In order to reduce the country’s national debt the French government has introduced several new tax rates. France’s newly elected president, Francois Hollande, has €1.7 trillion of national debt to contend with. With this in mind he recently announced plans to double potential capital gains tax.
In addition, he also raised income tax on rent for homeowners in France who live outside the country but within the EU. These increases come as France presses the “social charge” of taxes onto those living outside the country. This is expected to affect the estimated 200,000 British homeowners in France.
On paper the tax hikes look severe. Capital gains tax has jumped from 19 percent to 34.5 percent, while tax on rental income has risen from 20 percent to 35.5 percent. The changes to capital gains will come into effect at the end of July, while rental income tax will be backdated to 1st January 2012. HOllande hopes to raise €50 million this year and €250 million in 2013 from the tax increases.
In reality, with the relatively few homeowners who rent their properties and the limited income they earn, few British homeowners will see large increases in their tax bills. Currently, under double taxation laws, UK residents deduct tax paid in France on French gains from the UK tax on the same gains. However, if the French tax is higher, they won’t receive a rebate.
Targeting people living outside France
For French residents capital gains is waived on main homes, as in the UK. However, the tax levied on the sale of a second home differs depending on whether you live in France or not. Until the proposed changes take effect capital gains tax imposed on second homes is imposed at 19 percent.
But crucially, French residents pay an additional social charge on top of this at 15.5 percent (as of 1st July 2012). This means French residents have paid a capital gains tax of 34.5 percent while those living elsewhere in the EU pay 19 percent.
A similar situation is also seen on rental income tax. The basic level is 20 percent with an extra 15.5 percent in social charges. Social charges go towards improving social care and amenities such as public healthcare. As people living outside of France do not benefit from this charge traditionally they didn’t pay it. This is want President Hollande is changing. People with homes in France but who live outside the country will no longer be exempt from social charges.