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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. Please 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 factor may be taken into account for the “cut off” date between the current regime and the new rules to be implemented. You may now download a tax calculator on the “useful tools” page of our website: http://www.alps-property-france.com/#!useful-tools/cl5u and read our calculator’s explanation on “…calculator for September 2013 reform” (posted on the 14th of August).

While the previous blog was dealing with the new reform of capital gains tax when  selling a property in France (except main residency which remains exempted), this one is looking at simulated examples to factor the impact.

The calculation is based on the measures disclosed by the French ministry of budget and the assumption that the tax rate remains at 34.5% (19% of tax and 15.5% of social charges) using the different smoothing factors that were exposed in the previous blog. This assumption means that there may still be a 19% flat tax rate instead of replacing it by the marginal income tax rate. Also, the second assumption is that the 25% additional rebate (due to be in place between 1/09/2013 and 31/08/2014) is applied directly to the capital gain amount, and is only used for calculating the 19% tax but not for the 15.5% social charges.  A third assumption is that the additional tax above 50 000 euros of capital gains (after applying the “smoothing factors”) is still applied. It is likely that the date of the ” compromis de vente ” ( pre acquisition contract) will be taken into account for the cutting date of 1/09/2013 and 31/08/2014, however this will have to be confirmed with a law which will have to be voted by the “Assemblee Nationale” (Parliament), for the tax reform to be fully implemented. So caution should prevail.

Let’s imagine that you bought a beautiful 2-3 bedrooms flat in Morzine as a holiday home to spend some fantastic time in the scenic French Alps  for hiking in summer and skiing in winter. You acquired the flat the 1st of March 2002 for 160 000 euros. You really love this flat at the heart of “Portes du Soleil” unfortunately you have to sell it to help one of your children to acquire a property. You think you may sell it for 290 000 excluding stamp duty, however you have no idea how much capital gains tax you may have to pay, and how it could be calculated.

1/ You recently talked to one of your friend about the flat, he has shown some interest, and even went to Morzine to visit it, your friend would be ready to sign the “compromis de vente” (pre acquisition contract) before the end of August 2013. It would be just on time to help your child for a deposit.

In this case the capital gains tax  is under the current regime:

If you bought your property more than  5 years ago, the French tax rule allows to increase the acquisition value by a 15% flat rate for refurbishment. This flat rate is always applied whether the refurbishment took place or not. If a refurbishment was undertaken and the cost was higher you can applied the real cost (you have to keep the invoice for the whole amount).

Additionally a 7.5% flat rate is applied to the acquisition price for acquisition charges (stamp duty…)

your acquisition cost is therefore:

160 000 + 15%*(160 000) +7.5%*(160 000) = 196 000 euros

the capital gains are : 290 000 -196 000 = 94 000 euros

As you acquired the flat more than 11 years and 4 months ago, the tax rule is to decrease your capital gains by a “smoothed factor” of 2% every year from the 6th year following the acquisition, therefore by a factor of 6* 2% = 12 %

your “smoothened” capital gains is therefore : 94 000 – 12% * 94 000 = 82 720 euros

The 19% flat rate of tax is applied to this amount:

82 720 * 19% = 15 717 euros

warning: the 19% rate only applies for EEA residents (European Union+Norway+Iceland), for non EEA resident it is 33.1/3%, and 50% for resident of “non cooperative” countries on tax matters.

As your “smoothened” capital gains are above 50 000 euros, there is an additional tax of 2%  (as a reminder the rate increase by 1 percentage point from 100 001 for each additional 50 000 of “smoothened” capital gains, up to 6% for “smoothened” capital gains above 250 000 euros, with a smoothing factor between 50 001 and 60 000).

The additional tax is therefore: 2% * 82 720 = 1 654 euros

And then, the “social charges” at a rate of 15.5% is applied to the “smoothened” capital gains:

15.5% * 82720 = 12 822 euros

So the total amount that you will have to pay is : 15 717 + 1654 + 12 822 = 30 193 euros, or 31.2% of the 94 000 capital gains after deduction the acquisition cost and refurbishment flat costs.

2/ Now what would happen in case you would sign your ” compromis de vente” or pre contract after the 1/09/2013 (and before the 1/03/2014). For the first cutting date, please refer to the caveat at the beginning of this blog.

The capital gains still stand at 94 000 euros as the reduction for acquisition cost and refurbishment remain unchanged

However the reform should implement a temporary additional rebate of 25%, the capital gains is therefore deflated by a significant amount:

94 000  – 25% * 94 000 = 70 500 euros of “deflated” capital gains

From this deflated capital gains, more favourable “smoothing factors” should be applied, 6% for every full year of ownership from the 6th to the 11th year : 6*6% = 36%:

70 500 – 36 % * 70 500 = 45 120 euros of “smoothed” capital gains

to which are applied the 19% tax. There should be no additional 2% tax as the final “deflated” and “smoothed” capital gains stand below 50 000.

19% tax : 45 120 * 19% = 8 573 euros (instead of 15 717 before the 31/08/2013).

warning: the 19% rate only applies for EEA residents (European Union+Norway+Iceland), for non EEA resident it is 33.1/3%, and 50% for resident of “non cooperative” countries on tax matters.

However, the 15.5% social charges, should be applied to the 94 000 euros (as the total exemption on social charges should be after 30 years), after taking into account the “smoothing factors”, 1.65% per full year of ownership from the 6th year: 6*1.65% = 9.90%

94 000 – 94 000 * 9.90% = 84 694 euros

to which the 15.5% applies: 84 694 * 15.5% = 13 128 euros

total amount that you would have to pay : 8 573 + 13 128 = 21 701 euros

3/ If you sell between the 1/01/2014 and the 31/08/2014:

You should still benefit from the additional 25% rebate. As you will have owned the flat for an additional full year, the “smoothing factors” increase for the 19% tax rate at 7*6% = 42% which will be applied to the “deflated” capital gains:

70 500 – 42% * 70 500 = 40 890

on which the 19% rate applies : 40 890 * 19% = 7 769 euros

warning: the 19% rate only applies for EEA residents (European Union+Norway+Iceland), for non EEA resident it is 33.1/3%, and 50% for resident of “non cooperative” countries on tax matters.

…and you will benefit also from additional year for the “smoothing factors”  related to the social charges: 7*1.65% = 11.55%

basis for the social charges: 94 000 – 11.55% * 94 000 = 83 143 euros

the social charges : 83 143 * 15.5% = 12 887

So the total amount that you would have to pay :  7 769 + 12 887 = 20 656 euros

4/ Finally let’s see the case if you sell after the 31/08/2014 (before the 1/03/2015)  and the 25% rebate is effectively cancelled

The smoothing factors for the 19% rate are now based on the 94 000 capital gains:

94 000 – 42% *94 000 = 54 250 euros of “smoothed” capital gains (SCG)

and the 19% tax amounts to : 54 250 * 19% = 10 359 euros

However, the capital gains being above 50 000, the additional tax is applied. The amount being lower than 60 0001, the transition “smoothing factor” applies, instead of a tax at 2%, the formula is 2%*SCG- (60 000 – SCG) * (1/20):

2% * 54 250 – (60 000 – 54 250) * (1/20) = 816 euros

The social charges of course stand at the same level as for the previous case: 12 887 euros

the total amount you would have to pay is 10 359 + 816 + 12 887 = 24 062 euros

In order to simplify the calculation, the selling price has been considered stable, which is not likely to be the case, of course if the value of the flat changes this will have an impact on the final amount to pay on capital gains. As a reminder the above calculations will not apply to a building land (see previous blog) and to main residency which is exempted of capital gains tax.

Hereunder you will find a summary of the different calculations:

amounts in euros property sold before 31/08/2013 property sold between 1/09/2013 and 28/02/2014 property sold between 1/03/2014 and 31/08/2014 property sold after 31/08/2014 and before 1/03/2015
tax at 19% 15,717 8,573 7,769 10,359
additional tax 1,654 816
social charges at 15.5% 12,822 13,128 12,887 12,887
total amount to pay on capital gains 30,193 21,701 20,656 24,062