French News Archive


Toughening of Capital Gains Tax on Second Home Sales

Tuesday 08 January 2013

Within weeks of announcing a temporary reduction in capital gains tax on second home sales, the government has increased the tax on large gains.

Of late, there does seem to be a certain level of improvisation in French government policies on property taxation, particularly in relation to capital gains tax.

Two months ago we reported on the news that the government was proposing to give a boost to the housing market by a temporary reduction of 20% in the level of capital gains tax on the sale of second homes and rental properties.

Before the ink was even dry on this proposal, the Loi de Finances rectificative 2012 has introduced a supplementary tax (surtaxe) on large gains on the sale of second homes.

The principal home will continue to be entirely exempt from capital gains tax.

Neither will the supplementary tax apply to the sale of building land, although such sales are to become subject to a new, separate set of rules.

The government initially proposed two rates of supplementary taxation, starting at gains of €100,000, with the measure to be operative from 2014.

However, during the progress of the parlimentary debate they accepted an amendment to reduce the threshold to €50,000 and to move forward the operative date to 1st January 2013.

As a result, the government dropped a complementary proposal to increase the level of the local rates tax, the taxe d'habitation, on second homes.

This means that sale contracts signed in 2012, but not completed until 2013, will be affected by this measure, save for those contracts signed by 7th December 2012, which will escape the tax.

There will be five rates of taxation, depending on the size of the gain.

The following table shows a breakdown of the thresholds at which the supplementary tax will be triggered and the rates that will apply.

Supplementary Tax
Amount of Gain
Greater than €50K up to €100K
Greater than €100K up to €150K
Greater than €150K up to €200K
Greater than €200K up to €250K
Greater than €250K

The tax will run alongside the existing capital gains tax, comprising 19% CGT and 15.5% social charges.

So for large gains the rate of capital gains tax will be betwen 21% to 25%, depending on the size of the gain.

For a gain between €50,000 and €100,000 the total rate of tax (CGT and social charges) will be 36.5%. If the gain is greater than €250,000 the tax rate will be 40.5%. A dampening mechanism reduces the level of the charge for the first €10,000 of gain in each tax band, a rather whimsical concession the government agreed at the last minute during the parliamentary debate.

These rates will apply after deduction of the allowance for duration of ownership. This allowance provides a sliding scale of relief against capital gains tax from the sixth year of ownership, with total exemption after thirty years of ownership.

It remains unclear whether the supplementary tax will be applied on a fractional basis, so that each tranche of gain is taxed at a different rate, or whether the whole of the gain will be taxed at a single rate. The indications are that a single rate will apply for the whole of the gain, but we will need to await publication of the detailed regulations for confirmation as to whether this will be the case.

Over the Christmas period the French Constitutional Council declared illegal an Article in the Loi de Finances 2013, concerning the proposed taxation of building land, which was considered to impose a potentially 'excessive' charge on taxpayers.

Caught up in this decision was the proposed discount of 20% on capital gains tax for sales signed in 2012 and completed in 2013 as this measure was included in the same Article, which was struck out.

The government has indicated it will reintroduce the whole Article, including a modification of that part relating to the sale of building land.

Although a refrain of the surtaxe on second home sales was also included in the offending Article it would appear that this measure was unaffected by the decision. However, such is the level of instability and pace of change surrounding tax policies in France at the moment that final confirmation is awaited.

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