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

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.