> Financing your purchase
> Married Couples and Divorce
The taxes you will need to consider involve those when you acquire the property, regular ones once you move in and personal taxation:
The taxes and Notaire's fees associated with purchasing property represent a significant additional cost. We recommend that buyers budget that fees and taxes will add about 7% to the purchase price.
This money is paid to the Notaire on the day of signature of the Acte de Vente together with the balance of the purchase price. As a guide, here is a list of the fees and taxes that will be payable:
- Stamp Duty: 0.6% for property less than 5 years old, 4.9% for everything else.
- TVA (Value Added Tax) at a rate of 19.6% is payable on all property less than 5 years old, and is normally quoted within the purchase price.
- The Notaire's fees include various fixed costs for the various formalities called emoluments. They are calculated according to the price of the property. Allow around 1%.
- Various expenses for administration costs, specialist fees and minor taxes.
- Mortgage registration fees, roughly 2% of the value of the loan.
The seller will pay our commission.
When the formalities are completed, the Notaire will send you a detailed statement of costs with the Acte Authentique. This will show the individual taxes paid to the French state, the fees received by the Notaire and any other costs incurred.
Regular taxes once you have moved in
There are two local taxes which are both based on the property's theoretical rental value and which are adjusted in line with inflation.
- Taxe d'Habitation is payable by the occupier of the French home. This is to pay for the local services provided by the town and the region. There are limited exemptions for the over 60s and where the property cannot be occupied due to the need for renovation. Where the level of tax for a particular property is known we quote it in our details. However, as a guide, in our area this tax can vary between around 500 euros and 1500 euros per year.
- Tax Foncière is payable by the owner of a French home. This again is to pay for the local services provided by the town and the region. Unlike the Taxe d'Habitation, apportionment can be made between the buyer and seller in the sale for the year during which the purchase is made. If there is the case, it should be stated in the contract for sale. There are exemptions from the tax for some agricultural land and the owners of new property will have a temporary exemption. Where the level of tax for a particular property is known we quote it in our details, but generally this tax can vary between around 500 euros and 1500 euros per year in our area.
Non-resident property owners in France may be liable for various forms of personal taxation depending on their individual circumstances. Below we list the main taxes to be aware of, but we advise all purchasers to seek advice from a financial professional.
Owners are obliged to make a tax return in France if they receive rental income from their property.
There are various mechanisms by which owners can eliminate this tax liability if they pay income tax in their home country.
Capital Gains Tax
CGT will be payable on the sale of all property that is not a principal residence. In French law, property is considered as a Principal Residence if the owner is resident in the property for 183 days a year. However, the longer the property is owned, the less CGT is payable. This reduction applies after 5 years of ownership until after 15 years the amount of tax due falls to zero. For French residents the CGT is calculated at the rate of 27% after taking into account matters such as legal fees and renovation works. For a non French EU resident the rate is 16%. For a non EU resident the rate is 33.3%.
If the owner's home country has a double tax treaty with France then the agreement allows a credit of any capital gains tax paid in France to be set off against any capital gains tax payable in the tax domiciled country.Additionally, if a buyer makes a 'habit' of buying, renovating and selling, the tax authorities will suspect that they are a property dealer and charge a rate of 50%. If the property is owned by a limited company and subsequently sold at a profit, the Capital Gains Tax payable is divided between all shareholders.
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FINANCING YOUR PURCHASE
Financing through a loan
Loans and the Compromis de Vente
If you are taking out a loan to fund buying your property you are protected by French law since all Compromis de Vente and arrangements to sell are signed subject to the buyer obtaining the loan or loans required to finance the purchase. The term of validity of such a conditional sale is generally between two and three months, but may not be less than one month.
If you fail to obtain a loan within the given term, the Compromis de Vente will be rescinded without giving rise to any penalty or damages. All of the fees paid in advance, such as the security deposit or reservation indemnity, will be reimbursed to the potential buyer.
However, the law does not protect anyone who acts in bad faith, and no protection is offered if the buyer doesn't do what is necessary to obtain the loan in a reasonable period of time, or if they provide false information to the lender.
Mortgages in France
Most buyers wish to raise a loan to help with the purchase of a French property and they do so through a French bank. It is, of course, possible to raise the necessary finances on a different property in the home country.
Please be aware that any foreign mortgage will have exchange rate implications (except, of course, in the Eurozone). Specifically, where a buyer's income is in a different currency to the mortgage, the repayments will vary in size depending on currency rate fluctuations. Similarly, if the mortgage is raised in a non-Euro currency then the value of the equity will fluctuate in comparison to the debt taken.
The key criteria of eligibility for a mortgage through French Lenders are:
- The maximum percentage of the Loan to Valuation of the property is 85%, or 90% if the buyer is to be resident in France. In practice a maximum of 75% is more usual. The credit assessment is not based on income multiples but the projected percentage of the income taken up by total outgoings. As a general guide the combination of your loan repayments should not exceed 33% of your monthly income.
- The cost of registering the mortgage against the property is payable on completion to the Notaire and will not be financed by a French lender. If the buyer is self-employed then the method of assessment can be very stringent requiring a minimum of three years full audited accounts, tax assessments etc.
Re-Mortgaging is uncommon in France and bridging loans are not available to non-residents.
Renovation loans are available based on the estimates provided by French suppliers. The same criteria apply as to mortgages, and the funds are released on receipt of the invoices. If a buyer intends to carry out the work themselves it will only be possible to finance the cost of materials.
As mentioned before, valuations and surveyors' reports are not a standard requirement in the French lending process.
Most French lenders undertake a valuation for their own purposes in house, details of which are not passed on to the borrower.
We have contacts with several local banks and will be happy to put you in touch with them.
Selling a lodging to buy another
If you are intending to finance your purchase through the sale of your existing property, it is best to find a purchaser for your property first.
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'Droits de succession' (inheritance tax) is due on property located in France even if an owner is not fiscally resident in France. The tax payable is based on the relationship between the heir of the property and the deceased. The tax is charged in a series of bands - for spouses, children and parents, approximately 5% rising to 40% on large assets; and for brothers and sisters 35% rising to 45%.
French inheritance law gives an owner's legal heirs protected rights to a certain proportion of their French estate. This proportion is known as the 'Reserve Legale'. It is only the remainder that can be freely given away by a lifetime gift or a will. The proportion that can be given away decreases with the number of children in the family - 50 % for one, 30% for two and 25% for 3 or more. Should the owner have no children then other members of your family may qualify as legal heirs.
Inheritance and Children
French Inheritance law is designed to protect children by ensuring their share of an estate to the exclusion of any surviving spouse. Therefore, a spouse is not a legal heir and has no right to the 'Reserve Legale' when a property has been purchased in the normal way - 'en indivision' (divided).
The major problem with these rules is that the surviving spouse may have to face co-ownership of the property with children of the marriage including the children of any previous marriage. Further, if the surviving spouse is left with children under eighteen years old they cannot sell the property without asking the French Court for permission. The judgment has then to be enforced in England.
One way to avoid this situation is to purchase the property using a special form of limited company called a SCI (Societe Civile Immobiliere). Provided the buyer remains resident overseas the shares in the SCI are not regarded as property, and are thus governed by the inheritance law of the country where the shareholder permanently lives. The shareholders can then include provision for inheritance of the whole property on a shareholder's death within the constitution of the SCI, and therefore avoid the 'reserve legale'. This will not lead to the avoidance by the inheritors of inheritance tax; it merely means that the buyer will be able to dispose of the property as they see fit. However, an SCI is quite expensive to set up and expert advice should be sought before doing so.
Another way to avoid the difficulty is to buy the property jointly or 'en tontine'. It is, however, a complex process and difficult to untangle once set up. It quite simply means that on the death of one partner the property passes to the survivor. Again, whilst it mitigates the effects of French inheritance law, it does not mean that inheritance tax can be avoided.
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MARRIED COUPLES AND DIVORCE
Terms of Purchase
In most cases, when a property is purchased by a husband and wife with their savings, the property is joint owned by them without the need to make any specific provisions and each has identical rights to the property purchase, regardless of which spouse is the purchaser on the deed of sale. There are a few circumstances under which this is not the case:
Personal acquisition by a spouse
If the assets used to purchase the property belong to one of the spouses, the only way the spouse can ensure that they have an exclusive right to the property is to make a statement in the deed to the effect that the funds used for the purchase belonged exclusively to him or her and that the property purchased is also personal to them.
If the assets used to purchase the property are partially exclusive and partially collectively owned, then the property purchased cannot be exclusive unless more than half the price is financed by cash.
Acquisition by couples having signed pre-nuptial agreements
When couples have signed a pre-nuptial agreement, there is no rule to establish their financial relationship. Generally, the spouses are purchasers in proportion to their respective financial contribution to the purchase.
When the purchasers live together unmarried, they purchase in the proportion of the financing made by each, whether that is half and half, wholly or any other proportion.
It is common that the unmarried couple wishes to protect the surviving individual, although this is often quite difficult due to estate tax consequences. Unmarried partners who have not entered into a civil solidarity pact (pacte civil de solidarite) are in effect like couples that don't have children and, therefore, gifts and testamentary dispositions are subject to a 60% tax.
When the unmarried couple does enter into a civil solidarity pact, they are undivided owners of the assets acquired by one or the other. A clause to the contrary may nevertheless be inserted into the deed of sale.
What happens when a purchasing couple divorce depends on the manner in which the property was bought.
Property purchased 'en indivision'
This is the normal situation, and the parties will have a choice of two routes to follow. Either they agree to sell the property and share the sale proceeds or one of them decides to retain the property. In both cases a Notaire must be appointed.
a) In order to sell the property the Notaire will prepare a deed ('acte de partage') to settle the transfer of ownership of the property. Once the property is sold, the Notaire will split the sale price between the parties. The sharing out may then be referred to in the divorce judgment in England. Tax of 1% will be payable on this transaction to the French administration (the 'actif net de partage')
b) Where one party wishes to keep the property, the Notaire will still draft an 'acte de partage' which will state that the property will belong to one party on payment by the other of an agreed sum. This payment is called "soulte". Again a tax of 1% is payable on the 'actif net de partage' after having deducted any outstanding loan.
Property purchased 'en tontine'
If the property has been bought with a 'clause tontine' and one party wishes to retain the property, the divorce judgment in the home country must confirm one party's intention to transfer their share to the other and that both agree to renounce the clause. The problem is that the 'clause tontine' provides that both parties own the whole, rather than an equal share each. The renunciation allows the property to be split into two shares. A copy of the judgement and a 'certificat de non recours' will have to be registered by the Notaire before title can be passed.