Increase in taxes for non-residents

The French National Assembly has just confirmed an increase in the capital gains and rental income taxes. Overseas owners will be required to pay the additional taxes for the current year as the law will be back dated. However, there is some good news as these taxes should not affect the majority of non-resident owners. France has many dual taxation treaties. In the case of the UK, the new rental income taxes are lower than those in the UK. Whilst, the new capital gains tax rates in France tapes to zero after 22 years.

The French government expects to receive extra income from the increase in property taxes. Now overseas owners will be subject to the same rate and will have to pay 35.5% of tax on rental income versus 15.5% under the previous regime and 34% of tax on property gains up from 19%. As indicated above, it will be back dated to January 1st. However, European Union residents will receive a deduction from French notaries directly upon house sale if they have owned a property for a certain period of time. The taper relief will be of 5% every year after the first two years of ownership. The new system is more advantageous as it allows owners not to pay Capital gain tax after 22 years only instead of after 30 years with the previous one.

It is also possible to opt for a furnished letting tax system to mitigate the tax you pay on rental incomes and to also receive a total exception of capital gains tax after 5 years if you have more than €23,000 in rental income. These systems called LMNP and LMP are very profitable as owners can benefit from an amortisation system that cancels tax liability on the rental income (See www.frenchprivatefinance.com for more info).

In addition, an exceptional contribution on French wealth tax for 2012 will be payable on January 1st.  Household with total assets over 1.3 million euros will pay the difference between the former wealth tax rate and the new one settled by new President Francois Hollande. New rates have not been established yet. Nevertheless, only net assets are taken into account so it means that the current amount of your French mortgage is deducted from your gross assets.

As there is often a way to mitigate the tax you pay on your property investment, non-resident owners should use tax advisor services to optimize their annual taxes.

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French government to rescue Credit Immobilier de France

The French government has finally nationalised the Credit Immobilier de France which has been weakened by a liquidity crisis and a failure in the search for a buyer since May.  “To allow the CIF group to respect its overall commitments, the state decided to respond favourably to its request to grant it a guarantee” said Finance Minister Pierre Moscovici on September 1st. The country would provide a 20 billion euro guarantee without spending taxpayer money.

However, the bailout is still subject to the approval of the European Commission. Prime Minister Jean-Marc Ayrault has reassured French citizens saying in a radio interview that, “The state has taken its responsibilities to provide a guarantee, but as this bank has its own capital, the money of taxpayers won’t be called upon”. In order to respect one of the state conditions, CIF will not be authorised to make new loans anymore.

At the moment economic analysts think that the government will drastically slow down the mortgage lender’s activities instead of searching for a buyer. On Tuesday, Moody’s cut CIF’s credit rating citing that it would be placed into a run-off scenario rather than being rescued. The ranking agency said a “run-off scenario is probably not the preferred solution of the French government due to the importance of the bank’s lending activities to the French housing market, especially in assisting less privileged households”.

Last week, Claude Sadoun, CIF’s Chief Executive Officer has resigned before being replaced by Bernard Sevez, head of a French social housing group. Meanwhile, French government expects Claude Sadoun to renounce to his severance payments of 1.5 million euro.

The government’s intervention comes just after the rescue of the Franco-Belgian Dexia bank in October 2011. This is the latest problem that President Francois Hollande has had to face after the recent mass layoffs operated by Peugeot and Carrefour supermarkets.

These changes also affect Banque Patrimoine et Immobilier who are a key player in the non-resident mortgage market. Effectively, BPI will have to cease new lending which means no new offers will be issued. All existing offers will be honoured but any clients who are in the process of applying had better look elsewhere (French mortgage best buys). This is certainly a blow for the French mortgage market for overseas borrowers as BPI were a major player in keeping the others competitive. With less competition in the market we are likely to see bank margins remain the stable or perhaps increase. On a positive note we are experience the lowest French mortgage rates since the second World War.

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