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Purchasing property in France

Please click a heading to go straight to that section
A Purchasing by an individual  
B Purchasing from/in the name of a company  
C Purchase of land and construction  
D Construction guarantees  
E Inheritance Laws  
F Running costs and taxes  
G Wealth Tax  
H Capital Gains Tax  
I Mortgages  
J Renting  
K Starting a business  


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A – Purchasing by an individual
Purchasing
In France one Notary, a semi-public official, will usually act for both the purchaser and the seller. However, the purchaser may chose to use their own notary in France and the two notaries will then split the fee.

The notary fees are charged on a sliding scale according to the value of the property, but typically they will be around 1% of the purchase price. The purchaser will also have to pay land registry fees and disbursements (also calculated on a sliding scale) and these are usually between 1% and 2% of the purchase price. The total legal fees are therefore between 2% and 3% in the case of new property.

However, if purchasing an old property (over 5 years old), additional purchase taxes must be paid to the department and to the commune and these will total 4.89% of the purchase price. If purchasing a new property (less than 5 years old, being sold for the first time) then you do not pay the 4.89% tax, but you will have to pay TVA (VAT) but this will be included in the sales price. The total legal fees and taxes for purchasing new property are around 2.5% and for old property around 7.5%.
B – Purchase from/or in the name of a company
If you are buying a property, which is already registered in the name of a single purpose company, a saving may be made, by transferring the shares of the company into the name of the buyer. There will be no land registry fees, and the government purchase tax on the transfer of shares is 4.89% irrespective of the age of the property but extra care will have to be taken to ensure the company has no undisclosed liabilities.

If you are buying a finished apartment or chalet, it may be worthwhile considering forming a French company (an SCI) but usually only if the purchasers are not married, or if there are two families or friends buying a property together. There is no tax saving on purchase, the usual government purchase taxes will apply (4.89% for old property, 0% for new property). The costs for setting up an SCI can be up to 1,500 euros plus annual maintenance fees.

One advantage of an SCI is that the company is not liable for wealth tax (see below) but if the company elects to make the property available for use by the members of the company free of charge then the members still need to declare in their personal tax returns any rental income and capital gains when the property is sold.

The main advantage is that an SCI enables your advisors to minimise inheritance taxes and permits greater flexibility for changes of ownership (such as giving a share in the property to your children during your life time) without triggering a taxable event or incurring notary and property transfer fees. These schemes are now under scrutiny by the Inland Revenue in the UK which will now seek to tax you on the benefit you derive personally from using a property owned by a company.
C – Purchase of land & construction
If purchasing land for the construction of a chalet, this is usually best registered in the personal name of the buyer, not in the name of a limited company (as VAT at the rate of 19.6 % is payable on the purchase price of the land if it is purchased by a company for the construction of a chalet).

Usually the chalet to be constructed should not have a total surface area (all floors) exceeding 15% of the surface of the plot. The advantage of buying a plot and then building is that the taxes are levied only on the value of the plot.
D – Construction guarantees
New constructions, by law, must have a ten year insurance-backed guarantee against latent defects.

A deposit of 5% of the purchase price will reserve an apartment until such time as the notary draws up a deed of sale. When this sales deed is signed by the Notary, the purchaser will be required to pay 30%, unless construction of the building is already well advanced, in which case the usual stage payments are:

  • 35% foundations
  • 50% first floor (slab finished)
  • 70% roof
  • 80% watertight (windows etc)
  • 95% completion of the apartment
  • 100% release of keys
E – Inheritance Laws
French inheritance laws will apply to a property in France even if the owner is resident outside France. The laws are complicated and in effect they prevent a parent from disinheriting his, or her, children. If you are resident in France these rules will apply to all your worldwide assets, save for real estate held abroad; if you are not French resident, they will apply to all real estate you own in France. Only that part of the estate belonging to the deceased is subject to inheritance laws, so in the case of a married couple, it will normally be 50% of their joint wealth.

The main point to grasp with French inheritance laws is that your children are specifically protected from being disenfranchised from the inheritance. Liability to French inheritance tax depends, in the first instance, on the residence status of the deceased and, to a lesser extent, the beneficiary. Since the abolition in 2007 of French inheritance tax between man and wife, and those in a French civil partnership, this whole issue has become less important to international buyers. It is recommended that you draw up a French will to deal with your French property register this at the French Wills Registry in Aix en Provence.

You should amend your English will to specifically exclude the French property.
F – Running costs and taxes
Mortgages
Local property taxes consist of the ‘taxe d’habitation’ and the ‘taxes foncières’ which are both are levied in October / November. The taxes are based on the cadastral value of the property. The rates of tax are set by the région, the département and the commune and will vary, but are much less than in the UK.
G – Wealth Tax
Wealth tax is paid by relatively few people and the amounts paid are generally very small but with the increase in the value of property in France in recent years, it is a tax that is catching those who may be 'capital rich’ but ‘income poor’. There is an exemption from the tax on those assets located outside of France for five years, for those who become resident in France after 6th August 2008 so if you become resident in France now you will only be liable for the wealth tax on those assets located within France for the first 5 years. After this date, the tax is payable if you have total worldwide net assets in excess of €790,000, a threshold that is inflation linked. Taxes due, bank loans and other debts are all deductible before the calculation of net assets. If you are resident, there is also a 30% allowance against the value of your principal home. This concession does not apply to second homes. The applicable date for determining net assets is 1st Jan each year. The extent of your liability will depend on whether or not you are resident in France.

  • Resident - If you live in France the whole of your worldwide assets must be taken into consideration for the purposes of the tax
  • Non-Resident - If you do not live in France, then only property assets actually in the country are considered
The value of your second home in France will be used to assess your liability to wealth tax, even though you may not resident in France.

You should note however that if the property in France is subject to a mortgage then the mortgage may be deducted form the value of the asset before calculating the tax liability. Also if the property is owned by two families (even if related) then the value is effectively halved.

Wealth Tax rates on the net value of assets for 2009 are shown below:
Table: French Wealth Tax Bands 2009 Fraction Taxable

Up to €790,000
€790,000 - €1,280,000
€1,280,000 - €2,520,000
€2,520,000 - €3,960,000
€3,960,000 - €7,570,000
€7,570,000 - €16,480,000
Over €16,480,000		 Rate of Tax

0%
0.55%
0.75%
1.00%
1.30%
1.65%
1.80%		  
H – Capital Gains Tax
The applicable tax rate for gains on real estate will depend upon your country of residence for taxation purposes.

In all cases the tax is applied at the time of the sale by the notary, and will be deducted from the sale proceeds before the cheque is handed over. Residents in EU countries who are not living in France pay 16% capital gains tax but if you are a resident of France then the applicable tax rate is 28.1% (being gains tax at the rate of 16%, plus 12.1% social charges. Those who are neither resident in France nor the EU pay capital gains tax at the rate of 33.3%.
I – Mortgages
Typically, French banks will lend up to 80% of the purchase price and usually the repayment period would be in the region of over 15 years. French finance is still very attractive with 100% mortgages still available and rates as low as 3% and French banks, which are experienced in offering mortgages to British clients, include Credit Agricole, BNP (Banque National de Paris), and Credit Lyonnais. Barclays Bank offers mortgages on French property via their French subsidiary. Subsidiaries of British Building Societies such as Abbey National France also lend.

Whilst in many countries, mortgages are granted on the basis of a multiple of your earnings, this is not the case in France. Of greatest interest to French lenders is the level of your debt to total annual earnings, and the stability of your income and as a general rule debt cannot exceed 33% of total eligible revenues. However, depending on your circumstances, it may be over 40%, or as low as 20%. Thus, if the bank does not consider you have a strong business or stable employment, the percentage level of the loan will be reduced. In particular, if your main source of income is from property rental earnings the bank will normally only accept a proportion of the income because of the risks of non-payment of rent by the tenant, or works that may be needed to the property. Conversely, if you have a high and stable income, the lending criteria can be relaxed.

French law does not allow lenders in France to offer mortgages if the repayments on that mortgage amount to more than 30% of the borrower’s monthly income (joint income for joint mortgages). This 30% includes any existing mortgage you may have in Britain. Therefore, it sometimes may be necessary to consider re-mortgaging your home in the UK to release equity.
J – Renting
Renting
Rental agencies in the major resorts provide a full rental and management service and charge around 20% commission for this. Most owners rent their apartments through agencies on a weekly basis and set aside a week or two for their own use. Alternatively you could rent out your property direct to a Tour Operator for the whole season and negotiate a week or two for your own use.

The higher resorts, such as Val d’Isère, have a longer winter season, and therefore a greater rental income potential. However, these resorts have virtually no summer season at all, so a good dual season resort, such as Megève, may produce as good a return.

Generally the most important factor if you are buying a property with a view to renting it is to purchase in a good and convenient location. Apartments in the centre of a resort within walking distance of the restaurants and the ski lifts will always rent out first, will have a high occupancy rate, and command a premium. Larger apartments (2 or 3 bedrooms) are more in demand than small studio or one bedroom apartments. Chalets rent best of all and generally appreciate more in value than apartments. A chalet may still rent well even if it is not near the centre or on the piste provided it is an attractive property, but usually it is better to buy a well-located apartment rather than a chalet in the middle of nowhere if rental income is important.

Sale & Leaseback scheme
These are the easiest and most dependable way of securing rental income. They are like ‘buy to let’ - you buy a new chalet or an apartment freehold and then to lease it back to the developer. Under some schemes you will receive a guaranteed fixed income, under others the income varies according to the actual revenue produced, and sometimes it may be a blend of the two – a guaranteed minimum with a variable bonus.

Provided that the lease is for 9 years or more, then you will be able to reclaim from the French government the VAT (19.6%) which was included in the purchase price you paid. Some developers will simply discount the purchase price by 16.39% of the purchase price (this equates to the VAT element of the purchase price), you just pay the net price and the developer will claim the VAT back themselves.

The arrangements may be quite flexible; you can usually use the property for a set number of weeks per year without charge and buy additional weeks at a discount off the usual public price. The lease operator pays most of the property taxes and at the end of the lease period, you can choose whether to renew the lease or not.

We are currently marketing a stunning ski in, ski out development in Avoriaz which also has an Aquadome. This type of property always rents well and is on high demand.

Tax on rental income
Rental income should be declared to the French tax office by 30th of April. If the income is less than around 75,000 Euros per year, the taxpayer may elect simply to pay tax on 30% of the gross receipts (effectively you are given an allowance of 70% of gross receipts to cover expenses). Above this level then allowances are given for all business expenses such as management / letting fees, interest on a loan, depreciation of 1% to 2% per year of the purchase price, insurance etc, and the net income is then taxed at a minimum rate of 25%.

Credit may be claimed for any French tax paid against any UK liability. Liability to French tax on rental income can be enforced in the UK.
K – Starting a business
Starting a business
Investors in Property are not business transfer agents – we sell chalets, not businesses but if you are thinking of buying a chalet and then running it as a gîte or a catered chalet, here is some advice. Most new businesses fail in the first year and common causes are lack of experience, your planning and under-funding. Additional problems in France will be the language and the bureaucracy. You may get some assistance from the French Chamber of Commerce at 21, Dartmouth Street, London SW1H 9BP (Tel 020 7304 4040) and the local chamber of commerce in the Alps.

Even EEC citizens will need a carte de sejour to work in France or a K-Bis (business registration certificate). You must register your business before you start to trade as there are swingeing penalties for failure to do so – you should be able to get expert advice from an expert-comtable (chartered accountant) on the structure you need (sole trader / limited company) and get your business registered for under 2,000 Euros.