New French Wealth Tax
This information has been prepared by Sykes Anderson Perry Limited as a general guide only and does not constitute advice on any specific matter. We strongly recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of any information or advice given or omitted. The information herein does not constitute investment advice. Always consult an IFA if before taking any investment decision.
Wealth tax is an important factor when individuals purchase a property in France. This is largely because it is an unfamiliar tax to UK residents. The way in which the tax applies has changed significantly over the years but this year has seen perhaps the greatest overhaul.
With effect from 1 January 2018, the tax applies only to real estate assets, whether held directly or indirectly. This is helpful mainly for French residents as, previously, all their assets were taxable unless reliefs applied. These reliefs were relatively complex so the change in approach will certainly be welcomed by French residents.
For non-residents there is no particular positive change as they would only generally be taxable on their French real estate before this change. If you are not resident in France then any non-French assets are not subject to wealth tax. This was also the case prior to 2018.
As previously, the charge is based on a snapshot value of the property on 1 January each year. There is no pro-rating if a property is disposed of part way through a tax year.
A particularly negative change to the wealth tax regime is the deductibility of debts when calculating the charge. Previously this was relatively straightforward and many individuals would borrow at a high loan to value ratio on interest-only terms. This reduced the net value of the French property which is what the wealth tax was charged on. The new law is restrictive in relation to these loan arrangements. Firstly, if you have an interest-only loan, the law dictates that the amount of the capital which is deductible is reduced each year. This is on a straight-line basis so if you have a ten year term, the deductible capital is reduced by 10% each year. Secondly, if the loan capital is at least 60% of the property value, then only a limited amount might be deductible (depending on the gross value of the property). Essentially the first 60% of the loan to value is deductible then only 50% of any lending above that limit is deductible (i.e. the maximum deduction now possible is 80% loan to value).
This new law applies to loans which were already in existence prior to 1 January 2018. Unfortunately, commentary on the application of the new law was only introduced in June 2018 making it very difficult to plan ahead of 2018. However, steps can now be taken with more certainty in respect of 2019.
Individuals with these types of arrangement should take advice now as to what steps they might take. What is possible will depend on the circumstances of the ownership and the property but some options might be:
1. Consider ownership structure within a corporate vehicle;
2. Consider passing some ownership to the next generation; and
3. Consider different lending arrangements, which are not interest-only.
We would be happy to discuss the options available to you. For more information please contact Graeme Perry.
Graeme Perry, Solicitor
Sykes Anderson Perry Limited