THE INSIDE VIEW

Hollande's proposed new taxes for second homeowners in France

I have been mulling over several ideas for posts recently (I tend to have too many in my head at any one time, causing perpetual writer's block). However, the latest announcement from President Hollande's camp about how they are to raise revenue by taxation has finally managed to galvanise me.

By now most second home-owners in France will be in panic mode thanks in part to hurried newspaper reports in the Daily Telegraph and Daily Mail. We have been here before. Most recently with Sarkozy's defunct second-home tax (thrown out by Parliament last year, but I still have people ask about it as though it exists). Most newspapers seem hardwired to splash sensational headlines and can not be bothered to investigate or explain details further. I guess this is instant journalism - the McDo media (as McDonalds is known here in France).

The latest tax announcements come as little surprise. Hollande is making his mark across the business and banking sector, and we all knew that was coming. What worries the foreign second-home owner market is his proposed rise in capital gains tax and rental income tax. Nothing has become law yet, but it is looking likely to do so as the Socialists hold the majority. That said, there is a good chance the proposed law will be challenged under EU law (as Sarkozy's second home tax would have been if the French Parliament had not rejected it in advance).

It is important to pause and look at what is proposed and offer a counterpoint to the headings that scream 'French Tax Grab on Holiday Homes'.

Capital Gains Tax increase
For second homes owned by EU foreigners, Hollande is looking to increase the rate from 19% to 34.5%. This will effect EU second homeowners only.  Currently French residents pay the full rate of 34.5%. Non-EU second homeowners (e.g. US, Australians, South Africans, Canadians etc) already pay 33.3%.  This means everyone, be they French, British, Russian, American, Chinese, will pay almost the same rate across the board.

The controversy in part lies in the fact that the increase is labelled as 'social charges', which will ultimately prove to be the legal challenge. If it does pass to become law, however, British and other EU residents will simply pay the same rate as French and non-EU residents. The sliding scale (deduction by percentage points after year 6) will still apply, as will tax relief for renovation and improvements.

Thus the longer you hold on to a property, the less you will pay in capital gains tax (assuming and hoping there is a profit when you sell). As well, if you own a property under the SCI scheme (limited company for property purchases), then different laws apply to you.

It may be irksome as a British second homeowner suddenly to have this hike, but the logic is that it brings you in line with your French and non-EU colleagues.

Rental tax
Raising rental income taxes from 20% for non-residents to 35.5% again is based on 'social charges', so no doubt this will be challenged as well if it is passed by Parliament (the legal argument being that non-French residents should not have to pay social charges in a country they do not reside in).

I think this rise is a foolish move by Hollande. Not only will it scare away less experienced overseas investors but it will probably encourage more second homeowners who are renting out not to declare or to be creative with their accountancy. Obviously those who are not renting out (and they tend to be the wealthy) won't be concerned at all. Those that do, as I say, will find ways and means to either not pay or reduce the shown profit.

However, I also have to say that I am perplexed when I talk to many second homeowners here. They often feel aggrieved to be paying any tax at all on their rental incomes. For some strange reason, in their world, buying a property in another country exempts them from the normal laws that would apply in their own countries if they were landlords. It is a bit like they are living life on a Monopoly board with fun money. These same people grumble about paying the standard (for all owners) Taxe Foncière (land tax) and Taxe d'habitation (council tax). When I suggest we stop having their rubbish removed, ban firemen turning up to put out a fire in their home, refuse to send police when they have a break-in, leave the street outside their house unpathed etc, they look blank.

The point is if you are earning an income, you pay tax. Whether that money is earned in another country makes no difference. The amount you pay will depend on a number of factors and a good accountant should be able to offset most expenses against the income you make from the rental.

Good news for buyers

More tax is never fun. Hollande's new approach will upset many. However, the Côte d'Azur property market will continue to flourish and the smart investors are already swooping as they prey on sellers' nerves. The last time I saw this happen was end of 2011 when the Capital Gains time limit was raised from 15 years to 30 years (by right-wing Sarkozy, please don't forget). At the end of last year, I managed to save tens of thousands off the asking price for several of my clients as we hit the right moment to negotiate.

I also think it is worth remembering for the nervous buyers and sellers out there that governments come and go. Five years from now who knows what will be. It's not the time to make a quick buck, that's for sure. But as we have seen from the financial mess we are in, stability and long-term growth are far better bets for the future.

If you would like professional assistance buying on the Côte d'Azur, please contact us at home@coteabode.com or telephone 0033 (0)623630779