In a major change of policy the French government has abolished the current relief from capital gains tax for second home owners.

There has also been an increase in the social charges on capital gains, which will apply in equal measure to the income from rental properties and other investment income.

The sale of the principle home will continue to be exempt from both capital gains tax and social charges.

The changes are included in a €12 billion austerity budget recently announced by the government. The proposals have yet to receive parliamentary approval.

Capital Gains Tax

Since 2004 second home owners in France have been able to benefit from a reduction in capital gains tax (CGT) on the sale of their property, based on the duration of ownership.

The abatement has been at the rate of 10% a year from the sixth year of ownership, with full relief granted after 15 years of ownership.

This concession has now been abolished and replaced by a far less generous one based on the level of inflation over the period of ownership.

In effect, what the government has done is to make the taxation of capital gains neutral in relation to the general consumer price index.

However, this is of limited compensation, for since 1998 the price of property has more than doubled in most areas of the country, while over the same period the index of inflation has risen by a far more modest 20%.

By way of (a simplified) example, assume a second home purchased 15 years ago for €150,000, with a current value estimated at €400,000. With inflation of around 25% over the period, the owners would now pay taxes of €69,000, where previously there would be no taxes at all to pay.

There are, however, some second home owners who will benefit from this change. They are those who have owned their property for less than six years, for there was previously no remission from capital gains tax for such owners. Now they will at least have the benefit of five years of inflation (although final confirmation will only be available when the detailed regulations have been published).

The measure applies for all property sale contracts signed after 24th August, although if sale completion takes place before the law is passed, then the old rules will continue to apply.

It is likely that those who signed a sale contract before 24th August, but who do not complete before enactment of the measure, will not be liable.

The measure also applies equally to building land and the sale of rental properties.

Social Charges

Not only will second home owners lose the capital gains tax abatement, but the rate of taxation that applies has also been increased.

This is because the social charges (CSG and CRDS) have been increased by 1.2%, from 12.3% to 13.5%.

The actual level of capital gains tax itself remains at 19%, although the rate of CGT was increased from 16% to 19% on 1st January 2011.

Coupled with the social charges, it now means that the total tax charge has risen from 31.3% to 32.5% (19% capital gains and 13.5% social charges). However, non-residents are not liable for the social charges, so they will continue to pay 19%.

Rental Properties

These new social charges apply to all rental income as well as other forms of investment.

The new rate will apply on all rental and other investment income earned in the current year, although further details are awaited on the precise commencement date for different types of investment earnings.