CGT Tax on sale of properties UK/France

[Mamou]

We are currently living in UK - own property with mortgage, but own a property /holiday home in France mortgage free (for 3 yrs), and a plot of land.  Our aim is to build on the plot of land and eventually live in that new build, having sold the UK property and possibly the French holiday home.  Before we commit to anything, we are trying to investigate everything to keep CGT to a minimum.  From all our reading we have come up with a solution, but just wish to see if we are correct.  Our suggestion is to sell the UK property which is our main residence, and go and live in the French holiday home, and thus avoiding CGT on the UK property.  We can then start to build on the plot with the equity from the UK sale, and hopefully get it to a habitable state. We would then sell the French holiday home which would by then be our primary residence, to move to the new build house and finish off any works. Again avoiding CGT in France this way.  Are we right?  I think I have read that we can even move into the new build before the holiday home is sold, as long as it is up for sale before and sells within a year?

If we decided to stay in the UK and sell the holiday home first, would we still be liable for CGT in France and also UK (top up), if we are using the sale proceeds to finance the self-build? 

[Logan]

If you become resident in France and that means fiscally resident you will avoid the CGT on the sale of your property after a minimum of a year. You would need to complete an income tax return in March 07 declaring residency and enter the system both fiscal and medical. Your income tax bill will then arrive in the following September, assuming there is a liability. After the first anniversary of your date of residency(tax declaration date) you would be free to sell without CGT. Unless you have French resident status any sale of French property will attract CGT, cuurently 16% for EU residents, more for others. New build, if sold within 5 years of the declaration of works attracts 19.6% TVA, resident or not.

[Benjamin]

[quote user="Logan"]If you become resident in France and that means fiscally resident you will avoid the CGT on the sale of your property after a minimum of a year. You would need to complete an income tax return in March 07 declaring residency and enter the system both fiscal and medical. Your income tax bill will then arrive in the following September, assuming there is a liability. After the first anniversary of your date of residency(tax declaration date) you would be free to sell without CGT. Unless you have French resident status any sale of French property will attract CGT, cuurently 16% for EU residents, more for others. New build, if sold within 5 years of the declaration of works attracts 19.6% TVA, resident or not.[/quote]

Just a little query here. How can you complete an income tax return in March 07 if you didn't qualify to be fiscally resident in 2006 or am I missing a point somewhere?

[cooperlola]

I think you only have to complete an '07 tax return if you have been resident for all or part of 2006 (ie, if you moved here on 1st December '06 the income for the month of December would be taxed in France).  N'est-ce pas SD?

[Benjamin]

Thanks for your reply cooperlola but I wasn't asking for a general clarification of when to submit a tax return.  The question was more aimed at Logan insomuch as  does he know some special procedure for registering with the tax authorities earlier than may normally be neccessary when a question of future CGT may arise.

[Sunday Driver]

Mamou will become tax resident the day he moves permanently into his French house.  That means he can then sell it without incurring a capital gains liability.  There is no minimum period of residence required to qualify for this exemption.

In terms of proof of residence, the tax declaration is clearly the definitive evidence.  That said, other acts such as registration for CMU (only available for permanent residents) or obtaining local employment and paying social contributions, can be regarded as substitute proof.

In practice, Mamou will use the equity from his UK house to fund the building of the second French house.  By the time this is ready to occupy, he is likely to have submitted his first tax declaration in any case. That means there should be no question about the sale of his first house as a principal residence.

To sell your house as a principal residence, you should be actually living in it at the time of sale.  However, according to the Chambre des Notaires, the tax authorities will allow a reasonable time for you to sell the "old" house, provide you lived in up until the time of sale.

If you decide to stay in the UK and sell the holiday home, you will be liable to French and UK CGT regardless of what you decided to use the sale proceeds for.

 

[Logan]

Sunday Driver is correct in theory but in practice the notary will ask for proof of residence with documents before he will allow a CGT free sale. That can only be done with tax papers. When you submit them in March try and get the copy date stamped by the impot by taking it personally. It used to be easier with a Carte Sejour but regretably that's finished. I have bought and sold a number of properties in France both as resident and non-resident. The Notary is the gate keeper for CGT and if he thinks it's a border line case he will refer you to the Masion de Impot. You are then obliged to prove your status in other ways. ie: date of medical status, et al. In my experience any sale within 12 months of residency will be looked at with suspicion. I accept that there is no minimum period in statute but it's in practice things get sticky. Remember the burden of proof is always yours. 

[Will]

I don't totally agree - it does seem to vary between notaires. In fact I heard of one, in another part of Normandy, who would accept a verbal assurance from house sellers that they were French fiscal residents. This got known around the English bars and, reputedly, quite a few sellers made sure they used this notaire. The sales went through with no tax being paid. Then the impôts inspected the papers, as they are quite entitled (and I believe empowered) to do. The result was a number of tax demands, some sent through to England, for those who thought they had got away with it. This notaire was clearly in error, but it does demonstrate that there is some inconsistency.

I do agree though that until you are in the tax system it can be difficult to conclusively prove that you are a bona fide resident. Paying tax on gite rental or paying taxe d'habitation does not make you a fiscal resident. As it takes about a year to get into the system, the myth has arisen that capital gains tax (impôt sur plus value) is payable on houses owned for less than 12 months, and, as you rightly point out, sales taking place in under 12 months, or sales by those who have been in the coutry for less than 12 months, do attract suspicion.

If the value of the house is reasonably substantial, the impôts can demand that a guarantor is appointed to ensure that plus values are paid - this can usually just be another French taxpayer, or there are specialist tax advisors who provide this service.

Don't forget too that as far as UK is concerned, you can make taxable gains up to a certain figure (£8800 according to my source) in a tax year before CGT becomes payable. So in the case of a house jointly owned by a couple, provided you have made no other taxable gains in that year, you can make £17,600 profit before paying tax. No equivalent allowance exists in France.

[cooperlola]

A brief aside (and apologies for the mis-post above, Benjamin) - can you not still get a Carte de Sejour even though they are not obligatory?  I don't know the answer to that question but other postings on other threads give me the impression that some are still issued with them.  If it would make things easier for the OP then maybe it's an avenue to persue if it's possible.

[Will]

A good point Cooperlola. But from my own experience, at the time when the requirement was being phased out so I still needed one but not for much longer, by the time you actually received the carte you could well be past the 12 months anyway. And that was dealing with a prefecture that would issue one - some others had already stopped at the time.

[Sunday Driver]

Sorry, it's not "theory" - it's the actual process as defined in the tax law. The notaire has a professional responsibility for compliance with that process and tax papers are not the only evidence that is acceptable, as reinforced by the points raised by Cooperlola and Will.  If the notaire wishes to safeguard his position by confirming acceptability of your documents with the tax office , then that's his prerogative, but it's not a legal necessity.

As with all "self declarations" the impots reserve the right to investigate claims.  If you (and your notaire) have complied with the regulations then there is no issue to concern you.

 

[Llwyncelyn]

Dear Sunday Driver

My wife was forced to take early retirement on ill-health grounds thus an E121 was granted.  We are 'in' with the CPU people and indeed my wife is on a special drug that was started in the UK and has 100% for that condition only.

We have top up insurance.

We have paid our taxes for 2005 year and for the tax for 2006 have commenced payments by prevelements.

We both drive French cars all our insurances are obviously here in France.

Some of our savings are here in France.

We are fiscally resident here in France and all our income in the UK is declared here but interest payable gross in the UK due to our residency here.

I think I am able to answer the question myself but we are faced with potential gain on the house 'when and if it sells' do you think that based on the above that the Notaire will agree that no CGT applies.

He and I do not get on for he has views on the Brits........his words not mine.................and I very much stick up for the flag!

|I suppose I could move to anothe Notaire>

regards

[Sunday Driver]

Your house is your maison principale and as consequence, you are tax resident in France.  You have current tax records which support your status.  That means that under French tax law, you have no CGT liability on the sale of your property.

Your notaire has no legal reason to retain any monies from your sale proceeds for this purpose because it's not legally imposable. No doubt you will make this clear to him if he has misunderstood matters or is trying to make things difficult for you for personal reasons.

 

[Pommier]

Llwyncelyn,

If you don't like the notaire that you've used previously, then choose a different one. You (and your buyer) are free to choose any notaire you like.

Cheryl

[Benjamin]

When we purchased this house we were given two Attestations by the Notaire confirming our purchase. One had the price on and one didn't and these have never been refused by anyone as proof of when our ownership began.

This may of course be particular to this Notaire but if you have one of these or something similar I can't see another Notaire not believing what is being said.

[Llwyncelyn]

Thanks Sunday Driver now going to use differing Notaire but thanks for your response.

Now to try to get the purchase and sale in alignment is a whole new can of worms? One Notaire in the North another in the South.  We shall see.

 

rdgs

[Logan]

[quote user="Sunday Driver"]

Sorry, it's not "theory" - it's the actual process as defined in the tax law. The notaire has a professional responsibility for compliance with that process and tax papers are not the only evidence that is acceptable, as reinforced by the points raised by Cooperlola and Will.  If the notaire wishes to safeguard his position by confirming acceptability of your documents with the tax office , then that's his prerogative, but it's not a legal necessity.

As with all "self declarations" the impots reserve the right to investigate claims.  If you (and your notaire) have complied with the regulations then there is no issue to concern you.

 

[/quote]

In writing theory I mean the law. In 25 years I have never yet met a notary who did not wish to see provable documents for this subject or anything else come to that. I cannot imagine a situation in practice where a notary would allow a sale to be free from any investigation of possible tax liability unless perhaps he/she was corrupt. It would be a simple dereliction of duties. It just aint gonna happen. The best practical advice is ensure the sale is completed no less than 12 months after your provable residency date. If you cannot prove residency you will have a tax liability and after completion it's too late. I write from long experience, arguments with notaries trying to prove the obvious and inquisitions, and I mean inquisitions at the Masion de Impot.

[Will]

"I cannot imagine a situation in practice where a notary would allow a sale to be free from any investigation of possible tax liability unless perhaps he/she was corrupt..."

Not exactly beyond the bounds of possibility, particularly in France. Not wishing to imply that all notaires are rogues, but one piece of probably apocryphal information that is sometimes quoted in France is that there are more notaires in prison than there are estate agents. Food for thought?

And even notaires can make mistakes.

[Sunday Driver]

Logan

I don't understand why you are arguing this point with me.  There is nothing in that quote which implies that a notaire would not wish to see provable documents. In fact, I specifically refer to his professional responsibilities for compliance with the tax regulations and go on to mention the option of confirming the acceptablity of "your documents".......  

Both Mamou and Llwncelyn described their individual circumstances and my responses to them were conditional upon them having evidence of qualifying residency from approved sources.  If they do have such evidence, then they would comply with the regulations and would therefore not have a tax liability. 

To suggest that they unnecessarily delay exercising their proper legal rights for a further twelve months is not what I would describe as "best practical advice". 

  

 

[Logan]

I have no argument with you Sunday Driver. What you have written here on this subject is correct. It is theoretically correct according to the law. However my point is that in France very often individual notaries rightly or wrongly have their own distinctive interpretation of the law. They then apply that personal interpretation in their procedures. A property sale is an area where they seem to excercise that liberty more often, especially where the sale is by a non French vendor. I advise that to guarantee a tax free sale in practice wait 12 months from your date of provable residency. The notary will then not have room to excercise any personal interpretations. It can be a long drawn out and expensive process getting a notary to cough up monies incorrectly held in retention. Many notaries have an attitude that property sales where the purchase was relatively recent and a profit made is speculation and should be taxed, resident or not. Perhaps another method is to obtain a guarantee from the notary before completion that the sale will be tax free.

[Sunday Driver]

Given their role and qualifications, notaires are experts at operating "according to the law" in the matter of property sales.  That's what they do. The actual law is the only thing that matters, there's no question of being "theoretically correct".

If you put your principal residence up for sale the day after becoming officially resident in France then by law, you are exempt from CGT.  That is the rule, regardless of the profit made or whether you decided to "speculate".

If you find a notaire that needs to place his/her own "distinctive interpretation" on what should be a straightforward and clearly defined legal process, then I'd be wary of any other advice they offered me and would find myself another one to handle the transaction.

[quote user="Logan"]

Perhaps another method is to obtain a guarantee from the notary before completion that the sale will be tax free.

[/quote]

In practice, the notaire will have established your qualification for exemption from CGT beyond doubt, well before the signing of the papers. 

So I say again - no need to disadvantage yourself unecessarily by waiting twelve months....

 

[BJSLIV]

Isn't it still the case that if a house becomes your main residence after a period of secondaireship, then you must have lived in it for at least five years, and  still be living in it to be entirely sure that you will be exempt from French CGT?

see

http://www.opio-rouret-immobilier.fr/dossier/actua.html

I guess you would have to be a "serial mover" to attrct attention.

[avinalarf]

Although the law is the law, it is always open to interpretation in any number of 'what if' situations.

The notaires de France website gives the guidance on how notaires interpret the law.  Although a main residence is CGT free if occupied as such on the day of sale and therefore not subject to minimum occupancy - another paragraph describes your main residence as the place where you spend most of the year.  So if it is sold after one day as a main residence then the notaire might - in fact most likely will raise some further questions.   

I would definitely recommend filling out the appropriate forms to the UK taxman (R85?) as evidence of having left the UK.  Kids in school, health registration, etc are good proof of intended permanent residence and I would make sure these applications are in place before selling.

 

 

[Anyone for Cricket?]

From our very recent experience when selling we had to provide tax papers and other supporting documents even though we have been resident for 3.5 years so had kids in school etc.  We have also been told that we must pay CGT on the part of our property used as a gite as of course we can't state both as our principal residence (it is a detached separate house).  The notaire is assisting us to value the gite at a price which allows us to pay  minimal CGT, there is also a general abattement against CGT for residents which will mean we end up paying a fairly small amount.   

Interestingly it would seem that the previous owners did not pay CGT on the second house even thought it is clearly listed as two houses on the deeds etc..

It is probably obvious to everyone else but did not occur to us that this would be the case. 

[Will]

The difficulty with gites etc is that these are often regarded as business premises, so are assessed separately from the main house, and the full (33.3%) plus values rate applied. Some notaires will be kind and do what they can to minimise your liability, as you have found.

If the previous owner did not use the second house for short-term letting, or did not declare it to the tax people, then he/she will probably have avoided the tax.