elderly/Disabled Persons in France
- 5.1.8. Divorce/Separation in France
- 5.1.9. General Allowance
- 5.1.10. Sale of UK Home
5.1.1. Principal Residence in France
By far the most important exemption concerns the family home.
In order to qualify the property must have been occupied by you on an habitual basis up to the time of the sale.
You need not actually be occupying it at the time of sale, a concession that may be available for up to a year, but you may be required to give proper reasons why you have not been in occupation.
Moreover, the law does not state how long you need to have occupied the property for it to be considered as your principal home.
As a rule of thumb, in order to escape the attention of the tax authorities, it is generally accepted that eight months is a minimum period. There are, however, concessions on this rule, e.g. death of a spouse, job relocation, force majeur.
The tax authority will likewise normally expect you to have made an income tax declaration at the address and that you are able to you produce a taxe d’habitation (rates bill) in your name, in order for it be considered to have been your principal residence.
If you live in two properties in the year, then you will similarly need to supply a copy of the taxe d’habitation in order to demonstrate residence. It may well also be preferable to have previously notified the tax office which of the two properties you consider your principal residence.
5.1.2. Fifteen Year Rule
If the property has been owned by you for fifteen years then no capital gains tax is payable on sale, even though it is not, and may never have been, your principal home.
Between six and fifteen years an allowance of 10% per year of the gain is granted, so that, by the end of the fifteen years, complete exoneration arises.
Thus, if you sell a property after having owned it for a full 10 years, you will be granted an allowance of 50% against your liability to capital gains tax.
No exemption is available for a sale under six years.
Although the rule is a fairly simple one to operate, it can get complicated where part of the property is inherited and then later sold, as the rule will be applied to each part owner on their own circumstances.
Thus, a surviving spouse will granted exoneration from capital gains tax if they later decide to sell if it is their principal home, or they have owned it for at least 15 years, but their children may not have owned it on the same basis, in which case they will be liable. The liability will arise on the difference between the declared value on death of the first spouse, and the actual later sale value.
5.1.3. Building Works
The capital gain is determined by the difference between the sale price (less eligible expenses) and the purchase price (less eligible expenses).
The sale price is the price stated on the transfer, plus any estate agent fees, mandatory survey fees (lead, termites, asbestos etc), and any costs that may be associated with repossession proceedings.
The purchase price is the price on the transfer, plus notairial costs and taxes at the time of purchase, and costs associated with the construction, enlargement or improvement of the property.
This means, of course, that the costs of repair and maintenance cannot normally be taken into account. Just what is 'repair' and what is 'improvement' is not always a point easily determined.
As these matters are not precisely defined, in some measure it depends on just what the notaire is prepared to accept as eligible building costs. You may wish to arrange a meeting with a local notaire to discuss.
Only those building works carried out by a building professional are eligible, so that if you have undertaken the works yourself, then you cannot obtain tax relief on the costs.
The general evidence suggests that the French authorities are only prepared to accept invoices from France registered building professionals. This may be a moot legal point, as there are many commentators who consider that bon-fide invoices from companies registered elsewhere in the EU should also be permitted.
You will be required to produce invoices in support of any building costs. In the event that these are not available then, provided you have owned the property for at least five years, the notaire is able to apply an allowance of 15% on the acquisition price against improvement works on a property (but not land).
This concession applies even though you may not have actually carried out any major works.
If the property has been previously rented out on a tenancy, and construction or renovation costs have already been granted specific relief against liability to income tax on the rental income, then these costs will not be eligible.
Indeed, it would appear that even those who have adopted the micro tax status for lettings (in which a standard allowance for costs is granted), would be ineligible to claim building costs against tax liability.
Likewise, if you have been granted income tax relief for the installation of energy conservation or other works, you will not be able to set this off against tax liability.
Once again, however, practice around the country does vary. We have heard of cases where sellers have been able to obtain relief on building costs on the sale of the property, despite also having previously obtained income tax relief for the works against rental income. You need to make enquiries with the notaire.
5.1.4. Former Residents of France
No capital gains is payable on a property owned by a non-resident of France, provided you can demonstrate that you have been previously fiscally resident in France for a continuous period of at least two years.
It does not matter whether or not this residence qualification directly proceeded the period before the sale.
This is a provision in the law that has been created primarily for French residents who retire abroad, but it equally applies to international buyers who decide to return home.
The best form of evidence for demonstrating your prior residence is through tax returns submitted in France from the address of the property.
The non-resident must be a member of the EU, or living in a country that has signed an appropriate tax treaty with France.
This concession is limited to the sale of only one property in any five year period and on condition that it is your only property in France at the time of the sale.
Needless to say, this rule does not exonerate the vendor from potential liability to capital gains tax in their actual country of residence!
If you do not meet the two year rule, you are liable to capital gains tax on the usual terms.
5.1.5. Professional Landlords in France
A professional landlord is exempt from the payment of capital gains tax, provided they have held the property for letting at least five years, and they have been registered with the Chambre de Commerce as a business (and pay self-employed social security contributions).
5.1.6. Low Value
No capital gains tax is payable if the sale price of the property is less than €15,000, whatever the gain on the sale price. However, in these circumstances there is a liability to income tax on the proceeds.
Where the property is held in joint ownership then this threshold may be multiplied by the number of owners.
5.1.7. Elderly/Disabled Persons
Those resident and of retirement age, or registered disabled, are exempt from the tax, provided their annual income would also entitle them to exoneration from the payment of local property tax, the taxe fonciere, and they do not pay wealth tax (ISF).
The current annual threshold for 2008 is €9,437 per year for an adult, and €14,447 for a couple, as defined in your income tax notice, called the revenu fiscal de reference for 2006.
Thus, it is important to note that the reference period for determining your income, is two years prior to the sale. Accordingly, for a property sold in 2008, it will be your income earned in 2006 that is used to determine your entitlement to this concession.
5.1.8. Divorce/Separation
There is an exemption for those couples in the process of separation or divorce, one of whom may not be living in the family home (résidence principale) when it is sold.
Where, notably one of the parties remains in the property until it is sold, both benefit from exemption from capital gains tax.
This concession also operates in the case of those in a civil partnership, as well as those merely living together in 'free union', although in the latter case the couple would need to demonstrate more than they were simply co-habiting in the same property.
The exemption also applies in the case of a home under construction or renovation, where the couple were not living in it, but where they are able to provide satisfactory proof that it was being constructed or renovated for use as their principal home.
However, the tax authority will not allow an indefinite period for the property to be sold. As a general rule, a year from the divorce/separation is permitted, although this maximum period may be varied, depending on family circumstances, as well as the local market situation.
Crucially, if the period is to be extended, the tax authority will require evidence of marketing of the property, and that it is being offered at a reasonable price.
5.1.9. General Allowance
There is a general allowance of €1000 per year against capital gains. The general allowance is doubled for a property owned by two people.
5.1.10. Sale of UK Home
If you relocate from the UK and later sell a UK property, you will not be liable for either capital gains tax in France or the UK.
In the case of the UK, this concession applies as long as you do not sell in the tax year you left the UK, and that you do not return to live in the UK for five years.
In the case of France, the rule applies whilst the current tax treaty between the UK and France remains in force, as under a new draft treaty it is proposed that liability to capital gains tax in such cases will occur in France. No date has been set for ratification of this treaty.
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