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French capital gains tax on property changes set to benefit market

Previously the CGT rate applied to any capital gains made on French property would have reduced by 10% annually after the fifth year of ownership until it was effectively a zero rate applied in year 15.

This 10% reduction after year five has now been scrapped in favour of an alternative calculation which instead allows sellers of French property to deduct the official amount of inflation during the period of ownership from any capital gain before the flat rate of tax is applied, according to John Busby, director of French Private Finance.

The French mortgage specialist has worked out the figures. For example, a non French resident from the European Union buying a property in 1999 for €180,000 and selling it in 2011 for €260,000 would have made a capital gain of €80,000 after 13 years.
Before the new rate was introduced the capital gain of €80,000 would have been reduced by 10% for each year of ownership after year five leaving €16,000 to be taxed at 19% resulting in a CGT bill of €3,040.

Now, the same purchase and sale would be worked out as follows. To the purchase price of €180,000 is added the amount of inflation since 1999 of 21% or €37,800 which takes the purchase price to €217,800. The difference between the purchase price adjusted for inflation and the sale price is €42,200 to which the 19% CGT rate is applied leave a CGT bill of €8,018.

Rates for non French resident Europeans is unchanged at 19%. For those outside the EU the rate is 33.3%, whist for residents of countries without any taxation agreement with France the rate will be 50%. Rates for French residents will rise from 31.3% to 32.5%.

‘The main beneficiaries of this new calculation will be those who seek to sell within the first five years of ownership. Under the previous system the full rate of tax applied on the capital gain, whereas under the new system, sellers can offset the amount of inflation from the calculation of their capital gain,’ explained Busby.

This change will be ratified on the 06th of September. According to Busby it should lead to an increase in shorter term holding of French property and renovation of French property as there is now an approximate 10% extra tax free capital gain for those selling under the new regime.

For the majority of UK based buyers in France this tax is a bit of a red herring. ‘The new tax will not affect their overall situation as any tax paid in France will be offset against tax paid in the UK.

‘A larger effect will be found by those fiscally based in France or in low tax jurisdictions without dual taxation agreements with France,’ added Busby.