French Tax on Holiday Homes
Andrew asks:
I am looking to buy a house in Beziers, in the south of France. It's a beautiful area where I have enjoyed a number of holidays over the last five years. I would use the house as my holiday home and rent it out when I am not there. My budget is €120,000 (around £100,000). Do you have any tips for buying abroad and what are the tax implications that I need to consider?
Katie Binns replies:
Who hasn't been on holiday, fallen in love with the place and dreamt of making a permanent move or at least buying a holiday home there? However the reality can be more of a nightmare than a dream if you don't do your homework first.
Do your research
Buying property is a big investment – and especially tricky in an overseas properties system with different taxes and legal fees.
I know that you are familiar with Beziers and clearly love it but now you need to think critically. But if you want to buy in another country and rent out your holiday home to others, you need to do a lot of research.
- Subscribe to specialist magazines and websites devoted to expats in France
- Ask lots of questions in online forums
- Attend an international property exhibition, where you can talk to estate agents, lawyers, developers and experts
- Check out the UK government website, which has some good general advice on buying property in France
How to get a mortgage
There are a number of options if you need to get a mortgage to buy your property abroad:
- Work with a UK bank and remortgage your UK property to release funds
- You could apply to an overseas lender and get a mortgage there
WARNING: Foreign banks and mortgage brokers are not covered by the Financial Conduct Authority, so protections will be different.
Specialist mortgage brokers can give you tailored information, including a list of estate agents or lawyers used in France. There is also a list of French lawyers here.
Some overseas lenders speak English; if not you will need to look for a translator. A lawyer dealing with the purchase should be able to offer in-house translation services.
Factor in the exchange rate
If the pound goes down, French property prices go up – and vice versa.
Say you find a property in Beziers valued at €120,000:
- 4 April 2022's exchange rate was €1 for every £0.84 = £100,800 for the property
- 4 March 2022's exchange rate was €1 for every £0.82 = £98,400
In the space of one month, if the exchange rate fell, you would have to find an extra £2,400 to buy the property that is still valued at €120,000.
These fluctuations will also affect your mortgage payments if you are paying from a British bank account.
For example, on a €500 a month mortgage:
- April = £420
- March = £410
No one can predict what exchange rates will do and it is very hard to time a house purchase.
You could use a forward contract or a regular payment plan from an international payments firm. This can help you plan ahead by fixing an exchange rate for sending or receiving foreign money, for up to two years.
If you want to know more about buying abroad, check out our guide here.
The tax implications
Income tax
You will be liable to French income tax, even if you don't live in France full-time – and would have to submit a tax return to the French authorities and in the UK.
Don't worry, the UK and France have a double taxation treaty, so you will not get taxed twice. You will probably pay tax in France, and where the UK tax is more than the French tax that extra bit is paid in the UK.
However, if the UK tax is less, you pay the tax in France as normal – I'm afraid you can't get a refund because the UK tax is lower.
In France, if your rental income is less than €27,519 (after allowances and costs) you are taxed at 20%. Above this and it's 30%.
Stamp Duty SDLT
When you buy a house in France, all the taxes including the French equivalent of our Stamp Duty Land Tax, are pooled together under one umbrella, known as Notary fees.
These vary depending on the type and price of the property. You can expect to pay around 2% of for a newbuild, and 7% of the property value in tax when you buy an old property.
Capital Gains Tax & the Social Levy
Capital gains tax is the tax you pay on the profit you make when you come to sell or dispose of an asset. In France, you make two payments on a capital gain:
- capital gains tax (CGT) – 19% and only payable on a second home
- social levy – going up from 7.5% for EU residents with a second home in France to 17.2% for British homeowners.
Total costs payable will be 36.2%, up from 26.5%, as a result of Brexit.
A taper relief exists for both CGT and the social levy after five years of ownership:
- CGT – the taper exists from year five to 22, when no CGT is owing
- Social charge – the taper also starts at year five with no charge after 30 years of ownership
Inheritance Tax
You could use a property ownership structure, called a société civile immobilière (SCI), to mitigate inheritance taxes in France.
It is likely that your holiday home will be added to the assets that your estate might need to pay UK inheritance tax on, if it is over the threshold.
Find out more about inheritance tax and what are the thresholds and rates are here.
Andrew, I know there's a lot to think about, but once you've done the boring bits around tax, mortgages and exchange rates, you can get more excited about skiing and swimming. Bonne chance with your plan to buy in Beziers!
Checklist:
- Do your homework on Beziers
- Decide whether you need a mortgage
- Look into getting a translator to help with the property purchase
- Research products that will "fix" your exchange rate
- Read up on French income tax rules
Got a question for our mentors? Drop us an email and we'll get it answered.
Source: https://www.thetimes.co.uk/money-mentor/answer/holiday-property-tax-implications/
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