The reform of capital gains tax leaves little room for manoeuvre to reduce tax liability, but there are options that may be of use to some of you.

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

In future the allowance will be spread over 30 years and not 15 years, as is currently the case.

The one small piece of good fortune is that if you are non-resident, then you would not pay social charges of 13.5% on the sale of the property, so this substantially reduces the size of the potential liability.

Following some pressure on the government from French parliamentarians, a small relaxation of the rules has also been agreed.

Under the change those who are tenants of their main home, but own a second home, will now be granted exemption from the capital gains tax on the sale of the second home.

The concession is subject to several conditions, notably that:

• the sale cannot be earlier than 5 years after purchase of the property;
• the seller must not have been owner of their main home during the 4 years that preceded the sale;
• they must purchase their main home within 2 years of the sale;
• the sale proceeds must be used for the acquisition of their main home (that not used would be taxed).

This relaxation of the rules is meant to assist job mobility and younger households, but given the conditions that have been imposed, it is unlikely to be of use to more than a small number of households.

For those who do not meet this new exemption criteria there exists a number of other options, but each has their own difficulties and limitations.

Make a Gift to Your Children

One approach to reducing or removing your capital gains tax liability would be to make a gift of the property to your children.

As the gift must be transferred at market value, once in the ownership of your children it removes the capital gain from the property. The property could then later be sold.

The major risk is that if the proceeds from the subsequent sale of the property by your children are reversed to you, then the tax authority could decide that there has been abuse of the system.

The other problem with this approach is that stamp duty and notaire fees are payable, based on a percentage of the transfer value, and there may also be a liability for French gifts tax.

However, for each parent is able to gift to each child a sum equivalent to nearly €160K, so in the case of a family of four this would mean that the two children could receive real estate up to the value of circa €640K before gifts tax clicked in.

If you had a mortgage on the property, the value of the gift would be reduced by the level of the outstanding debt, and the mortgage can be used to also reduce stamp duty and notaire fees payable.

There are different approaches which can be taken here, some of which would need to be done in consultation with your bank, so you would need to discuss the best route with your notaire concerning a ‘donation avec charge’.

One other approach is to merely transfer the 'reversionary interest' in the property, so that the parents retain the right of life use of the property, and any rental income arising from it.

Good (written) professional advice should be taken before you make this choice.

You can read more about the gift transfer of real estate in Gifts Tax in France

Transfer the Property into an SCI

The purchase of a property in France via a Société Civile Immobilière is sometimes used by international and French buyers as a way of optimising their fiscal position, and as a method of getting around entrenched rights under French inheritance laws.

It also happens that the sale of your property to an SCI, as part of a diversification of the family wealth, would (coincidentally!) be a way around the new tax rules.

Nevertheless, you need to be careful of this approach, for if the tax authorities took the view that the only or main reason you were doing it was to avoid paying taxes, then they could re-qualify the transfer and apply capital gains tax.

Hence, the best recommendation is to include your children in the capital of the company, so that they become joint owners of the property with you.

As the SCI is a separate legal entity there is a need to fund the purchase by the SCI, which may be a problem in itself, but is probably best done by a mortgage, particularly useful if the property is then being rented out, as interest is a deductible charge from rental income.

You also will need to act quickly on the transfer in order to take advantage of current rules, as capital gains tax is payable on the transfer into the SCI. Alternatively, a sympathetic valuation from a local estate agent would help.

There are also transfer fees and taxes to consider so the likely cost of such a transfer needs to be weighed against the liability under the new rules.

If you already have the property in an SCI then this option will not be possible, as the law has been operative for transfers out of an SCI since 25th August.

Once again, as with the gift option, the SCI is a route that should not be taken without professional advice.

Change Your Main Home

This option may not be as crazy as it seems, and this writer is certainly aware of a number of expat home owners who are proposing to do adopt precisely this approach.

The point about this option is that relocation may be temporary or permanent, for you can of course later change your mind, by selling the property to which you have relocated, and then moving back to your original residence.

Although the law does not prescribe a minimum period for how long you must live in the property for it to qualify as your main home, unless there are other exceptional circumstances, eight months is regarded as the minimum prudent period; ideally it should be longer.

In order for the new home to quality as your ‘résidence principale’ you will need to have made both a physical and an administrative move, so that all tax and utility bills are in your name and the authorities are notified of your change of address.

There is a health warning about such a maneouvre as it does risk being re-qualified as an abus de droit, so prudence is needed.