For UK residents who are considering selling their French property, it is important to remember that, if the property has increased in value since it was purchased, the capital gain is taxable in France and in the UK.
What is Capital Gains Tax?
Generally speaking, both France and the UK levy a form of capital gains tax: a tax on the profit when you sell an asset that has increased in value since its acquisition.
Capital Gains Tax in France
In France, capital gains on real estate are taxable at a rate of 19% plus social charges at 7.5%. The social charge rate is increased to 17.2% if you are affiliated to the French healthcare system. This will generally be the case if you have previously worked in France and paid French social security contributions.
When calculating the capital gain, the following reliefs are available:
- The gain is reduced for every year of ownership after 5 years. There is no CGT after 22 years and no social charges after 30 years.
- Instead of deducting the actual incidental costs of acquisition when calculating the capital gains, you may deduct 7.5% of the acquisition price. This is particularly beneficial if the acquisition costs were not documented or are lower than 7.5%.
- You can either deduct actual improvement costs, or, where the property has been held for at least 5 complete years, 15% of the acquisition costs.
- €150,000 allowance for EU and EEA nationals (subject to conditions such as previous tax residency in France).
If, after the reliefs have been applied, a capital gain remains, you will be liable to French tax on it.
A progressive surcharge applies for larger gains, starting at 2% for gains exceeding €50,000, with a maximum rate of 6% for capital gains exceeding €250,000.
Capital Gains Tax in the United Kingdom
In the UK, real estate capital gains are generally taxed at a rate of 18%, to the extent that they do not exceed the unused basic rate band. However, if they do exceed it, the gains will be taxed at 28%. The unused basic rate band is the amount of basic rate band remaining after your income has been taxed (up to £37,000).
Very few reliefs are available other than deducting the incidental costs of acquisition, improvement costs and your personal annual exemption (£12,300 in 2022/23).
When selling foreign real estate, consideration should be given to exchange rates. When calculating a capital gain, the cost of each transaction needs to be converted into sterling at the date of each relevant transaction, such as purchase, sale, professional fees, enhancement costs etc.
Because the capital gains must be calculated in sterling, depending on the movement of exchange rates, it is possible to generate a loss in local currency, but a gain in sterling. So, even if you have generated a capital loss in France you should still consider the UK tax implications as it is not uncommon for French losses to be turned into capital gains in the UK because of currency exchange variations.
Double Tax Convention
The France/UK Double Tax Convention (‘DTC’) of 19 June 2008 provides that French CGT can be offset against the UK tax liability.
Whilst the effect of the DTC is to avoid double taxation, you should bear in mind that you will always pay the higher rate of the French or UK CGT. It is often the case that reducing your French CGT exposure increases the UK exposure and, even if your capital gain is exempt in France because of the taper relief, UK CGT may still be payable.
Furthermore, the DTC is not applicable to social charges and no tax credit will be available in the UK for social charges paid in France on real estate capital gains. This means that the total tax rate can be as high as 35.5% (28% UK CGT and 7.5% French social charges).
Have you appointed a tax representative?
Since Brexit, UK resident sellers must appoint a tax representative on the sale of a property in France. The role of the tax representative is to verify that the correct amount of tax is being paid on the transaction.
The cost of the tax representatives varies between 0.4% to 1% of the property’s selling price and can be deducted for capital gains tax purposes.
How we can help
It is worth raising CGT with the notaire before appointing them; some notaires only work with specific tax representatives. We have considerable experience of working with them and with tax agents and are happy to assist.
For more information about our legal services for UK and French clients, please fill in the form below or speak to: