And it undergone rearrangements between the moment the new regime was announced on 24 August, 2011 by the French prime minister François Fillon and the date it was finally voted on 8 September.
Despite being less penalising than first announced, this change still means that CGT on second homes will be significantly increased.
The proposal announced by François Fillon on 24 August
Before detailing the current reform, a little reminder on the current regime may be helpful: capital gains made by private individuals on the sale of a property that is not their primary residence are subject to a withholding tax of 19% to which is added the social security contributions (for French residents).
The capital gain is the difference between the purchase price and the sale price.
However, a reduction of 10% per year beyond the fifth year is applied to the gain calculated leading to a full exemption after fifteen years.
On 24 August, Fillon announced that the reform would remove this reduction: "The property holding period would not be taken into account for the taxation on capital gain."
The capital gain was supposed to be calculated on the purchase price to which would have also been added inflation since the date the property was acquired.
Also, to avoid any windfall effect the reform would apply to all transactions whereby the first contract would have been signed after 24 August, 2011.
Since then this reform plan has been softened.
For residents of France selling between 1 October 2011 and 1 February 2012
The new Act will increase social security contributions which will take effect from 1 October 2011. These contributions will increase from 12.3% to 13.5%.
As of 1 October 2011, the deduction rules do not change yet, but as higher social security contributions will be due, the total CGT, still exempt after 15 years, will increase from 31.3% to 32.5% of the gain.
From 1 February 2012
The new Act is enforced for all sales carried out after this date. The tax will amount to 32.5% (or 19% for non-residents) in case of a sale in the first five years of holding the property so as to avoid speculation.
A deduction of 2% per year will be applied for the next ten years, then 4% per year from the seventeenth year and then by 8% from the twenty-fifth to the thirtieth years.
Beyond thirty years, a seller will be totally exempt from CGT, instead of fifteen years today.
In other words, a seller will benefit from a 10% CGT deduction after 10 years, 20% after 15 years, 40% after 21 years, 60% after 25 years and will be exempted after 30 years.
(This should be the final version of the Act unless the Constitutional Council rejects any of its provisions.)
Guillaume Barlet is a French lawyer specialising in French assets and wealth management issues for Bank House Investment Management Limited. Guillaume can be contacted by e-mail or by telephone on 01242 545 971.
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