11. French Capital Gains Tax
- Scope of the Tax
- Exemptions on Sale of Property
- Allowable Costs on Sale of Property
- Shares and Personal Possessions
- Taxation of Building Land
- Fiscal Representative for Non-Residents
11.2. Exemptions on Sale of Property
There are a number of important exemptions and allowances from French capital gains tax on the sale of land and buildings.
Each on of these exemptions and allowances is considered below.
- Main Residence in France
- Duration of Ownership
- Former Residents of France
- Tenant Sale of Property
- Low Value
- Elderly/Disabled Persons in France
- Divorce/Separation in France
11.2.1. Main Residence in France
By far the most important exemption from capital gains tax in France concerns the family home.
This exemption applies equally to outbuildings (barns, workshops, garages) on the property, sold simultaneously with the main residence.
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 to be accepted as your principal home. 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 produce a taxe d’habitation (rates bill) in your name.
In order to qualify as your principal home the property must also have been occupied by you on an habitual basis up to the time of the sale.
However, this does not mean you actually need to be occupying it at the time of sale. You may well have relocated to another property while your previous home is for sale.
This concession may be available for up to a year, or possibly longer, but you will need proper reasons, which are probably best discussed with your local tax office.
In order to benefit from this rule you are not permitted to let out the property during the sale period, or to leave family members in occupation.
If, coterminously with the sale of your principal residence, you sell separately building land forming part of it, with a view to the construction of a new dwelling, then this would be subject to capital gains tax.
If you live in two properties in the year then you will preferably need to have previously notified the tax office which of the two properties you consider your principal residence.
In practice, there are also concessions for former residents of France, which are considered below.
11.2.2. Duration of Ownership
If the property is a second home or a rental property you are liable to the tax, but you are granted an allowance based on the duration of your ownership of the property, as well as allowances for eligible costs, considered in later pages.
The rules governing this concession for duration of ownership have been see-sawing wildly in the last few years.
The latest changes are applicable from 1st September 2014, with rules are rather more complicated than was the case in the past. In particular, the allowance for duration of ownership is not the same for capital gains tax and the social charges, as was previously the case.
Since August 2012, non-residents have been liable for the social charges, where previously they were merely liable for the main capital gains tax.
This means that the basic gross tax rate for residents of France and non-residents alike is 36.2%.
There is also the potential supplementary rate referred to in the previous Section 1 for gains in excess of €50K.
(i). Capital Gains Tax
As we stated in the previous page, the basic rate of capital gains tax is 19%.
Tapered relief against the tax is granted over 22 years of ownership, commencing from the 6th year of ownership, as follows:
- No allowance for the first 5 years of ownership.
- Between 6 and 21 years of ownership: 6% allowance per year.
- For the final 22nd year of ownership: 4% allowance.
This means that a property owned for 10 years would be granted a 30% discount on the tax, and one held for 15 years would be granted a 60% discount.
(ii). Social Charges (Prélèvements Sociaux)
Since 2018 the rate of social charges is 17.2%, applied in addition to the main tax itself.
In the same manner as capital gains tax, tapered relief is granted, but over a longer period of 30 years, commencing from the 6th year of ownership, as follows:
- No allowance for the first 5 years of ownership.
- Between 6 and 21 years of ownership: 1.65% per year.
- For the 22nd year of ownership: 1.60% in this single year.
- Between the 23rd year to 30th year of ownership: 9% per year.
The effect is that on a property owned for 10 year a 8.25% discount on the social charges is granted, and one held for 15 years would be granted a 16.5% discount.
The following table shows the cumulative percentage discount for capital gains tax and social charges for each year of ownership.
Table: Capital Gains Tax Allowances for Duration of Ownership
|Ownership Period||Capital Gains Tax Allowance||Social Charges Allowance|
Complications on the application of this concession can arise where part of the property is inherited and then later sold.
Thus, a surviving spouse will be 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 22/30 years.
However, if her children also inherited part of the property on death of her spouse, they will not have owned it on the same basis, in which case they will be liable for capital gains tax, provided it is not also their main home. Their liability will arise on the difference between the declared value at the time of the death of the first spouse, and the actual later sale value.
Faced with a potentially large tax bill, not unnaturally, most inheritors do all they can to reduce the level of their inheritance tax liability.
So when it comes to getting a valuation of the real estate for inheritance tax purposes inheritors look around for a sympathetic notaire or estate agent to give them the lowest valuation.
The problem that this raises is that if the property is later sold, the valuation that will be used for the purposes of calculating liability to French capital gains tax will be that given on the inheritance tax declaration.
Although a reduction in capital gains tax is available based on duration of ownership, the clock is rewound on transfer of the property to the inheritors.
This can then mean that the inheritors later end up paying far more in capital gains tax than they would have paid in inheritance tax.
In a significant court case in Paris the inheritors later sold the property of their deceased father for three times the figure that had been assessed for inheritance tax purposes.
Faced then with a large capital gains tax bill they sought a retrospective alteration to the initial valuation, going even so far as to submit a revised inheritance declaration, enclosing a cheque for the new higher amount of inheritance taxes payable!
Now, although in principal it is possible to obtain a revision of the inheritance tax declaration (declaration rectificative) the French tax authority resists such applications where it is merely being done for the purposes of reducing the tax bill.
Numerous court decisions in the past have confirmed their right to do so, particularly where it arises subsequent to a sale.
In the case above this principle was again reaffirmed.
11.2.3. Former Residents of France
Under certain circumstances former non-residents of France do not have any liability for capital gains tax (including social charges) on the sale of their former home.
This concession has been available for many years, but was changed substantially in 2014.
Under these rules there is relief against capital gains tax on a property owned by a non-resident of France provided:
- You are an EU national, or national from an EEA state, such as Iceland or Norway (although the detailed regulations suggest that nationals from outside of the EEA would also seem to be entitled, provided an appropriate tax treaty exists with France).
- You can demonstrate that you have previously been fiscally resident in France for a continuous period of at least two tax years prior to the sale, eg tax returns.
- That the sale takes place within 5 years of your departure from France, or that:
- If the sale takes place later than 5 years from your departure from France, that the property had been available for your use since 1st January in the year preceding the sale. For example, if you sell your property in January 2018, the property must not have been let since January 2017.
By way of restricting the scope of this concession, the exemption from capital gains tax is to a maximum of €150,000.
The threshold applies to each owner of the property.
Accordingly, a non-resident couple who sold a former principal home in France would be entitled to a total exemption from cgt provided their capital gain did not exceed €300,000.
The maximum threshold is also net of allowances. That is to say it arises after deduction of allowances for duration of ownership and eligible costs.
The concession can only be used once, for one property.
If you do not meet these requirements you are liable to capital gains tax on the usual terms.
The exemption does not apply if you own the property through a property company, such as a Société Civile Immobilière (SCI). There must be direct ownership of the property.
11.2.4. Tenant First Sale of Property
Those who are tenants of their main home, but own a property located in France, are granted exemption from the capital gains tax on the sale of the property.
The rule does not apply to non-residents, and it is subject to other strict conditions, notably that:
- The sale cannot be earlier than 5 years after purchase of the property;
- The seller must not have been owner of their main home, either directly or indirectly, during the 4 years that preceded the sale;
- They must purchase their main home within 2 years of the sale;
- The sale proceeds must be used for the acquisition of their main home (that not used would be taxed);
- It can only be used once, so cannot apply to other properties.
You would need to discuss your circumstances in detail with your notaire/solicitor.
11.2.5. 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, although the usual income tax allowances would apply.
Where the property is held in joint ownership then this threshold may be multiplied by the number of owners. So for two owners, the threshold is €30,000.
11.2.6. Elderly/Disabled Persons in France
Those resident and of retirement age, or registered disabled, are exempt from the tax, provided their annual income grants them exemption from payment of the taxe d'habitation, and they were not liable for wealth tax (ISF) in the year preceding the sale.
The reference period for determining your income is two years prior to the sale.
Accordingly, for a property sold in 2017, it will be your income in 2015 that is used to determine your entitlement to this concession.
The maximum income threshold is €10,708 (2017) for an single adult, increased to €16,426 for a couple, as defined in your income tax notice (the revenu fiscal de référence) for 2015.
An elderly person admitted to a 'medicalised' retirement home is also exempt from capital gains tax on the sale of their home for two years from being accepted into the home. The concession is also subject to the same income and wealth tax criteria above.
The same exemption applies to a disabled person admitted to a specialised establishment.
These exemptions are available for all citizens from the EEA, as well as countries which have agreed a tax treaty with France.
11.2.7. Divorce/Separation in France
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.
The position taken historically by the French tax authority has been that they will not allow an indefinite period for the property to be sold.
As a general rule, they have stated that one year from the official date of the divorce/separation is permitted.
This maximum period may be varied, depending on the circumstances of the case, as well as the local market situation.
In particular, where one of the parties has been ordered by the court to stay away from the former family home, then the courts have determined that both parties retain their right to exemption from capital gains tax, provided at least one of them remains in the property, even though the property was not sold for five years after the former spouse was ordered out of the property.
In recent years, the tax authority have been less rigid on the one year rule, and seem to be more willing to examine each case on its merits, if only because of the complications surrounding the divorce settlements and the delays that may be incurred in putting the property on the market, if at all.
If matters are more straightforward in the divorce settlement then in examining the period of grace they will allow, the tax authority will require evidence of marketing of the property, and that it is being offered at a reasonable price.
However, in certain circumstances, when there is a transfer of a property between a couple following a decision of the court it can bring about a liability for capital gains tax.
The legal position on this matter, as stated in a parliamentary response, is as follows:
L'attribution d'un bien propre de l'ex-époux débiteur en paiement d'une prestation compensatoire en capital a pour effet de transférer la propriété du bien à l'ex-époux attributaire et de libérer l'ex-époux débiteur de sa dette.
Lorsqu'elle est versée en exécution d'une décision de justice prononcée à compter du 1er janvier 2005, elle doit donc être regardée, conformément aux dispositions de la loi n° 2004-439 du 26 mai 2004 relative au droit de divorce et à l'article 281 du code civil, comme une cession à titre onéreux, laquelle constitue le fait générateur de la plus-value immobilière.
Il n'en résulte aucune différence de traitement de l'ex-époux débiteur au regard de l'imposition des plus-values selon qu'il cède un bien propre lui appartenant et verse le produit de cette cession à son ex-conjoint au titre de la prestation compensatoire ou qu'il abandonne un tel bien à celui-ci en paiement de cette même prestation.
Il s'ensuit que la plus-value immobilière réalisée lors de la cession ultérieure du bien reçu par l'attributaire est déterminée en retenant la valeur vénale du bien au jour de l'attribution.
Le point de départ à retenir pour le calcul de l'abattement pour durée de détention est la date de l'attribution de ce bien au cédant.
Accordingly, you need to take legal advice on your position to establish whether this might apply in your case.
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