Your liability to the wealth tax will depend on a range of factors.
The assets that are included in the calculation will depend on whether you are resident in France.
- Resident - If you live in France all your worldwide real estate assets and investments will be taken into consideration for the purposes of the tax.
- Non-Resident - If you do not live in France only real estate assets in France are considered, subject to the terms of any tax treaty between your home country and France.
In determining your residency status the tax authority will apply the general rules as set out in the French tax code, subject to any international agreements that may be in place on a country by country basis.
There is an exemption from the tax for five years on foreign assets for those who become resident in France. This concession applies irrespective of nationality.
Thus, for the first five years of you becoming resident in France (to 31st December of the fifth year), you will only be liable for the wealth tax on those real estate assets located within France.
The assets of the whole household living together will be taken into consideration, including spouse/partner, and children (minors). Similarly, if you live together as a couple in free union the wealth of both will be assessed.
Children of adult age, even though they may part of your household for income tax purposes, are separately liable on the value of their own assets, if greater than €1.3m.
The tax does not apply to company or commercial assets, except in relation to personal property held through a French property company, a société civile immobilière (SCI).
10.2.3. Applicable Date
IFI is an annual tax, and the applicable date for valuation of assets and determination of the household is 1st January of each year.
Accordingly, whatever changes occur to either your assets or your household during the year of declaration is not relevant for the purposes of assessing liability to the tax, as it is based on the situation as at the beginning of the year.
As stated above, those who relocate to France but were not resident in France during the previous five years are only taxable on their property located in France for the first five years of their residence, subject to any tax treaty that may apply.
The scope and evaluation of assets is on the following basis.
i. Taxable Assets
The assets that are taxable under the IFI are all real estate and investments in real estate.
Specifically, they include:
- The main residence, as well as second homes, land, and rental property;
- Shares held in French property companies, called sociétés civiles immobilières (SCI);
- Shares held in property funds, such as SCPI (sociétés civiles de placement immobilier) and OPCI (organismes de placement collectif en immobilier), including those held via an assurance vie policy;
- Shares held in companies up to the value of their property, where you hold at least 10% of the equity.
ii. Exempted Property
Business property assets are totally exempt, but only provided:
- They are used in the exercise of a business activity;
- The activity is exercised by the owner or their partner;
- It is the main activity of the owner;
- The property/investment is necessary for the exercise of the business activity
Furnished lettings are only exempt if the landlord is a registered professional landlord. That is to say, if their rental income is greater than €23,000pa, which must also be greater than their other professional income.
In addition, woodland or woodland investments are exempt at 75% of their value, but you need to declare at their full market value.
In principle, assurance vie contracts are also exempt, although that part of the policy that is invested in property (via SCPI, OPCI, SICAV and FCP) in unités de compte may be included.
iii. Valuation of Assets
The value of the assets is as at 1st January of the tax year.
The principal residence benefits from a 30% discount on its open market value.
In relation to residential properties that are rented out the authorities would ordinarily accept valuation of such a property on the basis of capitalisation of the rent at the rate of 5%. Commercial properties can be capitalised at 8%. Where the tenant occupies the property as their principal residence, the tax authority accept a 30% reduction in the open-market value.
Property held under usufruct (usufruit) is valued at its full freehold open market value, unless a spouse has inherited the property on this basis, when the usufruct is then valued on a discounted basis, in accordance with a scale based on the life expectancy of the usufructuary. Thus, between 71 and 80 years of age the value of the usufruct is 30% of the full freehold value of the property.
To take an example. A surviving wife, aged 73, opts for the full usufruct of a rental property portfolio valued at €3 million. Assuming the couple's two children hold the bare ownership of the portfolio and do not have any other real estate in France, the taxable assets will be respectively €900,000 for the usufruct (30%) and €1,050,000 euros (70%/2) per child. In this situation, the breakdown of taxable assets means that no member of the family is subject to the wealth tax.
Debts are deductible, provided they existed on 1st January of the tax year, that they are the responsibility of the owner, and relate to the taxable assets.
Deductible debts include those for the purchase, improvement or maintenance of property, as well as debts in relation to the purchase of property investments.
A mortgage against the principal home is deductible from the value of the property, provided the debt does not exceed 70% of the value, due to the 30% abatement on the principal home. Thus, for a property with a value of €500K (€350K after 30% abatement) a debt is deductible up to €350K.
Non-deductible debts are those where the value of the property assets exceeds €5 million and the amount of the debt exceeds 60% of the value of the assets. Where this occurs the amount of the debt exceeding this threshold is only 50% deductible.
Similarly, debts between family members are not deductible, unless they are taken under normal market terms.
Debts in connection with fully exempt assets are not deductible.
Loans with the principle repayable at the end of the contract - known as in fine loans - are commonly used to reduce the tax base to the wealth tax. This scheme permits the taxpayer to ensure the deductibility of fixed-rate debt for the duration of the loan. Henceforth, it will only be possible to deduct a notional depreciated sum, not the totality of the capital still owed.
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