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Warning: additional posts on capital gains tax were issued following the document released by the Ministry of Finance on the 2nd of August 2013. Pease refer to the post “French property: capital gains reform better than expected?” (posted on the 4th of August 2013), “Capital gains on French property: latest updates and caculations (part 1)” (posted on the 9th of August 2013), “Capital gains on French property: latest updates and caculations (part 2), simulations show significant tax reduction!“ (posted on the 9th of August 2013). The main changes concern the 25% rebate which is now also applied to the social charges, and what factors may be taken into account for the “cut off” date between the current regime and the new rules to be implemented.
Many commentators were sceptical when President Francois Hollande announced that he will reduce the period for the total exemption of capital gains on second home, from 30 years to 22 years (as it used to be before 2004).The French ministry of Budget, Bernard Cazeneuve, has recently disclosed some insights of the new reform of the capital gains tax. However a few key questions remain unsolved, which may have a significant impact on the outcome of the reform.
Up until now, the overall tax amounts to 34.5% (19% of proper capital gains tax and 15.5% of social charges, “CSG” and “CRDS”) of the capital gains on sale of second home. This rate is the same whether you are a French resident or a EEA resident (EU + Norway, Iceland and Liechtenstein), in most case its payment will be considered as tax relief for capital gains in your EEA country of residency. However the tax is fully exempted for property detained for more than 30 years, and there is a very slow “smoothing factor” to decrease the amount of capital gains from the 6th to the 30th year. This factor is -2% every year from the 6th to the 17th year, -4% from the 18th to the 24th, -8% from the 25th to the 30th. This factor is the same for the 19% tax and the 15.5% social charges. There is no capital gains tax for the main residency.
The new measures announced by “Bercy”, the office of the ministry of budget, should be implemented retroactively from the 1/09/2013 and should include:
- a reduction or the period for total exemption of the capital gains tax from 30 years to 22 years (similar to what prevailed before 2004)
- however the reduction to 22 years will not apply to the 15.5% ” social charges” (CSG and CRDS) of the capital gains for which the total exemption would stay at 30 years.
- the “smoothing factor” for the capital gains amount taxed at 19%, would be a straight line 6% from the 6th to the 21st year and 4% for the 22nd year
- the “smoothing factor” for the capital gains amount on which the 15.5% social charges will apply, would be 1.65% from the 6th to the 21st year, 1.6% the 22nd year, and 9% every year from the 23rd to the 30th year.
- an interim 25% additional rebate on capital gains amount will be implemented for a limited period between the 1st of September 2013 and the 31st of August 2014. However, this rebate is unlikely to be applied for the calculation of the 15.5% social charges.
The main question is whether the 19% tax rate will stay at this level or not (the social charges rate should stay at 15.5%), as minister Bernard Cazeneuve did not comment on this important point. The capital gain tax rate that prevailed before 2004 (which is the benchmark that President Hollande mentioned during its electoral campaign) was the marginal income tax rate. If this is the case again from the 1/09/2013, which tax rate will be applied for EEA residents?
Additionally, the minister did not mention the additional tax rate above 50 000 euros of capital gains (the 50 000 is calculated after taking into account “smoothing factors”). This additional tax was implemented for the 2013 tax year and is likely to remain. The rate amounts to 2% between 50K euros and 100K euros, and increases by 1 percentage point from 100k for every additional 50k up to 6% for the capital gains greater than 250K euros.
Finally, opposite measures will be implemented for capital gains on land, on which the town planning regulation allows building of new home. The current full tax and social charges exemption after 30 years will no longer apply as of the beginning of next year. The owner will have to pay the capital gain tax even if he owns the land for more than 30 years, if a “compromis de vente” is signed after the 31/12/2013.