Capital matters

Matthew Cameron throws the spotlight on the thorny issue of capital gains tax in France…

While there has been some evidence recently of renewed vigour in the French property market, we have seen a good number of clients selling their French homes over the past year or so. Some of these sales actually involve trading up’ – selling one French house to buy a larger one – perhaps with a view to retirement when they hope to spend more time there, or perhaps because they want to make a permanent move.That being said, the increased activity in sales does not in any way suggest an end to our well-established love of owning a home in France.It is always important to bear in mind the tax consequences of a sale in France, especially where the property to be sold is not your primary, or main, residence. We are concerned here, of course, with capital gains tax.The general background position with this tax is that it applies to the gain you make on a sale. The gain is calculated by taking the selling price and deducting the acquisition price plus costs related to the acquisition, as well as any justifiable deductions such as certain renovation works (provided that you have retained the receipted TVA invoices) to give you a final figure. Not all works are acceptable, though, so each invoice would need to be considered in turn; in general, work needs to be renovation or reconstruction, as opposed to redecoration.There is a tapering allowance that can be applied to reduce the gain: after the first 5 full years of ownership, a 10 per cent reduction in the gain is applied for each further full year. It follows from this that there is no capital gains tax in France once you have owned the house for 16 years.There are small personal allowances as well, available to each seller. These are taken to reduce the gain further. Once these have been applied, the gain is taxed at 16 per cent.Allowances availableThis though, is presuming that you are selling a house you own in France, while remaining a UK resident. Given this UK residency, you must bear in mind that there is a subsequent liability to tax in the UK as well. UK capital gains tax is charged at 18 per cent, and there are certain other allowances available, including the amount of tax you have already paid in France. However, even though this latter point, granted under the UK and France Double Tax Treaty of 1968, means that you do not pay the same tax twice, it does also mean that if you have qualified for a full exemption to the tax in France, you will have to pay the full amount of capital gains tax in the UK.There are some other quirks with the law in relation to capital gains tax. One that could be thought of as a little surprising is that it can in some instances be applied even if the property in France is your only house. It is generally accepted that where you are selling your main residence, you are able to claim a full exemption to capital gains tax. However, in the past, we have seen people who have not registered as tax resident at their French house – even though they were legally obliged to do so. In such cases, the French tax authorities, and indeed the notaire, are likely to hold that the exemption does not apply.There is little controversy in this – if you have not joined the tax system, then it is understandable that you will not be able to enjoy the allowances offered by that system.If you are selling your house for more than €150,000 (�129,265) (or more than €300,000 [�258,531] in the case of a couple of owners) then the French tax authorities may require that you employ the services of a fiscal guarantor to underwrite your tax obligation, should you not be tax resident in France. The reason for this is that they reserve the right to review all transactions for up to 4 years following completion, with capacity to seek a further contribution should they consider that an underpayment of tax was made.Guarantor companiesIf you are not resident in France at the time of any such enquiry, then they would not look to seek payment from you. Thus they require that you install a guarantor who will be prepared to bear this burden from you following the sale.There are certain guarantor companies in France who will take on this responsibility. Unsurprisingly, their services do not come cheap: indeed they will often charge up to 1 per cent of the sale price to cover their risk.This requirement is applied uniformly, with an exoneration only if you have owned the house for more than 15 years. It has been thought of as a discrimination against non-French residents. It is clear that this requirement is not discriminatory on the grounds of nationality – it would apply equally to a French person living in the UK and selling a house in France as it would to a British national. It is quite possible, though, that it would offend certain requirements of EU law.European law overrides the national law of each EU Member State. There are however a number of instances where local legislation is passed in such a way as to be non-compatible with EU law. When such instances of incompatibility do arise, it is often the case that an individual will suffer, on the basis that local law has been applied on them to their disadvantage.However, the requirement for a fiscal guarantor may be understandable from a local perspective – French tax inspectors would not want to be chasing around the world to seek payment of any tax shortfalls, so they look to a guarantor to bear the responsibility for the payment.Thus, when a notaire requires, on a sale, the intervention of a fiscal guarantor, he is doing so in accordance with French law. However, this is where the problem with EU law arises: residents of one EU state should not be subjected to extra tax burdens from another state that would not apply to people who were resident in that state. For example, if you were tax resident in Paris, selling a house in Calais worth say €500,000 (�430,885) you would not need to have a fiscal representative. If you were selling the same house in Calais but were tax resident in Dover, you would need a fiscal representative. It is here that the potential discrimination lies – as a question of residency not nationality. Given the cost of the fiscal guarantor, the result could be a substantial expense to the seller.The expense becomes potentially more painful in a falling property market. I started this article by saying there has been something of a resurgence in the property market, yet in some areas of France, current prices are still lower than they have been in the past. If that property in Calais had originally been bought at say €525,000 (�452,430) 2 years ago, there would be an actual loss on the sale, so clearly there would be no risk of capital gains tax applying. Nevertheless, the appointment of a fiscal guarantor would be obligatory.We currently have a client who is looking to take further action in respect of this concern. He appreciates that the cost and potential time taken would not be justified against the scale of his losses. However, if more people who have sold a property in France recently find themselves in a similar position, an action may prove worthwhile. If you have concerns of a similar nature, you should speak to a specialist solicitor.