Are you au fait with the financial side of owning a French property?

Friday, August 05, 2011 | Posted by: Stuart Maggs
Categories: Protecting your wealth | Tags: tax, tax planning, property, compliance, liability, inheritance, Stuart Maggs, rental, real estate, foreign property ownership, foreign assets, France, SCI, tax structures, forced heirship, holiday home, French, wealth tax

If an Englishman’s home is his castle, then his holiday home may well be a chateau in France. But a recent U-turn on taxing foreign property owners, strict inheritance rules and the challenge of complying with both French and UK tax laws can taint the dream. What are the issues and what can you do to minimise them?

French holiday home tax scrapped
This summer brings good news for those who have a holiday retreat in France. The French Government had been proposing a tax on holiday homes belonging to non-residents: essentially a 20% tax on an estimated or theoretical annual rental income for the property, despite having potentially received no income. But in the face of questions under European law and opposition from both non-residents and French expats, President Nicolas Sarkozy scrapped the proposed tax.

This is good news for those with property in France, as well as those thinking about buying French property – although it does act as a salutary warning to investors of the ups and downs of foreign property ownership.

France’s tax on holiday homes had been proposed as part of a review of the wealth tax in France, which levies an annual charge based on the total worth of residents of the country, or the total of French property belonging to non-residents. Where the holiday home U-turn leaves the wealth tax now remains to be seen, although the threshold has just been increased with effect from 1 January 2011.

Forced heirship and inheritance issues
Ownership of French property has not been simple for UK citizens to deal with. There are stringent rules in France around what must happen to real estate when someone dies, in stark contrast to the UK where the regulations are much more flexible. Forced heirship, for example, means that the real estate may have to be inherited by the children (rather than the owner’s spouse or another beneficiary).

To avoid the strict inheritance rules, many people bought French property through a Société Civile Immobilière (SCI) – a form of company – so owners held shares in a company rather than real estate.

However, for many years there was a concern that if a company-held property was made available to a director of that company, this could be seen as a perk and lead to a ‘benefit in kind’ charge. A significant UK tax liability could then have been imposed on home-owners in respect of an arrangement driven by wanting to secure the destination of the home on their death.

Fortunately, a law exempting this sort of tax arrangement from a ‘benefit in kind’ charge in well-defined circumstances was introduced in the 2008 Finance Act, and is deemed to have always applied – a rare case of an exemption being introduced and given wider application than normal.

What’s our advice?
The best advice is… take specialist advice before you sign on the dotted line.

While owning property in France can be an attractive proposition, it is vital to ensure that any arrangements that are put into place comply with both UK and French rules to ensure that a holiday escape does not end up becoming a tax nightmare.

If you own a property abroad and need help or advice with this issue, or to speak to someone directly, visit our Private Client and Wealth Management page. 

Image: © Justin Goring

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