IN GOOD COMPANY
If you’re buying a property in France, you might not have considered company ownership. Debbie Bradbury explains how it can be beneficial depending on your situation
Find out why company ownership of your French home is worth considering
Are you thinking of investing in French property and want to be sure you purchase in the most taxefficient way to suit your personal circumstances? If so, before you sign on the dotted line, make sure you have answered the following questions:
Who is buying the property and ultimately who is paying for it? Will you need to finance the purchase and, if so, will you borrow in France or refinance your UK property? Are you considering an old property or looking to buy ‘off-plan’? What is your personal situation with regards to spouse, children, and who would you prefer to inherit the property on your death? What is the value of the property? What do you intend to use the property for? If you hope to earn a rental income, will you be letting it out long-term, unfurnished, or will it be let furnished? If you intend to let the property furnished, on a seasonal basis, will this be self-catered or do you intend to offer a range of services?
WHAT WILL THE PROPERTY BE USED FOR?
If you are purchasing a property that will only ever be for personal use, then you may not need to complicate things by setting up a company structure. However, this may depend on your personal situation and who you wish to inherit the property should you die. It could be prudent to set up a SCI ( société civile immobilière) where there are children from previous relationships, or if you are not married, or if you are purchasing property to let out unfurnished.
However, if you are intending to let the property in order to make a return on your investment, you need to look at all the above questions to see which method of purchase suits your personal situation best.
1) OWNERSHIP IN JOINT NAMES
A married couple, with children from the same marriage, who wish to let their property furnished on a self-catered basis can run the rental activity in joint names, with no need for any form of company set-up. In most cases, married couples who jointly own property have to submit annual profit and loss accounts for the rental activity, enabling them to deduct all costs related to the rental activity, as well as an annual allowance for depreciation, which is in the region of 3% of the value of the rental property. Any profits are split between the spouses and a joint tax return is submitted to the authorities.
Lending is straightforward when you want to borrow as private individuals.
2) COMPANY OWNERSHIP
There are different forms of company that can be used to purchase a property where there are more complicated situations, either with regards to the relationship between the envisaged owners and possible inheritance issues, or with regards to the type of activity to be carried out at the property.
Also, as wealth tax is applied to high-value assets in France, a company purchase may be a way of dividing up the property into shares, partly owned by parents and children (or other shareholders) to avoid annual wealth tax and possibly inheritance tax at a later date. It is also easier to transfer shares among shareholders as these are classed as moveable assets, and if you are non-resident in France, the taxation of these transactions is governed by the law of your country of residence rather than French law.
An SCI is a civil company. It is particularly adapted for unfurnished rental of commercial units, or long-term unfurnished habitation, as it allows for annual deduction of all costs relating to refurbishment and repairs, loan interests and mortgage registration fees, whereas there is no annual depreciation allowance.
One of the advantages over joint ownership, from a legal point of view, is that the decisions are made in the majority. This is also a transparent company, with annual declaration of shareholders.
The tax regime applied is that of private individuals, so any profits from the company are distributed to shareholders and taxed individually according to that shareholder’s residency and other income, and any CGT is calculated according to the progressive scale depending on number of years of ownership.
Banks lend easily for an SCI structure as the individual shareholder’s income is taken into account for the purposes of calculating repayment of the loan in the same way as joint ownership.
A SARL is a commercial limited liability company. This type of company is adapted for running professional activities, such as catered furnished rental (hotel-type services) or any other traditional professional activity.
If the SARL owns a property and runs the hotel-type catered services, not only are all
running costs deductible from turnover, but there is also an annual allowance for depreciation.
However, this is a purely commercial company and as such its profits are taxed on the corporation tax regime; any distributed income is then taxed on the individual tax regime and corporation tax is due on the sale of the property. This will be calculated on the difference between the book value of the professional asset at the time of resale and the sale price rather than on the original purchase price, which could give a much higher gain.
Banks will require several years’ accounts or a three-year business plan if creating a new SARL before they will agree to lend, as this would be classed as a business loan.
It would be very unusual to structure a purchase using a SARL that is subject to corporation tax as the taxation would be highly unfavourable on resale.
It’s worth noting this would also be the case if an SCI were to run a furnished rental activity directly, as it would mean that the corporation tax would apply, as with a SARL.
A SARL de FAMILLE has the advantages of being a commercial limited liability company but governed by the private individuals’ tax regimes. It is a very good option when all purchasers are related by direct line (parents, children, grandparents, brothers and sisters, and their immediate spouses) as it can cover the eventual inheritance issues as well as enabling the property to be used for a commercial activity (furnished rental, hotel-type services etc).
Again, one of the advantages over joint ownership, from a legal point of view, is that the decisions are made in the majority. This is also a transparent company, with annual declaration of shareholders.
As it follows the individual income tax regime, there is no corporation tax to pay on profits, but all profits are automatically distributed to shareholders and taxed individually according to that shareholder’s residency and other income. Any CGT is calculated according to the progressive scale depending on the number of years of ownership (there is no exemption after five years*).
Some banks do not distinguish between a SARL de Famille and a purely commercial SARL and it is therefore imperative to check with your bank whether they are happy to lend to a SARL de Famille, as with an SCI.
Hopefully the above guidelines are useful but if you have more questions, your notaire can advise you on eventual inheritance issues.
As wealth tax is applied to highvalue assets in France, a company purchase may be a way of dividing up the property into shares
Debbie Bradbury is a coordinator of Englishspeaking clients at SAREG, a chartered accountancy firm advising owners of property in France. sareg.com
*It is important to note that the five-year exemption for CGT in France relates only to properties used for running a professional activity where the owners are directly involved in the business. It is not because you own a property with a company that it becomes a professional asset.