The owners of homes abroad fight legality of new tax plans
Property is a popular target for European governments to prop up their flagging economies, writes Emma Lunn
Sunday 15 July 2012
You could almost hear the shouts of pain from wealthier Britons when French President François Hollande announced plans to hit foreigners with holiday homes with massive tax hikes. However, a question mark hangs over whether the proposals can even become law.
The new socialist government said it plans to increase taxes on second homes by taking a cut of rental income and upping capital gains tax when a property is sold. The new charges will apply to so-called non-doms who own property in France but live abroad, hitting both foreigners with homes in France and ex-pats living elsewhere.
Under the proposals, tax on rental income would rise from 20 per cent to 35.5 per cent and capital gains tax (CGT) on property sales would rise from 19 per cent to 34.5 per cent. The extra 15.5 per cent in each case is being labelled a "social charge".
If the proposals go ahead, non-doms selling a property for a £100,000 profit would see their tax bill jump from £20,000 to £35,500. Those renting out a home will see the tax on £1,000 of rental income go up from £190 to £345.
The proposals follow similar plans made under Nicolas Sarkozy last year, which Britain opposed and were eventually scrapped. This time, Hollande made some reassuring noises on his visit to the UK last week that this wouldn't make France a high tax destination for overseas buyers and that Britons wouldn't be discriminated against. Nonetheless, up to 200,000 Britons who have second homes in France will be sitting nervously on the next pronouncement from the Élysée palace.
Those with holiday homes in France already pay two other taxes to the French government: taxe foncière, which is paid by the house owner, and taxe d'habitation, which is paid by the occupiers.
"Many British politicians are arguing against the proposal on the grounds that it may violate European single market laws and anti-discrimination rules, which could result in Hollande's plans failing," says Elliott Buss, tax manager at UHY Peacheys Chartered Accountants. "Hollande should consider how this new tax regime could damage the property market in France and, coupled with exchange rates, the regime could destroy the foreign home-owner market in France."
Alex Henderson, tax partner at accountants PwC, says governments across Europe are looking for ways to increase tax revenues and property is a popular target. "Tax on foreign owned second homes focuses on the wealthy and avoids hitting your own electorate. However, the plans could breach EU laws if they discriminate against other EU nationals," he says.
"Anyone wavering over buying a holiday let in France may find the double whammy of a 15 per cent rise in tax on rental incomes and CGT rise of 15 per cent on property sales tips the decision against."
However, Andy Scott, premier account manager at foreign currency broker HiFX, says although the tax hikes will make property ownership in France more costly, it's too early to determine the impact on the number of Brits buying property in France.
"Around 70 per cent of our clients who buy property in France do so with the intention of retiring there at some stage and so don't usually plan to sell it after just a few years," he says, "Assuming the same rules apply where capital gains is only payable on the difference between the purchase price adjusted for inflation and the sale price, the rise would at least be partly offset."
A double taxation treaty means UK residents are able to offset tax paid in France against tax paid in the UK on the same income, and the increase to tax on rental income will only be on revenue derived from unfurnished lets.
"The CGT increase, however, could hurt a bit more," warns Mark Giddens, tax partner at UHY Hacker Young LLP. "It would make French CGT higher than in the UK [our top rate is 28 per cent], which means holiday home owners may not be able to claim full relief for their French tax."
However, money spent on renovations on certain categories of property can be offset against the capital gains tax.
Some investors in French property buy into sale and leaseback schemes. This involves buying a new-build property off-plan which is then leased back to the developer. The owner occupies the property for a certain amount of weeks per year while they have guaranteed rent for the rest of the time.
In theory sale and leaseback owners will also be affected by any tax hikes but the long-term nature of this type of investment means, as French CGT liability still reduces over time, sales and leaseback investors are unlikely to feel any pain.
"As for leaseback properties, they have been around for over 40 years and have been structured in a way that makes this type of new proposed tax increase inconsequential," says Camille Letuve, partner at French property specialist Athena Advisors, "In some ways, it actually makes investing in a leaseback property more attractive, especially if you utilise the current mortgage rates – our investors are currently buying ski apartments with a 3.85 per cent fixed rate mortgage for 20 years. How's that for fiscal value?"
There's little time for Brits affected by the tax hikes to sell their holiday homes. If the proposals go ahead, the rise in tax on rental income will be backdated to 1 January this year. The increase in capital gains tax applies from the end of this month.
The increase in property taxes is part of a raft of new taxes introduced by Mr Hollande's government. The French president is introducing a one-off levy on those earning more than £1m and upping income tax on those earning more than £800,000 to 75 per cent.
France isn't the only European country to hike property taxes. In Greece last September, a new property tax touted as the only way of plugging a €2bn (£1.7bn) budget shortfall was introduced.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
How couples can protect their financial interests when cohabiting
Money alert: Overdrafts at HSBC and First Direct
'Dismal' eurozone data sparks concerns
How to protect your assets if the stock markets begin to head south again
Child Maintenance Service to replace Child Support Agency - but is it better?
- 1 Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC
- 2 Richard Dawkins on babies with Down Syndrome: 'Abort it and try again – it would be immoral to bring it into the world'
- 3 ALS ice bucket challenge co-founder Corey Griffin drowns, aged 27
- 4 A third of employers never check job applicants' qualifications, survey finds
- 5 James Foley beheading: Fox news presenter Megyn Kelly annoyed by Ferguson update during broadcast about murdered journalist
Richard Dawkins on babies with Down Syndrome: 'Abort it and try again – it would be immoral to bring it into the world'
Scottish independence: English people overwhelmingly want Scotland to stay in the UK
Isis threat: Cameron wants an alliance with Iran
Michael Brown shooting: Chaos erupts on the streets of Ferguson after autopsy shows teenager was shot six times – twice in the head
Bin bag full of cats' heads discovered near Manchester's Curry Mile
Disgusting, frustrating, but intriguing: how the country really feels about its politicians
iJobs Money & Business
£25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...
£25000 - £35000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...
£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...
£45000 - £55000 per annum: Harrington Starr: UNIX Application Support Analyst-...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony