Knowledge and Resources
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 :
|Net taxable assets||Annual tax due|
|1 300 000 €||2 500 €|
|2 000 000 €||7 400 €|
|3 000 000 €||15 690 €|
|4 000 000 €||25 690 €|
|5 000 000 €||35 690 €|