Tax clarification tempts buyers back to French luxury property market

Clarification surrounding the taxation of luxury property in France has been welcomed by overseas buyers who are starting to return to the market, according to Paul Humphreys and Mark Harvey, of Knight Frank’s French sales team.

The election of Francois Hollande as President in 2012 led to uncertainty over potential tax changes in the second half of the year. Prior to his election, Hollande had made several pledges to end tax breaks for the wealthiest residents. As such, his election led to a reduction in demand in France’s prime residential markets as buyers waited for clarification.

At the end of 2012, President Hollande gave further detail on his new tax plans. The changes for property taxes are less draconian than had been feared. The principal changes announced were in relation to wealth tax and an increase to Capital Gains Tax (CGT).

France’s wealth tax affects everyone who has net assessable wealth in France valued at or above €1.3m including property. Depending on an individuals’ net worth, rates of between 0.55% and 1.5% apply.

CGT has also been enhanced by the introduction of a social charge (taking the effective pay rate from 19% to 34.5%). This is payable on all gains realised on the disposal of all property except principal private residences.

Although there are slightly higher taxes in place, buyer interest and sales volumes have started to pick up since policymakers have clarified the details. This echoes what we saw in London where concerns over the introduction of a ‘mansion tax’ in the second half of 2012 resulted in buyers adopting a ‘wait and see’ attitude.

The rise in buyer interest has been most noticeable in the South of France in areas such as Mougins, Cannes and St Tropez as demand from Scandinavian and British buyers increases. The number of searches for property in Provence, France on Knight Frank’s Global Property Search website increased by 16% in the first five months of 2013 compared to the corresponding period a year earlier, for example. Indeed, searches for property in Provence from Norway increased by 32.5%.

Most recently Francois Hollande has announced that the taper relief system is to be changed so that from 2014 the required time of ownership before a property is completely exempt from capital gains tax will be 22 years, down from 30 years previously. Furthermore, his previously introduced taper rates will now be a more favourable flat 6% per annum, after six years. This is in addition to a 25% special discount on CGT between 1 September 2013 and 31 August 2014 (not yet law).

Below Mark and Paul provide an update on the luxury French property market:

How have buyers reacted since clarification surrounding property taxes was announced?

When it comes to international investment France is very much a lifestyle driven market. While uncertainty over property taxes resulted in a number of international buyers choosing to postpone purchases in the second half of 2012, it did not stop transactions.

Since President Hollande clarified his tax plans we have noticed that buyers are tentatively returning to the market. France remains an attractive destination for second home acquisition, with top schools, excellent healthcare and a desirable lifestyle, especially in the South.

The recent changes to CGT and taper relief are seen as a clear signal that President Hollande is seeking to encourage the property market and confidence can only respond favourably as a result.

As we alluded to in the French Insight earlier this year, when considering the increase in CGT many buyers take the ‘lifecycle’ of their new home into consideration. Many plan to keep their home for a minimum of 5 to 10 years and therefore take the view that a new government may be in place and the current tax structure will have changed when they come to sell.

Where is demand for prime homes in France coming from?

We are seeing an increase in demand for prime homes in the south of France from abroad and while the levels are still below those seen in 2011, it is encouraging to see a renewed interest in property in France from overseas buyers.

As well as the recent return of traditional British buyers, we have seen a noticeable increase in the number of wealthy Scandinavian buyers enquiring about property in the South of France, particularly from Norway.

Norwegian buyers are typically attracted to the warm climate and attractive lifestyle available to them in France. It’s the cold north [Europe] buying in the warm south, with particular interest in homes located on the coast from St Tropez to Menton. They want to buy prime real estate, and typically their budgets are higher on average than other overseas buyers – starting at around €3m.

How has the Paris market performed?

In 2012, the Parisian property market suffered a lot and activity was muted – a lack of new stock and high prices keeping many would-be buyers away. According to Knight Frank’s Prime Global Cities Index, prices for luxury homes in the city fell by 10% over the six months to Q2 2013. However, as prices have come down to a level more in line with buyers’ expectations the market has picked up.

What is your outlook for the market in 2013?

It is our view that demand for prime property in France will increase as the year progresses.

Vendors are becoming more realistic about asking prices. There is also a lot of good stock on the market, which we anticipate will be bought this season.

Paul Humphreys and Mark Harvey work in Knight Frank’s International Residential sales team covering France, Monaco and The Alps.

Knight Frank LLP is not a tax/legal adviser and whilst the information provided is given in good faith, we recommend you independently verify anything upon which you later intend to rely.

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