Article 2 of a series of specialist articles written by David Anderson of Sykes Anderson, Solicitors, London.

Current tax implications of investing in and developing French residential property.

Imaginary conversation between a UK resident investor and property dealer who has built up a UK portfolio and is planning a move to France in a few years time and David Anderson solicitor and Chartered Tax adviser on the tax position of investing in and developing French residential property.

Q. I have heard that France is a high tax country for UK property investors to move to. Is this correct?

A. No this is totally wrong. It is a complete tax haven for Capital Gains Tax and a partial tax haven for income tax. The significant tax breaks in France for UK property investors are simple to use but not well understood. Talk me through your proposals and I will explain how you can benefit.

Q. I want to stay in the UK for the next few years and build up a portfolio of rented properties in France. How will I be taxed on the income?

A. The income will initially be taxed in France. You will have the usual deductions for mortgage interest, repairs and the other outgoings in a similar way as in England. The rate applicable is 25%. The income should also be included in your UK tax return as it is subject to UK tax as well, though a credit is given for any French tax paid.

Q. In order to deduct the mortgage interest against the rents do I have to borrow from a French bank or the French branch of a UK bank?

A. No you can borrow from your normal UK lenders. You can even set up a mortgage with a private person.

Q. Does it make any difference if I rent furnished or unfurnished property?

A. Yes. In France unfurnished property is treated as non-commercial income whilst rented property is treated as commercial. They are taxed in different ways. In England there is effectively no difference.

Q. Any other tips?

A. Yes, be careful if you buy a property to rent out furnished using an SCI - Société Civile Immobilière. SCI’s should not be used for commercial purposes and if they receive income from furnished property this may have adverse tax consequences.

Q. How does the UK Revenue work out the net income on my French property? Do they use the French net income figure or do I need to do a further computation using the UK rules for deductions?

A. You work out the net rent using the same principles as for the letting of a UK property. You ignore the special UK rules for furnished holiday lettings. The “foreign” part of the UK annual tax return takes you through the computation. In other words the net figure you get for UK tax will be different to the net figure you have already paid tax on in France. However if your property income is less than £15,000 pa then you do not have to break down your expenditure and in practice the same figure as for net income in France is probably accepted by default by the UK Revenue.

Q. Does it make any difference if I move to France?

A. Obviously no UK tax return will need to be filed. However French national insurance may be levied on the rents. This does not happen whilst you are resident in the UK as you are then outside the French National Insurance net.

Q. If I move to France and still have a UK company can I use this company to receive tax-free income and other benefits?

A. Yes. This is a very useful tax and financial planning area with plenty of benefits, which is often sadly completely overlooked by expatriates in France. You need expert advice here.

Q. Once I am in France I may want to sell some of my UK properties and reinvest into French property. Will I have to pay any capital gains tax either in the UK or France?

A. There should be no tax to pay either in the UK or France.

Q. Why is that? I thought if you ceased to be UK resident you would become French resident and pay tax in France?

A. You will be non-resident for UK purposes and not liable to UK CGT, assuming you do not return to the UK within 5 years. Although France taxes its residents to French CGT on a worldwide basis this is subject to anything to the contrary in a double tax agreement. The UK France double tax agreement is interpreted by the French Inland Revenue to mean that you pay no tax on gains made on English property. This surprisingly makes France a tax haven for UK property investors.

Q. Once I am in France how will I be taxed on my rental income from my UK properties?

A. Any properties in your personal name will be taxed in the UK under the non-resident landlord scheme at 22%. The income is not taxed further in France because of the way France interprets the double tax treaty. The income should however be included in your French tax return and may push you into a higher tax bracket in France for the taxation of your French income. Again surprisingly moving to France is likely to save a higher rate taxpayer 18% on his UK rental income.

Q. How is the income computed for French tax purposes? Can I just use the UK net figures or do I need to recompute using the French rules?

A. The French Revenue generally accepts the UK net figure.

Q. Any other thoughts on this?

A. Yes. Think carefully about putting your UK properties into an offshore trust before you arrive in France. This can be helpful in keeping the assets out of your name for French Wealth Tax and Inheritance Tax. The tax treaty with France is being renegotiated and the current tax friendly approach in France may well change.

Q.I want to start dealing in property in France now whilst I am still resident in the UK. This will start with renovating properties. How is this taxed?

A. You will be treated as carrying on a trade of development in France and will be taxed at 50% on the profit.

Q. Is this how local French developers are taxed?

A. Property dealers are classed as “marchands de biens” or traders in France. They pay effective tax at similar rates.

Q. Is there a way around this?

A. Yes you can buy and sell the property using a UK company. The tax rate on a UK company is likely to be very much lower and you may have such a company available. It also means that you do not have to extract any money from a UK company you may already have either as salary or dividends at an additional UK income tax cost.

Q. But won’t the Company be trading in France and be taxable there?

A. It will be trading in France but if it does not have a permanent establishment in France, the UK France Double tax Treaty exempts the UK company from French tax in such circumstances. The good result is that the company is taxed only in the UK.

Q. So it's very important for the UK Company not to have a permanent establishment in France?

A. This is essential to avoid the excessively high French tax. The tax saving is likely to be at least 30%. Remember the first £10,000 profits in a UK company are tax-free.

Q. What is a permanent establishment?

A. This is a tricky question. It is easier to say what it is rather than what it is not. A sales or site office will be a permanent establishment. In some cases a desk in a corner of a room has been viewed as a permanent establishment. It is important that the documentation clearly shows no intention to create a permanent establishment.

Q. So how will I run the development?

A. The structure will have to show that the company carries out its trade in France through an appointed independent agent. The agent must not be connected with the company and should be paid at the local going rate. Typically the agent’s powers are very restricted to day-to-day matters and all major decisions and payments for supplies are made from the UK company.

Q. Assuming I am or become resident in France can I still use a UK company and this structure with say the UK company appointing me as the local French agent?

A. Yes though the way the UK company is set up is important to avoid the French authorities assessing it on the basis it is fully taxable in France. You would be able to deal with routine site matters only.

Q. What other practical snags are there?

A. It is important that the notary you use to carry out the conveyancing is aware of the double tax treaty to avoid the notary withholding 50% of the profit subject to you getting a tax clearance. The double tax treaty overrules domestic French law though local notaries may not appreciate this important point. The notary deducts from the money you receive the French CGT which is 50% of the gain and will refuse to pay the sale proceeds to you until you have appointed a French Tax Agent to agree your tax liability with the French Inland Revenue. Your works to the property may (at the notaries discretion) be deducted from the profit reducing the amount withheld. This is generally an unattractive option as most of the tax agents have very close connections with the French Revenue and may require you to deal with
fairly exhaustive enquiries. Please note that if you are not dealing in property then 33.3 % is withheld by the notary on the same basis as above. In our view this is illegal under the UK France Double Tax Treaty as the UK does not apply any withholding tax to French residents buying UK land. It is also likely to be illegal under the European Convention on Human Rights. If anyone is experiencing this problem we have the expertise to assist in resolving it.

This article is written and provided by David Anderson, a Solicitor specialising in taxation. This is intended only as a general guide and should not be relied upon without professional advice on the facts of your particular case. He is a Chartered Tax Advisor and has extensive experience in setting up tax effective structures for investment into France.

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David Anderson can be contacted at:

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