The main lines of the reform of capital gains tax applicable from 1st Sept have been released.

In a statement issued last month, the French Budget Minister, Bernard Cazeneuve provided outline information on the new rules for capital gains tax on the sale of second homes, to be introduced this autumn.

The essential elements of the reform are:

• A reduction in the discount period for complete exemption from capital gains tax from 30 years to 22 years;
• Maintenance of the 30 year period over which the discount for complete exemption from the social charges (prélèvements sociaux) would apply;
• A supplementary and temporary additional discount of 25% for sales between 1st Sept 2013 and 31st August 2014;
• No change on the supplementary tax for large gains (2% to 6%).

The method for calculating the discount for capital gains tax as well as that of the social charges would be issued later this month.

Nevertheless, FNAIM, the French national association of estate agents, later issued a press release in which they revealed what they believed to be the approach that would be taken.

They stated that a discount of 6% would apply for each year of ownership of the property from the 6th year, with a final discount of 4% in the final year, giving complete exemption after 22 years.

In relation to the social charges they stated that the discount would be 1.6% for each year between 6 and 22 years, and 9% between the 23rd and 30th year.

In addition, the supplementary tax for those obtaining a capital gain greater than 50,000 will continue to apply.

It remains unclear just how the 25% discount will be applied - on the gross capital gain, or the capital gain after application of the discount for duration of ownership, and whether it will also apply on the supplementary tax.

In the end, therefore, the proposed discount is less generous and far more complicated than was initially envisaged. The discount will not kick in until 6 years of ownership, there will be two separate discount periods, as well as a supplementary tax for large gains. 

There will continue be a separate regime for the sale of building land, which from 1st January 2014 will lose any discount for duration of ownership.

Capital gains tax itself is charged at the rate of 19% (EU residents), together with 15.5% social charges, making a total of 34.5% (plus supplementary capital gains tax if applicable). Non-EU residents pay capital gains at the rate of 33.3%, plus 15.5% social charges, a total rate of 48.8%.

In addition to the need for precision on the proposed changes, there still remains a some uncertainty of whether legislation can be introduced before 1st September in order for it all to be brought into operation!

We will update again in September, with further information and confirmation of the changes.