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More changes to French property CGT passed

The amendment says that the sale of second homes will be exempt from Capital Gains Tax (CGT) when the seller does not own a principal residence.

The amendment is primarily aimed at providing relief to French expats but could benefit hundreds, if not thousands, of UK owners of French houses who had been reluctant to put their properties on the market, according to Trevor Leggett, chief executive of Leggett Immobilier.

You must have owned the house for at least five years and you can't have owned a principal residence for at least two years. In cases of divorce the absent partner can still consider the marital home the principal residence.

Parliament has said that the new rule will come into force on 01 February 2012 to coincide with other property tax reforms. But Leggett expects further twists and turns ahead as the French political system is famous for tinkering with new policy up to the last minute.

Currently, residents of France are subject to fixed rates of capital gains tax of 19% as well as paying social charges. Non residents, from outside the European Union, pay 33.33% with no social charges.

Those non residents who come from within the EU pay tax on French property gains at 19% and do not pay social charges.

The capital gain is calculated as the proceeds from the sale less cost of purchase. A deduction of 7.5% of the acquisition price can also be made in lieu of actual costs, or the costs themselves (if you have proof) can be deducted, as well as any costs of sale such as estate agency and legal fees, transfer tax and Notaire's fees.

Parliament has already agreed a new scale of CGT that comes into effect in February. This means that if you sell your main residence within one to five years of buying there will be no relief. If sold within six to 17 years there will be 2% relief per annum, 4% relief per annum for a sale within 18 to 24 years and 8% for years 25 to 30.

A French property bought by a UK resident for €500,000 in 1996 and sold 15 years later for €1 million, for example, would not pay any French Capital Gains Tax on the €500,000 profit made.
If the same property, in the same circumstances, was sold after 01 February 2012, only 20% of the profit (€100,000) would be free from taxation. The remaining €400,000 would be subject to 19% tax, resulting in a €76,000 tax bill.

However, a number of countries in the EU have a double tax treaty with France, under which owners of French holiday homes are prevented from being taxed twice on a sale. Those whose primary residence is in one of these countries should therefore seek expert advice on how the tax law change in France affects them.

The impact of the new law means vendors may save a significant amount by selling their property before 31 January 2012 and many holiday home owners are doing just that.

‘The property market is already feeling the effect of the new law, We have already seen evidence of reduced prices on properties owned by non French residents wanting to sell before Christmas in order to avoid the extra cost,’ said Fred Schiff of Knight Frank's International Department.

He advises owners not to panic, however. ‘People need to do their sums carefully. Those who sell quickly will avoid a higher CGT bill, but they may have to accept a lower price for their house. The actual benefit could be less than they at first thought. As ever, tax should not be the tail that wags the dog,’ he added.