Welcome change to capital gains tax

President François Hollande has announced a change to the capital gains tax system on second home sales in France

President François Hollande has announced a change to the capital gains tax system on second home sales in France.

From 1 September 2013, the time limit for full exemption from capital gains tax for owners of second homes will be reduced to 22 years. Under the previous taper relief system, a property had to be owned for 30 years before no capital gains tax was due on the sale, so the reduction is sure to come as welcome news.

Capital gains tax is the net profit made when selling a property, and if the property is a second home then it is payable at 19% for EU non French residents. Should CGT be due there is a reduction in the capital gain on which tax is calculated, depending on the number of years that a property has been owned.

The taper relief for full exemption was doubled from 15 years to 30 years by the former government under Nicolas Sarkozy.

President Hollande has now acknowledged that this had been a mistake, claiming that the current tax policy is causing the French property market to stagnate. Indeed many believe that the increase to 30 years was partly responsible for a fall in the number of property sales seen across the country.

As reported earlier this year, figures released by both FNAIM and Notaires de France revealed a decline in the number of transactions in 2012. Resale property transactions in France generally stand at an average of around 800,000 per year, but an earlier market analysis by Notaires de France expected that 2012 would end somewhere between 650,000 and 700,000.

Issued at the end of June by BNP Paribas, the fifth edition of the international buyers research report ‘Investing and Living Abroad’ confirmed that, for the 12 months between February 2012 and January 2013, overall property sales in France were in fact down by 22% to 665,000 transactions. The report also showed that the number of purchases completed by international buyers was down by 29% on the previous year, falling from 15,073 to 10,663.

By reducing the capital gains tax threshold for owners of second homes, Hollande now hopes to provide a boost to the French property market. British buyers who may have been deterred from investing in a home in France as a result of the increase introduced by the Sarkozy government may well be encouraged to once again pursue their dream of owning a property across the Channel, either as a permanent or holiday home.

Matthieu Cany of Sextant Properties (www.sextantproperties.com) believes that the reduction to 22 years for full exemption from capital gains tax will spell good news for both buyers and sellers.

“This measure should give a small boost to the French property market until the end of 2013, and owners who were hesitating about selling their holiday home or buy-to-let property in France should benefit from it,” he comments. “It is also a great opportunity for buyers because there will be a greater choice of properties on the market, and at reasonable prices due to increased competition.”

Robert Kent of Kentingtons Tax and Investment Consultants (www.kentingtons.com) agrees that the change is a positive step. “It was only a matter of time before a softening of the tax position on property returned, but it was just a case of how long it would take for the government to realise the negative impact on the property market, and therefore the economy at large,” he says.

“A move to 22 years is a return to a previous and longest standing status quo, namely a relief of 5% per year after two years of ownership. It is not as generous as the previous 15-year rule but it will make a significant difference, both fiscally and psychologically.”

A proposal for a one-off 20% discount for sales of second homes completed in 2014, regardless of how long they have been owned, may also be approved in the near future.