Having read a couple of articles about the likely impact of the French government’s proposal for a new property tax on second homes, I thought I’d ask the head of our French desk, Paul Humphreys, for his view on the matter.
On the ball as ever, he’d already approached the tax law specialist Sykes Anderson to get to the bottom of the implications of the proposal. Unsurprisingly, things aren’t quite as clear cut as some might have you believe, but for most owners and prospective buyers the news shouldn’t cause too much alarm.
The second-home tax
Under the proposal, foreigners who own a French holiday home would be hit with a new annual tax. This would only be levied on those who choose not to rent the property out as a long-term let.
The tax would equate to 20% of the valeur locative cadastrale (VLC) – a theoretical rental value of the property set by the local tax office – and would apply from January 2012 if approved by the French parliament this summer.
Some examples provided by Sykes Anderson show that the charge will be relatively small in many cases.
The VLC values provided here are purely indicative as the value would be assessed on each property. It is therefore possible to have two properties of equal worth but with different VLC values.
But to paint a rough picture, the VLC for a €700,000 maisonette flat on the Côte d’Azur might be €1,400, in which case the owner would be charged around €280 a year.
Owners of a Côte d’Azur villa worth around €15m might be charged €700 a year based on the VLC being €3,500.
These costs would be balanced out in many cases by a reduction in wealth tax
This property tax proposal is part of the French government’s wider reform of wealth taxation. Wealth tax is an annual charge applied to French residents on the net value of their worldwide assets and to non-French residents on the net value of their French assets.
Under the current system wealth is assessed according to banded rates. Those bands range from 0.55% for assets worth between €800,000 and €1.31m, up to 1.8% on those valued above €16.79m. There is no charge on assets worth less than €800,000.
The proposed wealth tax reform will change the way in which wealth tax is charged. Those with total net assets worth between €800,000 and €1.3m will be charged at 0.25% on their total wealth, including the first €800,000, while those with assets valued in excess of €1.3m will be charged at 0.5% of their total wealth, leaving many people better off.
It’s important to point out, however, that not everyone will benefit form the wealth tax changes – those whose assets are not of high enough value to attract wealth tax but who do have to pay the new property tax will lose out. Although they will lose out to the tune of hundreds rather than thousands, as was once feared.
Nonetheless, Sykes Anderson believes that the reduction in wealth tax would have more of an impact on the way investors view France than the second-home tax would.
The property tax proposal might not be passed
French government ministers behind the plans argue that second-home owners should help pay for French public services. But there are a number of arguments against the second-home tax.
For a start, foreign second-home owners already pay two local property taxes – taxe foncière and taxe d’habitation - both of which are also calculated on the property’s rental value.
On another note, Sykes Anderson said the tax would be “clearly discriminatory” and that it would “act to restrict the freedom of movement of capital within Europe by creating an additional cost for non-French residents who acquire property in France”.
The tax specialist believes the French government may face difficulties in implementing the legislation.
Words of advice from Paul Humphreys
Paul has been selling French properties for many years and believes the overall impact of both the property tax and wealth tax reforms will be neutral.
But for those who might be affected, he advises: “Concerned buyers should ask the notaire from whom they are buying to provide them with the VLC for the property they are purchasing and thus they can calculate the likely tax. Existing owners should speak to their tax advisors for advice on their particular circumstances.”
“If the legislation is passed, and many voices have sounded against it, it is unlikely to be harsh, on the basis of currently proposed calculations.”
Though he notes that there will be some losers as well as winners if the plans get the go-ahead, he points out that second-home purchases are usually ruled less by the head than by the heart. “If you are in love with France then these tax changes are unlikely to greatly affect the decision to buy. Naturally, though, there will be exceptions.”
In any case, other factors such as the weakening of the euro against the pound could exert a bigger influence on demand, he adds. “For the past two seasons the strong euro has served as a background concern, albeit one that is accepted, but with the anticipated weakening of the exchange rate now more likely than ever, we expect British buyers to return to the market.”
The tax reform bill will go before the French parliament in July in time to become law in 2012.
Let us know what you think of the plans and their chances of being passed by commenting below.