Selling your Dordogne Property – changes in capital gains tax

The French government has now completed its reform of French capital gains tax on sales of property. How will it impact you? equally, how will it impact the moribund market for sales of Dordogne property?

The original draconian proposal

Like other European governments, the French state is strapped for cash. An overall review of tax breaks in the course of the summer homed in on the regime applicable to sales of second homes. This favoured a lengthy period of ownership, with the capital gain being reduced by ten per cent for each year beyond five years of ownership. Sales were thus free of capital gains if they took place fifteen years or more after acquisition.

The government's initial proposal, presented at the end of August, was complete abolition of this system with immediate effect, resulting in gains being fully taxable, regardless of the period of ownership. They offered a slight sweetener, in the form of an indexation allowance, by reference to increase in the cost of construction.

A compromise solution

The French Parliament considered the reform too drastic. A compromise was finally reached. The original mechanism of tapering relief was retained, but the period and the percentages adjusted.

First, the percentages: the capital gain is now reduced by 2% for each year after the fifth year following acquisition, by a further 4% for each year after the seventeenth year, and by a further 8% after the twenty-fourth year. This means that thirty years of ownership results in exemption from capital gains tax.

Secondly, the rates: 19% by way of tax and 13.5% by way of social charges, giving an overall rate of 32.5%.

The impact on non-residents

French capital gains has always applied to the sales of French property by non-residents. If the vendor is resident in a European Union member state, the rate is 19%. If not, it will be at the rate of one third of the gain. Social charges will not apply.

Although the changes in the French system will result in more French capital gains tax becoming payable, this will not necessarily increase the taxpayer's total bill. UK-resident taxpayers, for example, will be required to pay UK capital gains tax, with a right of deduction of the amount paid to the French. Although the impact will vary from person to person, the overall amount may be the same after the reform as before. The same is not true for those resident in the Netherlands, since the Dutch do not have a capital gains tax.

There is however an important effect on French-resident taxpayers selling property in the UK. Since the amendment to the France-UK double tax treaty, which came into effect at the beginning of this year, sales of UK property, exempt from UK capital gains tax for UK non-residents, became subject to capital gains tax in France. The reduction in relief for length of ownership, and the increase in the rate of social charges, may have a material effect on a UK sale under the new regime.

And the good news?

Well, everything's relative, but there are two rays of sunshine in the gloom. First, there was originally a proposal to extend capital gains tax to the principal residence. This has been abolished. Secondly, the new system will not apply to sales where completion takes place before 1st February 2012.

Impact on the Dordogne property market

The buoyant property market in Paris and other major French conurbations is at stark odds with the Dordogne and other regions of France – particularly those where the English bought in force in the good years. It is in our view unlikely that English buyers will be much influenced by the capital gains tax changes seen in isolation. The position may well be different for persons from other jurisdictions, such as the Netherlands or the United States. As part of a wider picture, however, in which we see increasing aggression of the French tax authorities in their fiscal policies, coupled with uncertainty over the economies of the eurozone countries and the future of the euro itself, this reform will not help a market that is showing little sign of life.

Antony Mair
MCM Dordogne Property