Tax Options for Landlords of Furnished Lettings
Wednesday 01 December 2010
There are various tax options available to landlords of furnished lettings, says Virginie Deflassieux of PKF (Guernsey) Limited.
The tax regimes applicable to holiday lets and furnished lettings have been substantially modified in the last two years with a new categorisation for professional landlords, the introduction of the auto-entrepreneur regime, and the modification of qualifying turnover thresholds for the Micro BIC regime.
This article provides a review of how the main changes have impacted on landlords of furnished lettings (loueurs en meublé) and what options are now available.
Professional or Non-Professional Landlord?
It is possible to be either a ‘professional’ or a ‘non-professional’ landlord of furnished lettings in France.
The professional status offers the following attractions:
- Rental losses and pre-letting charges may be set against the rest of the household’s taxable income. Pre-letting expenditure may be spread over the first three years of activity.
- Capital gains tax exemption on any gain arising from the sale of the rented property, provided the turnover is below €90,000 (instead of €250,000 formerly). This reduced turnover limit does not affect gîtes ruraux, meublés de tourisme classés, or chambres d’hôtes.
- Wealth tax business asset exemption may be granted in respect of the rented properties.
Unfortunately, the eligibility criteria to obtain professional status have been noticeably tightened, so that there are now three qualifying conditions:
- Registration as loueurs en meublé professionnels with the registre du commerce et des sociétés, and
- An annual turnover in excess of €23,000 (total per household), and
- A turnover that exceeds the household’s other total net earnings (including pensions and annuities).
All other furnished letting activities are treated as non-professional, but if assessed under the régime réel (see below) it is still possible to set losses against the same type of income for up to ten years.
Micro-BIC, Régime Réel or Auto-Entrepreneur?
There are different types of tax regime available to landlords of furnished lettings.
i. Micro BIC regime
There now exists a two-tier Micro-BIC tax regime.
The Micro BIC has always been a popular tax regime for furnished letting activities as it is relatively straightforward and offered a 71% fixed deduction for expenditure, provided the annual turnover was below €81,500 (2011 limit).
With the exception of registered hotel-like activities (para-hôtellerie) such as gîtes ruraux, meublés de tourisme classées, or chambres d’hôtes, furnished lettings are now subject to a specific Micro BIC regime limit and a set deduction, which are not as attractive. The qualifying annual turnover limit is €32,600 (2011 limit) and the set allowance is reduced from 71% to 50%.
As a result, préfectures and mairies have been inundated with landlords’ requests to register their properties as résidences meublées de tourisme classés and to remain under the old Micro BIC scheme.
This caused complete havoc and lead to a complete reform of the meublé de tourismeclassé registration process. The property evaluations have been relegated to the private sector, another cost to the taxpayer.
Below is the summary of the steps:
- Visit www.classement.Atout-france.fr to register online or to download the application form “Demande de classement d’un logement meublé dans la catégorie Meublé de Tourisme”.
- Appoint an accredited surveyor to inspect the property. Their report issued within a fortnight is valid for three months and available on line.
- The report and the completed application form are submitted to the local préfecture (all listed on the website).
- The agreement is normally issued within one month. The owners must then display the star rating sign in their property. The establishment’s details are also published on the website.
ii. Régime Réel
Activities which generate an annual turnover above the Micro BIC limit are automatically assessed under the régime réel. Furnished lettings conducted by co-owners who are not married or have no PACS are excluded from the Micro-BIC and thus also assessed under the régime réel.
Nevertheless, those under the Micro regime can opt for the régime réel in writing before 1 February for the current tax year.
Otherwise the default regimes apply by reference to the turnover. For instance, a non-hotel like furnished letting activity with a turnover below €32,100 will be under the Micro-BIC with the 50% deduction.
Micro businesses must still record income and expenditure details in a livre-journal.
iii. Auto-Entrepreneur Regime
Subject to specific turnover limits, resident landlords eligible to the Micro regime may elect to pay their income tax and all social charges at source under the auto-entrepreneur tax regime.
These include the micro-fiscal (effectively the tax charge) and the micro-social. The latter covers social security and the extra social contributions known as CSG, CRDS and PS. The tax and social liabilities thus paid are final.
The 2010 micro-fiscal (tax) and micro-social rates applicable on furnished lettings are as follows:
- For trading activities and hotel-like rentals: 1% for tax and 12% for social charges.
- For services and general furnished lettings: 1.7% for tax and 21.3% for social charges.
The levies are handled by your local URSSAF office.
The application must be sent before 31 December for the following tax year, or within three months of the start of any new activity.
Taxpayers still need to report their rental income on their income tax return as it is included in the barème computations to set the overall rate of tax applicable to their other sources of income.
In summary, conditions to become an auto-entrepreneur and pay income tax at source are as follows:
- Specific turnover updated every year by reference to the barème.
- The taxpayer must register for the micro-social, i.e. payment at source of social charges.
In the absence of any income for 36 months, or 12 quarters consecutively, the auto-entrepreneur registration is forfeited.
Many non-professional resident landlords are not necessarily registered for mainstream French social security. The auto-entrepreneur option brings these earnings into the scope of the micro-social charges. It is not yet fully known how this affects taxpayers who already have existing health cover.
The auto-entrepreneur tax at source triggers the loss of the deductible portion of CSG (5.8%) on the rental income.
In the first year of application, auto-entrepreneurs effectively pay tax in respect of their previous year’s and current earnings. For instance, if the taxation at source applies to 2011 income, the tax payments will take place throughout 2011, as well as the liability due in respect of 2010 income.
In accordance with the France-UK double tax treaty French rental income is taxable in France even if received by a UK resident, paid in the UK, in sterling, by non French resident clients. The taxation at source option is not available to non-residents as they are not subject to French social charges. Their net taxable income is subject to the 20% minimum tax charge.
Registration of furnished lettings (professional or non-professional) is now more scrutinised and the recent changes have rendered this process necessary. It is done through the filing of form P0 with the local tax registry office and may trigger a liability to the Contribution Economique Territoriale which has replaced the taxe professionnelle (local business tax) in the case of regular seasonal lettings.
Unfortunately, the legislative changes which have stretched across several areas of French taxation have complicated the decision process when choosing a suitable option to conduct furnished lettings. Comparing the final tax bill, or even eligibility for each option, has become increasingly difficult.
For further information, or a review of your French tax affairs, please contact Virginie Deflassieux or Catherine Le Pelley at email@example.com or visit www.pkfguernsey.com. A complete French tax guide “Taxation in France, a Foreign Perspective” is available on this website.
Disclaimer:The information contained in this article is offered as a basis for further consideration only and is not to be acted upon without independent professional advice based on the actual circumstances of the taxpayer. Neither the author or PKF (Guernsey) Limited can accept any responsibility for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or refrained from in reliance to the contents of this article.