When thinking about buying a property in France you may well consider the possibility of letting the property when you are not using it. It could be that you already have a holiday home there which you rent out or you may retire to France and buy a second home for letting purposes. What taxes will you have to pay on the income?
Rental income arising on a French property is always taxable in France, regardless of where the money is paid to you or where you live.
Resident or non-resident?
Non-residents pay French tax on the taxable income at a flat rate of 20%. However, they have the option to apply the French scale rates of income tax to their worldwide income in order to establish the effective tax rate on the French letting income. In that case, the tax liability is calculated on the worldwide income as if they were French tax residents, but then the proportion of the tax liability related to the income that is not subject to French taxation is discounted.
If you move to France and become a French resident, the income is added to your other income and taxed at the progressive scale rates of income tax (currently up to 45%). Depending on where you have your social security, you will have to pay 15.5% social charges on top of the income tax*.
Taxable rental income is calculated under two regimes in France: revenus fonciers, applicable to income from land and unfurnished lettings; and Bénéfices Industriels et Commerciaux (BIC) applicable to income from furnished lettings, which is treated for calculation purposes as commercial income (although it is specifically investment income unless you are in a position to adopt a professional approach).
Where the gross rental income (i.e. the total rental income before deductions) from furnished lettings is less than €32,900, the taxable income may be calculated under the Micro-BIC, a simplified deduction scheme that simply taxes 50% of the gross income (i.e. 50% of the gross rental income – so the total income with no deductions at all – is automatically deducted in place of actual expenses). No expenses need be demonstrated, no accounts are required and no separate tax forms for the business need be prepared. The main drawback of this regime is that it always shows a fixed taxable profit i.e. it can never show a lower net profit or a loss.
For gîtes, chambres d’hôte and meublé de tourisme, the threshold is €82,200, and the amount given in lieu of actual deductions is 71%, so only 29% is taxable. Again, this will always show a fixed profit if there is any income at all.
A similar simplified deduction scheme called the Micro Foncier can be applied, for income from unfurnished property or land, provided the gross rental income does not exceed €15,000 per annum. In this case the percentage deduction is 30%.
If the turnover exceeds the above thresholds, you will automatically fall within the income and expenditure method of calculation, the Régime Réel Simplifie (RRS). Under this method, actual expenditure related to the letting of the property is tax-deductible e.g. management expenses; insurance; property tax; mortgage interest; depreciation; repairs; maintenance and improvement expenditure (generally where the property has been modernised, or made more comfortable, but where the structure of the property has not been changed). Improvement costs related to rebuilding or expanding your property are tax deductible for capital gains tax purposes only.
The default position where you fall within the above thresholds is the Micro regime. However, should you make a loss or your expenses exceed the fixed ‘Micro’ deductions, you may opt into the RRS. Such an option is currently valid for a minimum period of two years for furnished lettings, and a minimum period of three years for unfurnished lettings, and the cost of this regime can often outweigh the tax saving. In some circumstances, the option may be more beneficial, such as where there is a high level of expenses (e.g. a large amount of mortgage interest), if this gives rise to a loss which can be carried forward and set against future profits. There are also strict restrictions on the timing of such an option.
If your gross rental income exceeds €23,000 per annum (and other requirements are met), you may register as a professional furnished landlord (loueur en meublé professionnel – LMP), as this can be advantageous with respect to French capital gains and wealth tax. However, you can not apply the Micro-BIC.
If the property is held in an SCI (a private French property-holding company) or a non-French company, the Micro regimes cannot be applied to rental income. In either case, and with the Réel regime for individuals, any tax savings from operating the RRS may be lost in additional accountancy bills. If an SCI lets a furnished property, the income becomes subject to corporation tax, not income tax, as does any capital gain on disposal. There are additional penalty taxes if the property is owned via a company in a blacklisted country.
If you remain UK resident, the French rental income will also be liable to UK income tax, wherever the money is deposited or paid to you, or even if the money is never brought into the UK. Any French tax paid is deductible against the UK tax liability, in accordance with the UK/France Double Tax Treaty. Where the French tax is higher, no further tax will be due in the UK, and no refund will be made for the difference. However, if the UK tax liability on the income exceeds the French tax paid, the difference between the two liabilities will be due in the UK.
Each country will apply its own rules in calculating the taxable income, and each country has a different tax year (the UK tax year runs from 6th April to the following 5th April and the French tax year is a calendar year).
In the UK, the taxable income is calculated by deducting actual expenses wholly and exclusively incurred for the purposes of the letting and include: agent fees and commissions, repairs, insurance etc., interest on any loan used to acquire the property (if you extend a UK mortgage over your main home, only the element related to the purchase of the French property will be permitted). A ‘wear and tear’ allowance is available if the property is furnished, which is 10% of the gross income subject to certain deductions (e.g. utility bills paid by you that the tenant would normally pay for themselves). From April 2016, the wear and tear allowance will be removed and only expenses incurred will be deductibles.
Therefore, if you are UK resident, it is essential to keep full records, because whilst there may be simplified deduction schemes in France, there are none in the UK. You need to make a note of the dates as well, because you will need to convert the Euro amounts into Sterling for UK tax purposes at the individual dates in question.
[*Note from the editor: The European Court of Justice (ECJ) ruled in February 2015 that French social charges on unearned income such as capital gains or rental income generated in France should no longer apply where the taxpayer is subject to the social security system of another EU or EEA country or Switzerland (i.e. Form S1 holders, and residents of such countries provided they do not have substantial work activities in France). The French Supreme Court confirmed the ECJ’s position on 27th July 2015, and we are now awaiting the French tax administration’s interpretation of this ruling to understand the full extent of the decision.]