French CGT on property sale

WHEN the sale of a property in France is made at a higher price than what it was purchased for, arising gains may be subject to capital gains tax (CGT), writes Guillaume Barlet.

The yet to be voted French Finance Bill for 2013 includes some alterations to the current system and recent changes in 2011 and 2012 may have left some confusion as to where one stands in that respect.

Recent modifications to the applicable rules

In 2012, new legal requirements meant that the calculation of the taxable capital gain has been altered in consideration of the length and rate applied to the tax free allowances but also as regards to the definition of the purchase price (covering cases where the purchase price is not known or when one is purchasing a property to be renovated).

Partial to total CGT exemption over time

Currently and since February 1, 2012, owners of property benefit from an allowance linked to the duration of his ownership reducing the taxable capital gain:

• 2% for each year beyond the 5th year of ownership
• 4% for each year beyond the 17th year of ownership
• 8% for each year beyond the 24th year of ownership leading to a total exemption after 30 years of ownership

Other exemptions

In addition to the progressive exemption mentioned above, three new cases of exemption have been created:

• For first time sellers of a property that would not be a main residence and on the condition that the proceeds of the sale are entirely used towards the purchase or building of a main residence within 24 months from the sale
• For sales carried out by elderly or disabled individuals residing in a care home of a property that used to be their main residence prior to moving to a care home. The sale must be made within 2 years after their move to a care home
• For sales of property with transfer of a right to raise the height of a building which allows a third party to remove the roof of a building, increase the height of the walls and build a new habitable level above the existing one

Social contribution charges applicable to 'non-resident' individuals

Income from property situated in France received by private individuals who are not domiciled in France for tax purposes is now subject to social contribution charges at the rate of 15.5%.

This means that CGT has increased from 19% to 34.5%. This measure is applied from August 17, 2012.

Possible modifications to the applicable rules

The French Finance Bill for 2013 currently includes several changes in order to create a short-term 'surge of offers'.

Please note that this Bill is currently being debated in Parliament and will need to be voted (at the end of December) for its provisions to be enforceable.

In the first instance, CGT calculation on buildable plots of land would be modified. From January 1, 2013, no allowance in consideration of the duration of ownership would be taken into consideration.

This rule would only be applicable to plots for which the first sale agreement would be signed from January 1, 2013 and for which the sale would be completed before January 1, 2014. Tax free allowances would therefore still be applicable for the sale of plots of land with a first sale agreement signed before January 1, 2013.

In addition, the sale of a buildable plot of land would be subject to income tax. The 19% flat rate currently retained would still be applicable on completion but may only constitute an “advance” on additional income tax or that may be refundable depending on the applicable income tax bracket. This measure would be enforced from 1st January 2015.

Finally, for the sales of property (except buildable plots of land) occurring in 2013, an additional 20% tax free allowance would be applied to the taxable net capital gain (in addition to the current taper reliefs). This exceptional allowance would only reduce CGT calculations and not social contributions.

The objective is here to boost the sale of properties in the short term but since the first presentation of this measure, the Sénat has required its reduction to 15%.

Guillaume Barlet is a French lawyer specialising in French assets and wealth management issues for Cubism Law. Guillaume can be contacted by e-mail or by telephone on 0207 831 0101.