Hostage to fortune
If you’re buying a property in France, you should be aware of wealth tax. Legal expert Matthew Cameron explains who is liable and how it is calculated
Many people buying a house in France, whether as a holiday home or as a permanent residence, will not have to worry about the potential implications of wealth tax, Impôt de Solidarité or ISF. Perhaps it is a problem they might wish to have, because as the name suggests, it is a tax that is calculated by reference to the value of a taxpayer’s qualifying estate.
The definition of the qualifying estate, and the level of tax payable, will depend on a number of various points. In this article, we will consider some of the main issues of relevance in relation to this tax.
Over the past few years, there have been several stories in the press about high-profile French residents threatening to leave France (and some actually doing so) largely in protest at the impact of ISF. Certainly it can be a notable burden for very high net-worth individuals, as the tax is incremental, which means that not only is the tax applied to a greater set of assets, the rate of tax applied is higher.
The term ‘taxpayer’ refers to a person, if they are single, or to a couple, if they are married or in a civil partnership. Just as with income tax declarations, therefore, a joint tax declaration is submitted.
HOW IS WEALTH TAX CALCULATED?
It is prudent at this stage to understand how the tax is calculated. It is applied on the net value of the qualifying estate. If the total net value is less than €1,300,000, then no tax return need be submitted. Where the value exceeds that threshold, then the tax is chargeable on the total net estate starting at €800,000. The tax is applied annually on the value of the taxpayer’s estate as at 1 January of each year.
The portion of the estate worth between €800,000 and €1,300,000 is taxed at a rate of 0.5% per year, which amounts to a total of €2,500 per year.
The portion of the estate worth between €1,300,000 and €2,570,000 is charged at 0.7%, which amounts to a total of €8,890.
The portion between €2,570,000 and €5,000,000 is taxed at 1%, which amounts to a total of €24,300.
The portion between €5,000,000 and €10,000,000 is charged at 1.25% which amounts to a total of €62,500.
Any part of a person’s net estate worth in excess of €10,000,000 is taxed at the rate of 1.5%.
WHO HAS TO PAY?
The definition of qualifying depends primarily on whether the taxpayer lives in France or has a holiday home there. If the latter is the case, then it is only the net value of the house that is taken into account. It is the net value that is taken into account, because the amount of any mortgage registered against the property will be taken into account to reduce it.
The fact that a mortgage charged against its property will reduce its value for wealth tax purposes is occasionally used as a reason by some people to take a mortgage. But while it might make the homeowner’s cash-flow position easier, and indeed reduce or cancel the exposure to wealth tax, careful thought should be given as to whether this is necessarily the best option: what if the interest repayments on the loan are greater than the tax that would have been payable?
If the taxpayer is permanently resident in France, then the value of the whole of their worldwide estate is taken into account for the purposes of the calculation of wealth tax. The only exception to this is where a similar tax exists in another state, in which case the amount of tax paid in that other state is credited against the French tax. There is no similar tax in the UK.
ALLOWANCES AND EXONERATIONS
When the taxpayer lives permanently in France, there are several allowances and exonerations that can be granted to alleviate the tax. Some of the allowances appear below. Please note, it is not possible, in the space available in this article, to establish an exhaustive list here, nor