How Brexit affects the taxation of French holiday homes
Virginie Deflassieux, the French tax director at BDO Ltd (Guernsey – Channel Islands), explains the impact of the new relationship between the UK and the EU on those with property in France.
When it comes to British owners of holiday homes in France, it is expected that Brexit will propel them, at worst, into the non-EEA zone, which would affect their French tax situation. This may not be totally disastrous, as the terms of the France-UK Double Taxation Convention (DTC) are unchanged. The updated version took effect on 18 December 2009.
Time limits
Under the European Freedom of Movement Act, there is no time limit for stays in France by EU citizens. Needless to say, prolonged stays are likely to trigger a French tax resident status under French tax domestic rules, leading to an exposure to the French tax system on a worldwide basis.
However, this is not the topic here. For UK residents who own property in France, a hard Brexit is likely to limit the time that they may spend in their French homes to 90 days, thus precluding prolonged stays.
The 90-day rule allows non-EU citizens to spend 90 days of any 180-day period in the Schengen Zone without applying for a visa. Visits to other Schengen Zone territories will effectively compromise the length of time UK citizens can spend overall in France. This may also affect French second-home rentals but to a lesser degree, since these tend to be for shorter periods.
Tax discrimination
In taxation terms, Britons have enjoyed the protection of the European Court of Justice (ECJ) which, on many occasions, has ruled against any discriminatory tax regimes or practices contrary to EU regulations for EU citizens in connection with the French tax system. This was the case, for instance, with the French social contributions applied to French source income and gains received by non-residents of France.
Such levies were initially applied to French residents, then extended to non-French residents, before being successfully overruled through various ECJ rulings. This protection may not be available to Britons in the future.
Rental income
Under the terms of the France-UK DTC, the rental income a UK resident derives from the rental of a French property is primarily taxed in France. A tax credit is granted in the UK in respect of the French tax charge.
There are various regimes applicable to rentals, depending on whether the property is rented furnished or unfurnished. In both cases, an itemised regime allows the deduction of all charges pertaining to the activity and subject to proper evidence and proof of payment. When the annual gross unfurnished rental income does not exceed €15,000, it is possible to opt for a simplified micro foncier regime, whereby the deductible expenses are set at 30% of the gross annual income.
Furnished rentals may also be assessed using set deductions but under strict conditions. In France, furnished rentals are treated as a commercial activity and must be properly registered with a unique business reference number known as a SIRET. When operating holiday lets, in most cases there is also a local business tax known as contribution economique territoriale, and this is variable depending on where the property is situated.
Landlords must also levy a taxe de séjour on a ‘per night, per person’ basis, payable to the local town hall. It is still uncertain whether, following the end of the transition period, UK citizens will need to obtain a special permit to continue activity, such as applying for a Carte de Commerçant.
The net taxable income is taxed at 20% up to €25,710 for 2020 income and 30% thereafter in the hands of non-French residents. These rates are applied under a minimum taxation rule.
Therefore, if a taxpayer can prove that the average tax rate resulting from the application of the normal French rates scale (barème) applicable to French residents is lower when applied on a worldwide income basis, they may apply for a lower taxation. However, to claim this requires a full disclosure of worldwide income and gains, and depending on the case, sometimes a much more onerous filing exercise in France. This may explain why the majority of non-French resident taxpayers are not usually prepared to do so.
Social charges
There are additional charges to the net rentals. These are:
the contribution sociale généralisée (CSG) at 9.2%;
the contribution au remboursement de la dette sociale (CRDS) at 0.5%; and
the prélèvement social (PSOL) at 7.5%.
These social levies are akin to an extra income tax charge since they do not entitle the payer to any social benefits. Following past successful ECJ rulings, the CSG and CRDS only apply to non-residents who are not affiliated to another EEA social security regime (or Switzerland), so they only pay the 7.5% PSOL. From 1 January 2018, this is no longer treated as a social charge and should therefore be included in any UK tax credit claim under the France-UK DTC.
From 1 January 2021, individuals affiliated to the UK social security system are likely to suffer the total extra social charges at a rate of 17.2% as a result of Brexit, subject to any negotiation.
Selling the property
Following the end of the transition period, we expect UK tax residents who sell their French property to be required to appoint a fiscal representative in France to deal with the capital gains tax (CGT) computation and where the proceeds exceed €150,000 per person or per couple if married or in a civil partnership.
This does not apply where the asset has been held for more than 30 years, since the gain is then exempt through the application of a taper relief. Fiscal representation triggers additional costs of around 0.7% to 1% based on the sale price and depending on the firm used. The fiscal representative’s responsibilities extend to ensuring that any liability is paid in full.
French CGT is currently levied at 19% on the taxable gain together with the extra social charges of 7.5% for individuals affiliated to an EEA or the Swiss social security regime (excluding France) and 17.2% otherwise. Those affiliated to the UK regime are likely to suffer the higher social charges in respect of sales completed after 1 January 2021.
Higher costs?
In summary, Brexit is likely to mean higher French social charges for French rentals and property gains received by UK residents. In terms of the tax element itself (including the extra 7.5% PSOL), this is claimable as a tax credit under the DTC. In practice, taxpayers should continue to pay the higher liability of the two tax systems.