The main lines of the reform to capital gains tax on property sales have been announced by President Hollande.

In large measure the reforms reproduce those proposals included in the Finance Act 2013, but which fell foul of the Constitutional Council at the end of 2012.

The three principal measures are:

• the abolition of the reduction in the level of the tax for duration of ownership on the sale of building land;

• the merger with the income tax system of the taxation of capital gains tax on the sale of building land;

• a temporary discount of 20% on the level of the tax on the sale of second homes.

Noticably absent from these proposals is any proposed reduction in the number of years required to obtain complete exemption from capital gains tax on the sale of a second home.

Since 2012, in order to benefit from exemption, the property must be owned for 30 years, although there is a progressive reduction in the level of the tax from the sixth year of ownership.

A return to pre 2004 capital gains tax rules on property sales was one of the pledges made by President Hollande in his election campaign in 2012, a pledge that appears to be fast receding into the distance.

Building Land

The main objective of the abolition of the allowance for duration of ownership on building land is to bring more land onto the market for housing development.

However, this reform is a temporary one for 2014 only, as it is then intended that from 2015 the gains on the sale of building land will be taxed as part of the income tax system.

The problem for the government with this second stage measure is to ensure that incorporating the taxation of capital gains into the income tax system does not again meet with objections from the Constitutional Council. Last time around they considered that in certain cases it could result in a marginal tax rate of 82%, which they considered to be excessive.

President Hollande clearly recognises this problem, for in his announcement he stated: "nous devrions reprendre une disposition qui n’a pas été acceptée à ce stade par le Conseil Constitutionnel. Mais nous la reformulerons parce que nous avons besoin qu’il y ait plus de transactions et plus d’activité sur le marché immobilier et que l’incitation soit faite pour libérer tout de suite, pour créer ce choc de confiance sur le marché."

The taxation of building land in France is potentially subject to certain ancillary taxes that do not apply in relation to the sale of second homes. So in order to deal with constitutional objections, these taxes will either need to be abolished or reformed.

You can read about the particular and complicated rules that apply at Taxation of Building Land in France

Second Homes

The planned discount of 20% in capital gains tax on the sale of second homes is unlikely to suffer any similar constitutional objections, and was only an inadvertant casualty of the decision by the Constitutional Council.

As with the separate changes to the taxation of building land, the aim of the measure is to encourage owners to put their properties on the market to ignite the moribund housing market.

We await details of the applicable period, but the discount is likely to at least apply for sales in 2013, but not signed until 2014.

However, the measure will apply uniquely in relation to the rate of capital gains tax (impots sur les plus-values) of 19%.

The social charges (prélèvements sociaux) will continue to be charged at the rate of 15.5% on the whole of the net gain, after allowances.

This means the real level of the discount is not 20%, but 11%.

We shall know more when the details of the proposal Finance Bill for 2014 are revealed in the autumn, when it is possible that there will be further changes.

Duncan Campbell of French tax advisors Kentingtons comments that, "The French government are really caught between a rock and hard place on tax policy, for although there is a need to give a boost to the flagging housing market through fiscal incentives, they are constrained from being able to give much away due to the need over the short-term to bring down the budget deficit."