What will letting French property cost you in tax?
If you own or you are thinking about buying French property, you may have considered the letting opportunities. It could be that you only live in France part-time and want your property to generate income when you are not using it. Or if your home is in France, you might want to buy a second property as an investment and regular source of income.
In any case, there are some questions you should consider to help ensure you do not pay more tax on your French rental income than necessary.
Where are you tax resident?
Rental income from a French property is always taxable in France, regardless of residency or where the money is deposited.
If you are a French resident, rental income is added to your other income and taxed at the progressive scale rates of income tax up to 45%.
If you are not resident in France, you will be charged a flat rate of 20% on the taxable income. You could, however, potentially attract a lower rate by opting to apply French income tax to your worldwide income. In this case, the liability on your worldwide income is calculated as if you were a French tax resident, with a discount on the proportion applying to income that is not taxable in France. This is not always the most tax-efficient approach for non-residents, so seek advice first.
All recipients of rental income from French property will also face social charges of 15.5% (more on this later).
What kind of rental property is it?
There are two main methods of calculating taxable rental income in France. Revenus fonciers applies to income from land and unfurnished lettings. Rent received from furnished lettings is treated as commercial income under the Bénéfices Industriels et Commerciaux (BIC) regime.
How much income will the property generate?
Where the gross rental income – the total received before deductions – from furnished lettings is less than €33,100 a year, the taxable income falls under the Micro-BIC regime. This is a simplified deduction scheme that only taxes 50% of the gross income, although no expenses on the property can be claimed. While record-keeping is required, no accounts or separate tax forms for the business need be prepared. The main drawback of this approach, however, is that it always shows a fixed taxable profit – i.e. it can never show a lower net profit or a loss.
The income threshold for gîtes, chambres d’hôte and meublé de tourisme is much higher at €82,800. Here, the deduction given in lieu of expenses is 71%, so only 29% of rental income is taxable. Again, this will always show a fixed profit if there is any income at all.
For income from unfurnished property or land, there is a similar simplified deduction scheme called the Micro-Foncier. This offers a 30% allowance if the annual gross rental income is €15,000 or less, leaving 70% subject to taxation.
Where gross rental income exceeds €23,000 a year (and other requirements are met), you can register as a professional furnished landlord – loueur en meublé professionnel (LMP). While doing this can bring French capital gains and wealth tax benefits, it can also trigger liability for other taxation.
What happens if income exceeds the thresholds?
If rental income goes over the limit for the relevant property type (but is under €788,000), it will automatically fall within the Régime Réel Simplifie (RRS) tax regime.
Under this method, as in the UK, expenditure related to letting the property is tax-deductible. This includes management fees, insurance, property tax, mortgage interest, depreciation, repairs and non-structural maintenance costs. While any improvement costs related to rebuilding or expanding your property are excluded here, they are tax deductible for capital gains tax purposes.
Even if your rental income fits within the Micro regime thresholds, you may find it more beneficial to opt into the RRS regime where you make a loss or your expenses exceed the fixed deductions. Take note, however, that the administration and accountancy costs of maintaining this approach can often outweigh the tax savings. There are also strict restrictions on the timing of such an option.
How is the property owned?
The tax treatment of property held through a company – such as a Société Civile Immobilière (SCI) – depends on how it is rented. If unfurnished, it will be considered a ‘transparent’ SCI, with similar income tax rules and Micro regime eligibility as for individuals.
If an SCI lets out a furnished property, the income becomes subject to corporation tax of 28% to 33.3% instead of income tax, as does capital gain on disposal.
Are you still a UK resident?
UK residents should note that French rental income will also be liable to UK income tax, wherever the money is deposited – even if it never enters the UK.
However, any French tax paid (excluding social charges) is deductible against the UK tax liability in line with the UK/France double tax treaty. If 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. While the French tax year is a calendar year, the UK’s runs from 6th April-5th April.
In the UK, the taxable amount is calculated by deducting actual letting expenses such as agency fees and commissions, repairs, and insurance. It also includes interest on any loan used to acquire the property, but if you extend a UK mortgage over your main home, only the portion related to purchasing the French property will count.
If you are UK resident, therefore, it is essential to keep full records, because while there are 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.
Will UK residents pay social charges?
The short answer is yes, but it is more complicated than that and may not be permanent.
Social charges are additional taxes to income tax, used to finance French social security. Between 2012 and 2015, non-residents were liable for 15.5% social charges on rental income and capital gains from French property. This included owners of holiday rental homes in France – who were already paying social security charges in the UK and held EU Form S1 to prove it.
The fairness of charging non-residents was successfully challenged by the European Courts in 2015. As a result, that October the French government removed liability – and offered refunds dating back to 2012 – for anyone affiliated to the social security of another EU member state, including the UK.
However, the French government fought back and reintroduced social charges for all last year. So regardless of your residency status – for now at least – you will face social charges of 15.5% on top of income tax for French rental income, even if you have Form S1.
French tax is complicated, especially if you have to consider the tax regime in the UK as well as the interaction between them. And with social charges on top of income taxes, your tax bill for rental properties can be high. However, with careful, personalised tax planning, France can be a very tax-efficient place to own property and live. Taking professional advice can make sure you are keep up-to-date with the latest tax rules and you structure your assets in the most tax-efficient way possible.
Blevins Franks is the leading international tax and wealth management advisers to British nationals living in Europe. Contact: 0800 668 1381 Freephone UK, 0805 112 163 Freephone France, firstname.lastname@example.org or visit www.blevinsfranks.com for more information.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.