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New rules governing French wealth tax came into effect on 1st January 2018. In this post, we explain what the changes to the law mean if you own a French property or if you are planning to acquire one.

Prior to the changes, French wealth tax (ISF) was assessed on all assets owned by the taxpayer when net taxable assets exceeded a threshold of €1,300,000. The basis for the wealth tax included worldwide assets for taxpayers domiciled in France and real estate assets located in France for non-resident taxpayers.

With effect from 1st January 2018,  a new real estate wealth tax scheme (“Impôt sur la Fortune Immobilière” – IFI), is assessed only on the real estate owned by the taxpayer to the extent that the value of the taxpayer’s real estate net assets exceeds a threshold of €1.3 million.

All other assets (especially financial assets) are no longer subject to wealth tax. The five year exemption for property held outside of France for new French residents continues. As with individuals domiciled outside of France, those who have not been domiciled in France during the five years preceding their arrival on the French territory will only be taxed on their French real estate assets, until 31 December of the fifth year following the year of their arrival in France.

The new IFI scheme is governed by the same taxation scale as the former ISF scheme and similar rules as for the French wealth tax apply. More specifically:

• Real estate used in a trade or business are excluded.
• A 30% discount on the value of the taxpayer’s primary residence continues
• Mortgage debts related to taxable real estate assets can continue to reduce the wealth tax base

 Mortgage loans as a lever to reduce French Wealth tax

With regards the deduction of mortgage loans in the wealth tax base, new rules specify that interest-only loans will be governed by similar rules as amortising loans. This rule also applies to existing interest-only loans.

For example, a 10 year €100,000 interest-only loan arranged on 1st Jan 2016  will be assessed as follows : for the purpose of reducing the 2018 wealth tax base : €100K – (€100K x 2) / 10 = €80K

French real estate assets with a gross value exceeding €5 million will also be subject to a deduction cap. In practice, when the mortgage outstanding balance exceeds 60% of the property value, the maximum amount of mortgage debt that can be used to reduce the wealth tax base is capped at 50% of the “excess” over and above the 60% cap.

For example, assuming a property worth €6 million with a €4 million mortgage :

60% cap : €6m x 60% = €3.6 m. Excess over the cap : €4m – €3.6m = 400K€.  50% of the excess : 200K€. total deduction from the wealth tax base: €3.8m

 As a reminder, assuming the €1.3 million threshold is met, tax bands applicable to net taxable real estate assets are :

Real estate value under €800,000 – 0% tax rate

Real estate value €800,001 to €1,300,000 – 0.5% tax rate

Real estate value €1,300,001 to €2,570,000 – 0.7% tax rate

Real estate value €2,570,001 to €5,000,000 – 1% tax rate

Real estate value €5,000,001 to €10,000,000 – 1.25% tax rate

Real estate value €10,000,000 upwards – 1.5% tax rate

Annual wealth tax bill applicable to unencumbered French real estate assets would be as follows :

Principles applicable in French property law go back to the declaration of human and citizens’ rights in 1789 “the right to property is an inviolable and sacred right, that no one can be deprived of …”

In addition to protecting property owners, the French legal system has, over the years, added a number of laws designed to protect the buyer and, as such, creates a very safe and heavily regulated purchasing environment.

Initial Stages

After a property has been found and a purchase price has been agreed, the vendor and the buyer must sign an initial contract – known locally as the Compromis de Vente. In some cases, this document will be a standard contract held by a French estate agent; however, it can also be drawn up by an official of the government – referred to in France as a Notaire.

Once the Compromis de Vente has been signed by all parties, a seven-day cooling-off period begins. During this seven-day period, the buyer has the opportunity to withdraw from the purchase. After the cooling-off period has ended, the transaction becomes legally binding, and significant penalties are payable if either party should withdraw from the sale.

A conditional clause can be added to the Compromis de Vente stating that the purchase is subject to the mortgage application be approved by at least one lender.

A deposit of at least ten percent of the purchase price will normally be required – although it will remain in escrow with the notaire until the transaction completes successfully. In the event that a mortgage application is not approved, the compromis de vente becomes void and the deposit is refunded.

At this point you may wish to appoint your own notary to oversee all aspects of the transaction.
The appointment of your own notary does not incur any extra costs.

Role of the Notaire

The involvement of a notaire in real estate transactions is a legal requirement in France. He is a public official who has a monopoly over conveyancing. One notaire can be appointed to oversee the entire transaction; however, both the vendor and the buyer can appoint their own. The notaire will oversee all aspects of the sale to ensure all applicable laws are adhered to and that all taxes are paid. The notarial profession is strictly controlled by statute owing to the delegation of public authority. The profession is also monitored closely by its peers and if necessary by the judicial authorities.

A notaire will typically charge between six and eight percent for their services, and all fees are payable on completion of the sale. For the most part, notary fees are taxes set by the Government.

Conveyancing process

The average timescale for completion of the various searches and legal checks – undertaken by the notaire – is three to four months. A meeting will then take place between the buyer and vendor – or parties nominated to represent them by proxy. The final deed of sale – known in France as the Acte de Vente – will be signed during this meeting, and the property’s ownership will finally pass to the buyer.

The French housing market is expected to strengthen further in 2018. Strong demand for houses in France is buoyed by low interest rates. Find out more about the latest trends in French property prices.

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As your mortgage instalments will be debited from an account by Direct debit, you will need to open an account with a bank in France. Bluesky Finance can help you find a suitable retail bank and the right package for you.

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