The reform of capital gains tax on second homes has now been adopted, albeit in a modified form.

As we reported last month in our Newsletter, the French government have toughened the capital gains tax rules on the sale of second homes.

Initially they proposed to abolish the tapered relief over 15 years of ownership and to replace it with relief link to the consumer retail price index.

In response to parliamentary pressure this idea was abandoned, in favour of continuing with the principle of tapered relief over duration of ownership, but extending the period of full relief to 30 years rather than 15 years.

The relief will now apply as follows:

• No allowance for the first five years of ownership.
• Between six and seventeen years of ownership: 2% allowance per year.
• Between eighteen and twenty-four years of ownership: 4% allowance per year.
• Between twenty-five and thirty years of ownership: 8% allowance per year.

In addition, the government deferred implementation of the legislation until 1st February 2012, although for sales being undertaken through a French property company (Société Civile Immobilière – SCI) the applicable date remains 25th August 2011.

So what this new date of 1st February means is that the deed of sale - the acte authentique - would need to be signed by 31st January, which implies that the sale and purchase contract would need to have been signed by 30th November, due to the two months normally needed to complete the formalities.

The increase in social taxes (CSG/CRDS) that was taking place simultaneously with this change will be operative with effect from 1st October for all property sales.

This means that the new rate of capital gains tax for those resident in France will be 32.5% (19% CGT and 13.5% CSG/CRDS).

EU residents will continue to pay at the total rate of 19% as no liability arises for the social charges for non-residents. Those from outside of the EU will also continue to pay CGT only at the higher (existing) rate of 33.3%.

Applicable Rates

The following table illustrates the difference in the allowances that will be available under the new rules with the allowances currently in force.

In the fourth column we show the effective rates under the new rules for those who are resident in France, after taking into account the allowance for duration of ownership; the fifth column shows the applicable net rate for EU residents living outside of France. Those from outside of the EU can view the applicable net rates in our 'Guide to Capital Gains Tax in France'.

As can be seen, at the end of 15 years ownership, instead of 100% exemption, under the new rules the allowance is 20%.

This means that, for a resident in France, at the end of 15 years the effective rate of tax is 26% (80% X 32.5%). For a non-resident from within the EU the tax payable is 15.20% (80% X 19%).

Allowable Improvement Works

Perhaps not surprisingly we have received a fair number of e mail enquiries from you on these tax changes.

Clearly, it is not good news, but one point on which many of you seem to be confused, or not to appreciate, is that major improvement works that you have carried out to the property can be offset against liability to capital gains tax.

Like the price you paid for the property, major improvement works are a cost you can charge.

So if you have spent €100K on restoring an old wreck, and you can produce registered builders receipts to support the work, then some of this expenditure is added to the purchase price of the property before calculation of the liability to the tax.

However, only that work undertaken by a registered builder in France is deductible, so DIY work and work undertaken by a builder not registered in France cannot be taken into account.

We will be saying more about this tax concession in a later issue, as the rules are not clear, and a great deal of work is not eligible.