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French Tax Guide » Living In France
Information provided by David Anderson - solicitor and Chartered Tax Adviser
with Sykes Anderson LLP.
 » Notaries’ costs
Why are the notaries’ fees so high?
They are fixed by statute and broadly break down as to 6.3% stamp duty
and land registry fees and 1% as legal fees. There is no price competition. In
addition to the fixed charges notaries can charge extra when dealing with complex
cases and acting for foreigners. You should ensure you are being charged the same
as a French person without this supplement.
What is the best way to get a good deal out of a notary?
Forget about knocking him on fees. Instead agree the fee put forward
but insist that a will and if applicable a marriage contract are thrown in –
see below.
Why are notaries generally not forthcoming about tax planning?
They are appointed by central government and are effectively tax collectors.
Their duties extend beyond conveyancing to maintaining registers for the French
government. When it comes to taxes they are definitely not on your side. Remember
also that many senior positions in the French Land Registry are held by French
Tax inspectors who monitor sales and purchases and may query suspiciously low
prices.
What tips do you have when selling?
The notary calculates any Capital Gains Tax and is under a duty to withhold
the tax. Make sure you are dealing with a notary who is aware of the tax rules
and exemptions for non-residents. Also notaries may charge you a fee (around £500)
for discharging your mortgage and get confirmation in writing he will not charge
you this if he handles the sale and purchase. Sellers are often not told about
this charge and it is simply deducted from the net sale proceeds.
» Owning taxes
What are the annual local taxes on property?
Local taxes are levied on a calendar year basis and are determined by
the local authority. Notaries are under an obligation to collect them on sale
and will deduct unpaid local tax from your net sale proceeds.
What is the annual wealth tax?
This is an annual tax payable on worldwide assets if you are French resident.
If you are not French resident it is payable on your assets in France. You start
paying the tax on net assets over Euro 720.000 at 0.55% and it goes up in bands
to 1.8%.
Are there any deductions?
Yes you can deduct debts and some business assets are exempt.
Can you legally reduce it further or avoid it altogether?
Yes this can be done easily and cheaply and dealt with in England. However this
planning needs to be put in place before you buy the property and before you submit
your first tax return in France. Remember that the annual return will disclose
all your assets to the French Revenue and planning at the outset is essential,
especially if you intend to become resident in France.
» Buying in the name of a UK company or trust
Can you buy the French property using a UK company?
Yes. You can use any UK entity, which under UK law has capacity to own land.
What advantages does a UK company have?
You have a structure you are familiar with. The shares can be transferred easily
without involving a French notary. If you do not become French resident then the
shares are outside the French Inheritance Tax net but within the UK Inheritance
Tax net. This means that say gifts by will to a surviving spouse, which may be
taxable in France, are not normally taxable in the UK. You can also put the shares
into an English or offshore trust though this area requires specialist advice.
This route is likely to be better than the use of a tax haven company owning the
property direct for the reasons given below.
What are the disadvantages of a UK company?
The UK company will be taxable in the UK on any capital gain you make. You will
have potential additional tax liabilities when you distribute the net sale proceeds
from the company or liquidate the company. It is unlikely to be a suitable vehicle
for most people buying a second home. Buyers are normally reluctant to buy shares
in a company and normally insist on the property being transferred from the company
to them.
Can an English trust or an offshore trust buy the property?
Yes however French law does not however recognise trusts. The trustees will be
viewed for tax purposes as owning the property outright or as a partnership or
possibly as a company. Because of French unfamiliarity with trusts and the consequent
unpredictability of the way the tax authorities will view them it is generally
not advisable to buy French property using a trust. If tax planning or structuring
the transaction requires the use of trust money it is likely to be better to structure
it as a loan from the trustees to the beneficiary.
» Buying in the name of a tax haven company
Can you buy the French property using say a newly formed Jersey or
other tax haven company?
Yes.
Why is it not advisable to buy French property using a tax haven company?
Generally such companies are assessed annually to French tax on a deemed income
equal to 3% of the value of the property. It does not matter whether the property
is rented or not. You cannot offset any mortgage or other costs against this deemed
income.
Are there any other useful offshore angles?
Yes several but you need specialist advice. This is not normally worth considering
unless your assets exceed £1 million, as the costs of advising setting up
and maintaining an offshore structure are high. Remember that if anything goes
wrong the property is situated in France and will be security for any French taxes
claimed. In practice if you need to sell the property the notary will not release
the sale proceeds to you until the tax authorities are satisfied all French tax
has been paid. This is very different to the UK position in which the solicitor
is not under a duty to obtain a clearance from the Inland Revenue.
» Buying in the name of a French company
What type of companies are available?
There are a range of French entities you can use with different tax regimes. For
straightforward purchases of second homes by a couple it is however best to buy
in your own names. If you are buying a property with other people then a French
company may be worth considering.
» Renting the property
Does it make any difference whether you rent the property furnished
or unfurnished?
Yes. If it is furnished you are taxed on running a commercial business.
How is a UK resident owner taxed on the income?
You pay French income tax on the profits after deductions for repairs and mortgage
interest.
Are there any traps?
Yes. Non-residents can be deemed to be in receipt of rents equal to three times
the rental value of the property (usually calculated as 5% of the property value).
There are various exemptions.
What forms need to be filled in and which tax office do you deal with?
Form 2042N/2044 obtainable from any French tax office or at the French Inland
Revenue web site www.impots.gouv.fr. It needs to be completed before 30th April
in each tax year. Care needs to be taken when completing this form especially
for the first time and professional help is advisable. English residents deal
with Centre des Impots de Non Residents, 9 rue d’Uzes, 75094 Paris Cedex
02. Tel 01.44.76.18.00. If you become resident in France you deal with your local
French tax office.
 » Renovating the property
Can I get out of paying VAT if an English based architect invoices
me?
Yes. The English architect does not have to charge VAT either in England or France.
You should ensure his invoice specifically refers to work in connection with your
French property. An architect based in France will have to charge VAT if registered
for VAT. Similar planning may help avoid VAT on other services.
» Other income
if retiring to France
I am retiring to France. How is my pension taxed?
If you pension is derived from employment in the UK Armed Forces or for
the UK Government it is taxed in the UK and is exempt from French tax. All other
UK pensions are taxed in France and not in England. France will tax your English
“tax free lump sum” commonly taken on retirement. If you are planning
to take your pension after you are resident in France you may want to reconsider
and take your lump sum whilst you are still an English resident.
How am I taxed on rental income from a rented property in England?
The rental income is subject to UK tax. The tax is deducted at source though you
can normally reach an agreement with the UK Revenue to receive the income gross
and account in the usual way.
I plan to rent my English home for a number of years and then sell
it. Will I have to pay UK Capital Gains tax?
No. Under the UK French double tax treaty the UK has the right to tax the sale
proceeds but you will not be taxable in the UK if you are not UK resident. There
may be a tax liability if you are not resident in the UK for at least 5 years.
Are there any tax angles on the lump sum from the sale of my English
property or any other assets normally liable to UK CGT?
Yes. It is normally not a good idea to remit the money to France. If you are selling
when you move if you time your move correctly you can be resident nowhere for
a short while. This is because the UK tax year runs from 6th April to 5th April
and the French tax year runs on a calendar basis. If you simply go on holiday
(anywhere but not France) in the meantime you may be able to dispose of assets
with large gains into a discretionary offshore trust free of Capital Gains Tax.
This needs to be done after you leave the UK and before you take up residence
in France. Timing is very important and professional advice essential. Provided
the offshore structure is set up correctly when you become French resident you
will not own the assets and so will not pay any tax on them.
» Selling the French property
If I never become French resident and sell the house what tax do I
pay?
You are liable to French Capital Gains Tax. The notary calculates the CGT and
may refuse to pay the sale proceeds to you until you have appointed a French Tax
Agent to agree your tax liability with the French Inland Revenue. This is generally
an unattractive option as most of the tax agents have very close connections with
the French Revenue and may require you to deal with fairly exhaustive enquiries.
You can, through the notaire, apply to the French Revenue for a dispensation before
you complete the sale.
What happens if I become French resident?
Provided you are resident in France for one tax year gains on your main residence
are exempt from tax.
» Forced heirship
What is the forced heirship problem in France?
Under French law you cannot disinherit your children. They are entitled to a share
of your estate. This is widely misunderstood in England because we do not have
marriage contracts as in France. In France most couples marry under a community
of property contract. This means they are treated as owning three pools of property.
Property belonging to each of them and community property. The forced heirship
rules only apply to property owned by each of them. Most houses bought by French
couples are owned as part of the community and pass to the surviving spouse as
the community is liquidated on the death of the first. The forced heirship rules
will bite on the death of the second spouse.
So how does the problem arise for English couples?
English law does not have the concept of community of property and everyone from
England is in French eyes married under separation of assets i.e. each spouse
owns their part and there is no community. This means the forced heirship rules
bite on the first death. It also means that French Inheritance Tax is payable
on the first because France taxes gifts passing between spouses. This is not normally
the case in the UK.
What is the solution for English couples?
Make a marriage contract in France under which you hold French property including
the house as part of the community of property. The notary who conveys the property
for you can also deal with this. Try to have it included in the price as making
one later costs around £750. On the death of the first the community will
be dissolved and the deceased’s spouses half share in the property will
pass automatically to the survivor. You have to pay a registration fee of 1%.
The notary draws up the marriage contract and various formalities are required.
There are complications if there are children by earlier marriages.
Does the French marriage contract affect the position in England?
We don’t know. This is a complex area on which there are no clear precedents.
It is likely to result in a contentious probate test case in the future. The best
way to avoid the problem is to have a marriage contract which states that it only
applies to your French property.
What about single people who do not want children to inherit?
The simplest solution is not to die in France. Sell up and move back to England
in good time. Alternatively purchase the property in the name of an English company
and bequeath the shares not the property. The shares will be deemed assets situated
in England and you will be liable to UK Inheritance Tax on them. No French Inheritance
Tax will be payable. The shares will not be French property and so the French
inheritance rules do not apply to them.
What is buying “en tontine”?
This is similar to English joint ownership and has a superficial attraction as
the surviving spouse inherits the deceased’s spouse’s half share automatically.
It is however generally tax inefficient because the deceased spouse is deemed
to make a gift of the half share which is taxable if the half share is worth over
Euro . Making a marriage contract under community of property is usually more
sensible. Very few French couples buy en tontine. It is probably best to avoid
this structure.
Social Services and charges
Will I have to pay French National Insurance?
If you are retired and over UK retirement age then you generally will be covered
under the UK scheme and will not make payments. If you are under retirement age
you may be required to contribute about 8% of your income from whatever source.
French National Insurance contributions are higher than in the UK. Benefits are
generally better.
What about running a small business such as a B & B?
French national insurance is very high. You can expect to pay 20% of turnover
in NI contributions. This coupled with high French income tax rates can be unattractive.
Fortunately simple planning using a UK company can legally avoid or substantially
reduce your liability. If you employ staff your employer’s NI can exceed
50%.
How can a UK company help?
Your customers contract with the UK company, which then enters into a contract
with you to provide the services in France. The UK company makes a profit, which
reduces the profit you make in France. The UK company can make up to £10,000
pa free of tax. You need specialist advice to set this up. You also need to consider
how you draw money out of the company. More sophisticated planning may involve
paying small amounts of National Insurance to the UK to preserve pension and other
benefits both here and in France.
This article is by David Anderson a Solicitor
specialising in taxation. This is intended only as a general guide and should
not be relied upon without professional advice on the facts of your particular
case. He is a Chartered Tax Advisor and has extensive experience in setting up
tax effective structures for investment into France. Article Copyright ©
2003 Sykes Anderson LLP and SAFS Ltd.
Please note that your taxation enquiry will be passed to Blevins Franks Tax Advisory Service, who will contact you shortly.
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