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Please read our new important post on Capital Gains Tax posted on the 21st of October 2013:  “French Parliament backs capital gains tax reform on property…but further changes not excluded for properties owned more than 22 years”

In our last Sunday blog “French property capital gains reform better than expected?”  we briefly announced the latest updates on the capital gains tax for a second home in France. Today, let’s examine in detail the document that was released on the 2nd of August by the French Ministry of Finance (can be accessed on the following link from paragraph 152  http://bofip.impots.gouv.fr/bofip/292-PGP also http://bofip.impots.gouv.fr/bofip/8911-PGP?BRANCH=2 ). Please also read our posts “Capital gains tax on French property: latest updates and calculation (part 2), simulations show significant tax reduction!” and “French property capital gains tax: calculator for the September 2013 reform“.

From the 1rst of September 2013:

  • The tax rate is still at 34.5% of the amount of capital gains (19% for  the “proper “ tax rate and 15.5% for the social charges rate or CSG, 19% only applies for EEA residents -European Union+Iceland+Norway-, otherwise it is 33.1/3%, and even 50% for “non cooperative” countrie on tax matters ). However the dampening or smoothing factors for the 19% tax rate become more favourable, leading to no tax at 19%, 22 years after you acquired your second home:
    • The dampening factors for the 19% tax: decrease by 6% per year, from the 6th to the 21st year, of the capital gains amount on which the 19% tax rate is applied. Decrease by 4% the 22nd year leading to a complete exemption after 22 years of the 19% tax.
    • The dampening factors for the 15.5% social charges: decrease by 1.65% per year, from the 6th to the 21st year, of the capital gains amount on which the 15.5% tax rate is applied (so reduction by 26.4% of the amount of capital gains which is taxed at 15.5% after 22 years). The 22nd year the dampening factor is at 1.60% and from the 23rd to the 30th year it stands at 9%, leading to a complete exemption of social charges after 30 years.
    • There will be an additional 25% rebate for both the tax rate at 19% and the social charges at 15.5%, between the 1rst of September 2013 and the 31st of August 2014. This means that once you have reduced your capital gains amount using the above dampening factors, you will apply an additional 25% rebate on the remaining amount. However the 25% does not apply if you sell your property to your husband or wife, couple partner, to an heir or to a ancestor. It also does not apply if the property is sold to a company in which one or several of the above persons are shareholders or are to become shareholders.
    • The additional tax (above 50 000 euro of capital gains amount) remains and the 25% rebate also applies to this tax. As a reminder this additional tax is:

from

to

additional tax

50,001

100,000

2%

100,001

150,000

3%

150,001

200,000

4%

200,001

250,000

5%

250,001

6%

There is a smoothing factor for each of the first 10 000 euros of each layers (e.g. : between 50 001 and 60 000, between 100 001 and 110 000 ….). A new document from the French ministry of Finance gives insights on the calculation of the additional tax. In a nutshell, the capital gains subject to the additional tax is assessed based on the number of sellers in case of undivided owners, couple partners, married or civil partners. The tax calculator in our post “French property capital gains tax: calculator for the September 2013 reform” takes into account the worst case scenario (one individual seller). We are preparing an improved version which will show the amount of additional tax separately and allow to calculate in case the property is sold by undivided owners, couple partners, married or civil partners. You can access the French ministry of Finance document at: http://bofip.impots.gouv.fr/bofip/8597-PGP?datePubl=17/08/2013

  • At the moment the cut off date for the 1/09/2013 and the 31/08/2014 will be the realisation of the “conditions suspensives”. Example: if the buyer has applied for a mortgage and or for a planning permission and these are stated as “conditions suspensives” in the preliminary acquisition contract, it will be at the date when these conditions will be realised, so very close to the signature of the final acquisition contract. (We will come back to the “conditions suspensives” in another blog).
  • This reform does not apply to the building land, for which the current tax rules still apply. As a reminder, under the current tax rules the dampening factors are the same for the 19% tax and the 15.5% social charges. These factors are: 2% between the 6th and the 17th year, 4% between the 18th and the 24th year, 8% between the 25th and the 30th year, leading to a total exemption after 30 years for both. Consequently the 25% additional rebate does not apply to the building land. Additionally the French government has the firm intention to suppress the dampening factors for the building land from the 1st of January 2014, leading to a full 34.5% of tax on the capital gains amount, whichever the date the owner acquired the land (there is no additional tax above 50 000 euro for building land).
  • Although it is now nearly certain that the reform will take place (as the French President Francois Hollande announced it during a televised interview mid June), this package of new tax rules still has to be backed by the French National Assembly.