Ratified: What does France’s property tax mean for you?

Francois Hollande property tax ratified

Photo credit: IDF-Fotos

This month, the French National Assembly r atified President Hollande's financial proposals , bringing into effect a raft of new property taxes from January 2013.

For non-resident property owners letting out their homes, the levy on rental income has increased from 15.5 per cent to 35.5 per cent. Tax on property gains has also increased from 19 per cent to 34.5 per cent.

French notaires will take taxes directly from the house sale, although British owners of property in France can offset charges thanks to the double tax treaty between the two countries, while deductions can be made on gains tax for each year of ownership after the initial five years.

The rental income tax sparked much controversy when it was first announced. The tax would have been illegal under European rules, which forbid EU members to levy each other "social security charges". The wording has since been changed, labelling the income fee a "gains tax". As a result, it was approved earlier this month along with several other new financial measures.

But what do these changes mean for French property investors? Some have forecast a downturn in the French housing market, with house sales already falling. Will the tax deter new buyers?

Robert Stones, Managing Director of global property agent Target Markets, is optimistic. Speaking exclusively to TheMoveChannel.com, he explains why it should still be business as usual:

"Most of the investors we have spoken to are not deterred by the new measures for non-domestic investors. France is widely viewed as secure bet for medium to long-term property investment with a general upward curve and the world's most reliable holiday rental pool. To cap it all, when you invest in France, you also have an investment which is very accessible from the UK – who doesn't like to spend as much of their own time as possible there? For most investors, then, it's business as usual."

But is business as usual a good thing? According the Notaires de France , sales of new French homes fell by 19 per cent in the first quarter of 2012, with average property prices dipping by 1.6 per cent. But that seemed to pick up in the second quarter of the year, with research company DTZ finding that real estate investment volumes, including commercial property, surged by 114 per cent.

Target Markets has seen a similarly strong level of demand: "We are finding that interest in the French Property Market remains very strong. We think that this is mainly because France has proven itself to be the most robust property market in Western Europe, or indeed the world, over the last 4 years," explains Stones.

"As other property markets have faltered or seen rapid decline, French property has seen a steady increase averaging 6% per annum over all departments. It's surprising to see this happen when you consider what is happening in Spain and other major markets, but it is a testament to the French property system and the bank's sensible lending policies when other countries were only concentrating on the good times, the French system means that they are much more sheltered in these harder economic times."

This safe haven status has attracted investors to both France and the UK in recent months. But strong buy-to-let markets is something else the countries have in common, Stones adds.

"One of the key attractions for property investors in France are the rental returns which can be made. Indeed, this is why the French government introduced there leaseback scheme which offers investors the opportunity to own a freehold property in France which they can then lease to a management company. Because of the acute shortage of properties to let to holiday makers in French hot-spots, these schemes offer the investor real benefits, such as great finance options, VAT refunds on their property and guaranteed rental returns which are pegged to inflation to further protect their investment. It offers property investors low-risk and hassle free investments in key locations in France."

Indeed, he explains, Target Markets has just launched a French development with 6 per cent rental yields . Are they not concerned that the new taxes upon rental income will dent the investment appeal?

"People always fear change and property investors are no different," reassures Robert. "The point here is that the changes taking place for non- domestic property investors are actually only bringing them into line to pay the same rates as residents and therefore this is seen as fair and not an extra tax on non-French residents who are hoping to spend at least some of the year enjoying the good life in France while also taking advantage of the strong and stable returns the French property market has historically delivered."

Indeed, he continues, the new French property taxes will make very little difference to most investors: "For investors taking a mortgage on their property in France the changes will mean less than one may expect and the fact that the UK has a double tax treaty with France means that the changes may make very little difference to many purchasers and investors. You may also benefit from structuring your purchase through the use of an SCI. It is therefore essential to take professional advice when purchasing a new investment or holiday home in France."

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