In this five part series of posts we will summarise any changes on tax and how they may effect you with the help of The Spectrum IFA Group: Independent Financial Advisers. In part 3 we are looking at Capital Gains Tax on property.
CAPITAL GAINS TAX on property
With effect from 1st September 2014, the taper relief applicable to gains arising from the sale of building land has been brought in line with that applicable to other property gains, as follows:
- 6% for each year of ownership from the sixth year to the twenty-first year, inclusive; and;
- 4% for the twenty-second year.
Thus, the gain will become free of capital gains tax after twenty-two years of ownership.
However, for social contributions (which remain at 15.5%), a different scale of taper relief applies, as follows:
- 1.65% for each year of ownership from the sixth year to the twenty-first year, inclusive;
- 1.6% for the twenty-second year; and
- 9% for each year of ownership beyond the twenty-second year.
Thus, the gain will become free of social contributions after thirty years of ownership.
An exceptional reduction of 30% of the taxable capital gain, arising from the sale of building land only, has also been introduced, subject to the following double condition that:
- a compromis de vente has been signed between 1st September 2014 and 31st December 2015; and
- the completion of the sale of the land must take place by 31st December of the second year following the signing of the compromis de vente.
The exceptional reduction applies for both the capital gains tax and the social contributions liabilities. However, it is not available for land transferred between spouses and PACS partners, nor to ascendants or descendants.
It should also be remembered that there is still an additional tax applicable for property sales, when the gain exceeds €50,000, as follows:
|Amount of Gain||Tax Rate|
|€50,001 to €100,000||2%|
|€100,001 to €150,000||3%|
|€150,001 to €200,000||4%|
|€200,001 to €250,000||5%|
|€250,001 and over||6%|
Where the gain is within the first €10,000 of the lower level of the band, a smoothing mechanism applies to reduce the amount of the tax liability.
The above taxes are also payable by non-residents selling a property or building land in France. However, at some point during 2015, the European Court of Justice (ECJ) will most likely rule on the outcome of the European Commission’s infringement procedures against France, regarding the application of social contributions on income and gains arising in France for non-residents. Following the delivery of the legal opinion of France’s Advocat General to the ECJ, it is widely expected that non- residents will become exempt from social charges on gains and income arising from French property.
One other point worth mentioning concerns the rate of capital gains tax for non-residents. To date, this has been at the rate of 19% for residents of EU/EEA countries and at 33.33% for non-residents of other countries, except for those of ‘non- cooperative territories’, who have been liable to a 75% capital gains tax rate.
In October 2014, the French Conseil d’Etat, which is the highest court in France for tax matters, decided that the higher rate of capital gains tax for non-residents is illegal, in certain circumstances. The basis for its decision was that it considered this to be a disincentive for non-residents from outside of the EU/EAA to purchase property in France. As such, the court considered this was a restriction on the free movement of capital and thus, contrary to EU law.
Arising out of this decision, the government proposed to harmonise the capital gains tax rate at 19%, but not for those residents of ‘non-cooperative’ States, for whom it decided that the 75% rate should be maintained. However, when considering the proposed legislative changes, the Constitutional Council ruled that a capital gains tax rate of 75% is excessive, when taken into account with the social contributions of 15.5% and so ruled that this is contrary to France’s Constitution.
The Constitutional Council’s decision is somewhat of a surprise, since the 75% tax rate plus social contributions has already been the practice. One assumes, therefore, that as and when France is instructed not to apply social contributions to gains arising for non-residents, then the 75% capital gains tax rate will no longer be considered unconstitutional!
Finally, one other good point for some non-residents is that for those who are resident in the EU (and in some cases in the EEA), it will no longer be necessary to appoint a tax representative in France to deal with the calculation of the capital gains tax, when the property is sold.
If you would like to find out more about how these changes could affect you, we recommend speaking with your local Spectrum IFA Group adviser.