What you need to know about owning property in France
THE latest changes to the tax system in France have focused attention on the tax treatment of overseas property.
These changes in particular may result in higher tax bills if you own property in France. This means that you could have tax to pay in both the UK and France, and you then need to know how the interaction between the two tax systems works.
Let’s look at your situation if you have a property in France that you let out for part of the year.
Not everybody reports such income to the French tax authorities, but to stay on the right side of their laws you need to.
You pay French tax on the profits, which broadly speaking will be calculated as the rental income you receive less the running costs.
Interest on loans that you have taken out to pay for the property will be deductible from the taxable profits, but not the capital repayments.
However, you will need to consult an expert in French tax to help you to work out the taxable profits and send your return to the French authorities.
The French income tax rate under the latest changes is 35.5 per cent, which is a big increase on what UK people used to pay, but is actually no more than French people have been paying for some time.
Then you need to report the same income on your UK tax return.
This time the profits are calculated using the UK’s rules, so you need to consult a UK tax expert.
There are differences in how expenses are dealt with as between the two tax systems. One example is the treatment of repair and maintenance costs.
So far you have two tax calculations and two amounts of tax payable.
This is where the tax treaty comes in, and allows you to reduce your UK tax for the French tax that you pay.
However, you can only reduce your UK tax to nil. If the French tax is higher, you won’t get a refund for that.
Monsieur Hollande has also raised the rate of tax on French capital gains for UK property owners.
If you make a profit on selling a French property you will now face a French tax rate of 34.5 per cent.
Because you live in the UK, you will also have to work out a gain for your UK tax return.
The calculation of the taxable gain is all-important, and the rules in the two countries are different.
One key point is the currency in which you work out the gain. For the French tax calculation, you compare the sale price in euros with the cost in euros.
These figures will generally be the actual euro amounts that you pay and receive.
There are then other adjustments to make for the French tax calculation.
One is a percentage reduction in the gain depending on how long you have had the property.
If you have paid for improvements or repairs some of those costs may be deductions from the gain on sale. Here in particular you need good local advice.
When it comes to the UK tax return, the gain is worked out in sterling terms, applying the exchange rates for the purchase and sale dates.
So the amount of the gain on the French tax return may be different from the gain on the UK tax return, because of exchange rate movements.
The basic idea of double tax relief is then the same as for income tax.
You pay the French tax, and then reduce the UK tax for the amount of French tax paid.
But as with income tax, you won’t get a refund if the French tax is higher.