French TAX SYSTEM for people looking at PROPERTY FOR SALE in FRANCE

French TAX SYSTEM for people looking at PROPERTY FOR SALE in FRANCE

Introduction

By no means at all is the French tax system simple, there are so many different basis of assessment, and such a large number of taxes and so many different rules, which can be broken at various occasions that it very hard to describe on paper.
France is not the place to come from abroad and set up a business, due to numerous interferences, which also don't make life any easier for people on low incomes and doesn't help employers and self employers at all.
The French authorities have a fierce reputation for punishing people who under declare there incomes. So be honest. And as always make sure you know what you're doing.

Income Tax

You are liable to French income tax if:
You are fiscally resident in France;
On the income of the whole household;
And on the basis of your worldwide income.
Please note however that you don't have to be living in France to pay income tax, but if you're a non resident you will only be taxed on what you earn IN France.

Resident or not?

To be considered a resident you have to have a main home in France OR have a job in France OR that your centre of economic interests is in France.
If you have any 2 of those 3 things then you are considered by law a resident.
Another general rule is that you have to live in France for 183 days per year. However that is not compulsorily.
You can be considered a resident in two countries, this can be tricks and have some slight downfalls, however the two countries will sort it out so as you don't have to be taxed twice. For assistance on this visit; http://www.hmrc.gov.uk/pdfs/ir20.pdf

If you consider yourself not to be a resident but you earn income from France, taxation is going to depend on the terms of any deal between France and your home country.
Generally rental income is taxed in the country its earned in, however you should check that up because you may be entitled to partial relief or exemption against potential tax liability in your home country – this simply means that if the tax you pay in France is greater than what you would pay in the UK, then no further tax is payable in the UK.

Your Fiscal Household

If you are a resident French income tax is based on the income of the house as a whole item.
In order to determine the tax payable, the income of the fiscal household is divided by the number of 'parts' that comprise the household. The notional income of each 'part' is then assessed for tax using the rates applicable.

A couple would be 2 parts and with a child that would make up 2.5 parts.

If your children earn a income there may be a tax advantage in them making their own tax declaration, outside of the foyer fiscal. If you later find out you did not make the best choice, you can ask the tax authority to do a recalculation. However apprentices and pupils are exempt from the income tax.

What income is taxed?

Once residency is obtained you must declare your worldwide income from all sources. This declaration must include salary, pension, rental income, investment income, interest on savings, and income from business activities, if not taxed already.
Some income is excluded, notably some French social security payments, certain French, and some concessions for apprentices.

This foreign income will be added to your French salary to calculate the income tax of you earning in France.
It may increase the rate of taxation on your French income.
If you are based in France, but earn business or salaried income from both UK and France, then you will pay obligatory health insurance charges on the UK income.

UK Pension Income.

If you are a resident but receive a state retirement pension, private sector pension or annuity from the UK, it is taxable.

Foreign Rental Income

If you become resident, but receive letting income from a property remaining in the UK, then this income is ordinarily taxable by the UK authorities, to whom you will need to make a tax declaration.
Of coarse you will also need to declare it to the French authorities as well.

Foreign Savings Income

If you earn foreign savings or investment income, then this is entirely taxable in France, although you will get relief against any taxation paid elsewhere.

French Rental Income

Of course, you must declare this to the authorities; the basis of the tax will be on whether it's furnished or unfurnished rental income.

Tax Returns

If you are a resident or non-resident you have to submit a tax return. If you have not made a tax declaration you may not be sent a tax return for your first submission, contact your local tax office for paperwork.

You could also download forms from the tax authority website. There are no concessions if you later claim to the tax authority that you did not submit a tax return because you were not sent one.

Income Tax Calendar

Income tax is assessed so your tax declaration for 2010 will cover your earnings of 2009. There is not a PAYE system for employees.
 
There is a closing date for submission of tax each year by which the time declaration needs to be returned to the tax authority.
 
You will be advised of the outcome of your tax declaration sometime during august or September.

Completing Your Tax Return
There is no single tax return in the same way as is the case in the UK. The four main forms for personal income tax are; The Main form, Property rental income, Income from abroad and Accounts held abroad.

If your income is modest a cheaper alternative would be for you to visit your local tax office and ask for their help top fill out the forms.

Prepare a statement of earnings and distinguish the origin of your earnings. If you are exempt of payment of health contributions or if you have banks accounts abroad you are formally obliged to declare this.

Calculating Your Income Tax Liability

Composition of Your Household

In determining your tax liability the tax authority will establish your gross earnings and then make certain allowances against the income to arrive at your net earnings. Your tax liability will then be calculated on a progressive basis.

To minimize the impacts of higher rates of taxation on those with dependants, the size of the household is taken into account to determine the size of tax. The total income of the household is then divided by the number of members in it.

Each adult counts as one part/share and each child as half a part/share, but any third child or dependant will count as one part/share.

Income Tax Rates

There are five tax rates and bands:

The rates are applied on a sliced basis so that each ‘part' of the income is charged on a progressive basis. Thus, if a couple have net income of €30,000 in the year, and then there are two 'parts' of €15,000, with each part taxed using the scale rates.

Income Tax Allowances

There are a number of tax breaks you may be able to use to reduce your liability to French income tax. 

It may take the form of either tax relief or a tax credit.
There is a general abatement of 10% for professional costs in relation to salaries up to a ceiling salary figure of €13,893 for income earned in 2008. This abatement is calculated after the deduction of social security contributions. 

Salaried employees can, alternatively, and within agreed limits, elect to deduct actual professional costs, including costs of travel to work, meals, tools and clothing. Social security contributions are also deductible. 

If your pension is taxed, then there is also a general 10% abatement, to a maximum sum of €3592 per fiscal household. 

In addition, for those aged over 65 years old a fixed sum is deducted from your net income before you become liable to income tax. 

With total net income per person of less than €14,010 the deduction is €2276 per person; between €13,950 and €22,590 the deduction is €1138 per person. With a net income above €22,590 no deduction is available (2010 figures).

Tax Credits
The main tax credits are Home Energy Conservation, Home Adaptations and Child Care.
Home Energy Conservation: An allowance ranging from 15% to 50% for the installation of certain energy conservation works in the family home. It may be an existing property, or one to be constructed, but second homes are not eligible. 

Home Adaptations: There is an allowance of between 15% and 25% against the cost of specific works to give greater mobility or safety to elderly or disabled persons in the home.
Child Care: An allowance of 50% up to a maximum of €2300 per child under 7 years of age towards the costs of child care outside of the home.

Payment Methods for Income Tax

You can either pay in one lump sum, by monthly direct debit, or in three installments.
If you do not pay your tax bill by the due dates then your liability is increased by 10%, as well as an interest charge of 0.40% per month (4.80% per year) on the outstanding sum.

Payment Difficulties with Income Tax

If you find yourself in financial trouble, and cant afford your taxes you will be able to negotiate a delay in payment with the tax office.
You can also seek relief from a penalty charge; of coarse this all depends on whether you can prove your financial difficulties. You must have proof.
Less than 30% then the decision is discretionary, and application needs to be made to the local tax office.

Social Security
Unlike to most European countries, where the social security system is financed through general taxation, the system in France is funded directly through social security contributions.
Employer, employee or self employed the social security contributions are extremely high.
Social Security contributions are tax deductible.
Accordingly, income tax is charged after most social security contributions have been deducted.
The distinction between taxation and social security contributions is not as clear-cut. Neither is there a single national insurance charge in France, in the same way as is the case in the United Kingdom

Contributions for Employee/ Employer

The following table shows the level of contributions to employer or employee.
The rates shown are based on a percentage of salary.

Self-Employed

If you are self-employed then the level of your contributions are around 40% of net income

People who've reached the official age of retirement are not liable for social security contributions.

The list of contributions are considered a distinct social welfare levy known as contributions sociales.
The levy actually comprises three different charges, as follows:
Contribution Sociale Généralisée (CSG)
Contribution au Remboursement de la Dette Sociale (CRDS)
Prélèvement Social (PS

Investment Income
Generally you can distinguish investments with a variable level of return and a fixed one. Some of these investments are taxable in the normal manner, whilst there are others with tax breaks.
In relation to fixed interest taxable investments you can either be taxed at the rate of 18%, or declare the interest as part of your annual tax return.
In either case you will also be liable for social at the rate of 12.1%. So, the effective rate of taxation is 30.1%.
As far as variable rate taxable investments are concerned they are taxed on the same basis as fixed interest investments with a rate of 30.1%, or taxed as part of your general income for income tax purposes.

Residence Tax

This is a annual residence tax imposed on the occupier of a property in which they were resident on 1st January of each year. 

If the property is your second home, even though you may not physically be resident on 1st January, the tax is still payable, provided the property is capable of occupation.

How much do I pay ?

This is determined by the local or county councils, however the calculation and collection is carried out by the central government tax authority.

The formula is complicated but generally its based on the rent that the property might be expected to achieve in an open market, obviously based on location, condition and size.

Are you exempt?

The tax isn't payable if the property is not occupied (if it's empty).

However, the definition of 'occupation' used by the tax authority includes those properties capable of occupation. Ordinarily, this would imply that there would need to be furniture in the property, and that utility services were also available. 

In - Paris, Toulouse, Lyon, Montpellier, Cannes, Grasse, Antibes, Nice - the tax is payable on a property that has been empty for at least 5 years, with an additional penalty of 50% of the tax for those empty for at least ten years.

TV License

The annual cost of the TV license is €121 (2010), which is subject to an annual index linked increase.  No matter how many TVs you have you only need 1 license per household.

Wealth Tax

Liability? 

The tax has attracted a lot of bad publicity, in many cases misinformed. This is because fewer than 500,000 pay it, and the amount that they pay is usually relatively small.

Thus, for the first five years of you becoming resident in France, you will only be liable for the wealth tax on those assets located within France. 

After this date, the tax is payable if you have total worldwide net assets in excess of €790,000, a threshold that is inflation linked.

The extent of your liability will depend on whether or not you are resident in France.
Resident - If you live in France then the whole of your worldwide assets must be taken into consideration for the purposes of the tax.
Non-Resident - If you do not live in France, then only property assets actually in the country are considered.

What Assets are Included?

If you are resident the tax is wide in the assets which must be included in the calculation. 

They include, of course all cash and property owned by the household, as well as cars, jewels, furniture, shares, fine wines and other valuables.
Assets must be valued on the open market valuation at 1st Jan each year, with a discount of 30% granted for the main residence.
In addition, antiques over a 100 years old, art collections, historic cars, the value of artistic, industrial and literary rights and certain alimonies are also exempt. 

There is also substantial exoneration for employee and director shareholdings and those by investors in small or medium sized companies based in the EU, in addition to partial exemption for woodland, long term shares held by share clubs and business properties.
There is an exemption from the tax for five years for those who become resident in France after 6th August 2008.
If you are not resident then only the net value of your fixed property assets will be taken into consideration for the tax. 

Given that the tax is not payable if the property has a value of less than €790,000; it is only going to be relevant for a small number of owners.

Rates of Wealth Tax

Wealth Tax Declaration
If you are resident in France then the tax is payable by 15 June each year; if you are a non-resident European you have until 15 July; if non-resident from elsewhere you have until 1 Sept.

Capitals Gain Tax
Real Estate Exemptions
1. Principal Residence in France
By far the most important exemption from capital gains tax in France concerns the family home. 

In order to qualify the property must have been occupied by you on a habitual basis up to the time of the sale. 

This concession may be available for up to a year, but you will need proper reasons.
For the period 2009 and 2010 the French government has agreed that this one year grace be increased to two years.
In order to benefit from this exemption you are not permitted to let out the property during the sale period, or to leave family members in occupation. 

The law does not state how long you need to have occupied the property for it to be considered as your principal home.
As a rule of thumb, in order to escape the attention of the tax authorities it is generally accepted that eight months is a minimum period. There are, however, concessions on this rule, e.g. death of a spouse, job relocation, force majeur.
The tax authority will likewise normally expect you to have made an income tax declaration at the address and that you are able to produce a rates bill in your name, in order for it be considered to have been your principal residence. 


2. Fifteen Year Rule
If the property has been owned by you for fifteen years then no capital gains tax is payable on sale, even though it is not, and may never have been, your principal home.
Between six and fifteen years an allowance of 10% per year of the gain is granted, so that, by the end of the fifteen years, complete exoneration arises.
Thus, if you sell a property after having owned it for a full 10 years, you will be granted an allowance of 50% against your liability to capital gains tax. 

No exemption is available for a sale under six years. 

Although the rule is a fairly simple one to operate, it can get complicated where part of the property is inherited and then later sold, as the rule will be applied to each part owner on their own circumstances. 

Thus, a surviving spouse will granted exoneration from capital gains tax if they later decide to sell if it is their principal home, or they have owned it for at least 15 years, but their children may not have owned it on the same basis, in which case they will be liable. The liability will arise on the difference between the declared value on death of the first spouse, and the actual later sale value.
3. Former Residents of France
No capital gains is payable on a property owned by a non-resident of France, provided you can demonstrate that you have been previously fiscally resident in France for a continuous period of at least two years. 

It does not matter whether or not this residence qualification directly proceeded the period before the sale. 

This is a provision in the law that has been created primarily for French residents who retire abroad, but it equally applies to international buyers who decide to return home. 

The best form of evidence for demonstrating your prior residence is through tax returns submitted in France from the address of the property. 

The non-resident must be a member of the EU or living in a country that has signed an appropriate tax treaty with France. 

This concession is limited to the sale of only one property in any five year period and on condition that it is your only property in France at the time of the sale. 

Needless to say, this rule does not exonerate the vendor from potential liability to capital gains tax in their actual country of residence! 

If you do not meet the two year rule, you are liable to capital gains tax on the usual terms.
4. Professional Landlords in France
A professional landlord is exempt from the payment of capital gains tax, provided they have held the property for letting at least five years and they have been registered with the Chambre de Commerce as a business (and pay self-employed social security contributions).
5. Low Value
No capital gains tax is payable if the sale price of the property is less than €15,000, whatever the gain on the sale price. However, in these circumstances there is a liability to income tax on the proceeds. 

Where the property is held in joint ownership then this threshold may be multiplied by the number of owners.
6. Elderly/Disabled Persons in France
Those resident and of retirement age, or registered disabled, are exempt from the tax, provided their annual income would also entitle them to exoneration from the payment of local property tax, the taxe fonciere, and they do not pay wealth tax (ISF). 

The annual threshold for 2008 is €9,560 per year for an adult, and €14,666 for a couple, as defined in your income tax notice, (called the revenu fiscal de référence) for 2007. 

Thus, it is important to note that the reference period for determining your income, is two years prior to the sale. Accordingly, for a property sold in 2009, it will be your income earned in 2007 that is used to determine your entitlement to this concession.
7. Divorce/Separation in France
There is an exemption for those couples in the process of separation or divorce, one of whom may not be living in the family home (résidence principale) when it is sold. 

Where, notably one of the parties remains in the property until it is sold, both benefit from exemption from capital gains tax. 

This concession also operates in the case of those in a civil partnership, as well as those merely living together in 'free union', although in the latter case the couple would need to demonstrate more than they were simply co-habiting in the same property. 

The exemption also applies in the case of a home under construction or renovation, where the couple were not living in it, but where they are able to provide satisfactory proof that it was being constructed or renovated for use as their principal home. 

The position taken historically by the French tax authority has been that they will not allow an indefinite period for the property to be sold. 

As a general rule, they have stated that one year* from the official date of the divorce/separation is permitted, although this maximum period may be varied, depending on the circumstances of the case, as well as the local market situation. 

In particular, where one of the parties has been ordered by the court to stay away from the former family home, then the courts have determined that both parties retain their right to exemption from capital gains tax, provided at least one of them remains in the property, even though the property was not sold for five years after the former spouse was ordered out of the property. 

Since 2008, the tax authority have been less rigid on the one year rule, and seem to be more willing to examine each case on its merits, if only because of the complications surrounding the divorce settlements and the delays that may be incurred in putting the property on the market, if at all. 

If matters are more straightforward in the divorce settlement then in examining the period of grace they will allow, the tax authority will require evidence of marketing of the property, and that it is being offered at a reasonable price.
*Due to the downturn in the housing market, the period of one year has been extended to two years until the end of 2010.

Real Estate Deductions

The capital gain is determined by the difference between the sale price and the purchase price. The sale price is the price stated on the transfer, plus any estate agent fees, mandatory survey fees, and any costs that may be associated with repossession proceedings. 

The purchase price is the price on the transfer, plus notairial costs and taxes at the time of purchase, and costs associated with the construction, enlargement or improvement of the property. 

This means, of course, that the costs of repair and maintenance cannot normally be taken into account. Just what is 'repair' and what is 'improvement' is not always a point easily determined. 

As these matters are not precisely defined, in some measure it depends on just what the notaire is prepared to accept as eligible building costs. You may wish to arrange a meeting with a local notaire to discuss.
Only those building works carried out by a building professional are eligible, so that if you have undertaken the works yourself, then you cannot obtain tax relief on the costs.
The general evidence suggests that the French authorities are only prepared to accept invoices from France registered building professionals. This may be a moot legal point, as there are many commentators who consider that bon-fide invoices from companies registered elsewhere in the EU should also be permitted. 

You will be required to produce invoices in support of any building costs. In the event that these are not available then, provided you have owned the property for at least five years, the notaire is able to apply an allowance of 15% on the acquisition price against improvement works on a property (but not land). 

This concession applies even though you may not have actually carried out any major works. 

If the property has been previously rented out on a tenancy, and construction or renovation costs have already been granted specific relief against liability to income tax on the rental income, then these costs will not be eligible. 

Indeed, it would appear that even those who have adopted the micro tax status for lettings (in which a standard allowance for costs is granted) would be ineligible to claim building costs against tax liability. 

Likewise, if you have been granted income tax relief for the installation of energy conservation or other works, you will not be able to set this off against tax liability.
Once again, however, practice around the country does vary. We have heard of cases where sellers have been able to obtain relief on building costs on the sale of the property, despite also having previously obtained income tax relief for the works against rental income. You need to make enquiries with the notaire.
There is a general allowance of €1000 per year against capital gains. The general allowance is doubled for a property owned by two people.

Tax Rate
The applicable tax rate for gains on real estate will depend upon your country of residence for taxation purposes. 

In all cases the tax is applied at the time of the sale in the offices of the notaire, and will be deducted from the sale proceeds before the cheque is handed over.
1. Resident of France
If you are a resident of France then the applicable tax rate is 28.1%. 

This sum comprises capital gain tax at the rate of 16%, plus 12.1% social charges. 

If you want to get some idea of what you might have to pay in capital gains tax on the sale of a property visit capital gains calculator.
2. EU Resident
If you are not resident in France, but you are resident in the EU, then the applicable tax rate is 16%, as no social charges are payable.
3. Non-Resident of France
Those who are neither resident in France nor the EU pay capital gains tax at the rate of 33.3%. 

However, if you are based in a tax haven that does not have a tax agreement with France, then the rate that applies is 50%.

Shares and Personal Property
i. Shares
French capital gains tax is payable on the gain realised from the sale of shares by anyone resident in France at the rate of 30.1% (18% CGT + 12.1% social charges). 

No capital gains tax is payable if the sale value is under €25,830 a year (2010). 

Nevertheless, commencing 2010, all capital gains on shares are subject to the social charges at the rate of 12.1%. 

You can carry forward losses to offset later gains. 

The rules are different if you are a professional punter as all gains are taxable at the rate of 30.1%, or on a progressive basis under income tax rules, depending on how you elect to be taxed. 

Even if you are not a professional those gains on sales under €25,830 must be declared on your French income tax return.
The exemption from capital gains tax does not apply to a capital gain below €25,830, but to the total value of the sale.
Accordingly if you sold shares valued at €25,000, having realised a capital gain of €500, you would not pay capital gains tax. 

Conversely, if you sold shares valued at €26,000 having realised a gain of €170, the gain would be liable to capital gains tax! 

If you hold shares longer than six years (for those held since Jan 06), then you will be entitled to a progressive reduction in capital gains tax if you later sell them, with full exemption available after eight years. 

Accordingly, under the terms of this recent change, no full exemption will be available until 2014 at the earliest. 

There are certain types of share dealings which are exempt from capital gains tax, and it may also be possible to exceed the €25,830 limit in exceptional circumstances, e.g. redundancy pay. You would need to discuss with your financial advisor the concessions that apply. 

If you are not resident in France then the rules will depend on the terms of any double taxation treaty with your home country. 

Normally you are exempt from capital gains tax in France on the sale of shares if you are non-resident.

ii. Personal Property
In relation to capital gains on personal property other than real estate, such gains are exempt if the sale proceeds are under €5000. 

There is also 10% relief for each year owned over 2 years, granting complete relief if held for 12 years. 

There is no capital gains tax payable on the sale of household furniture or your car. 

Special rules apply in relation to the sale of jewellery or precious objects, where a standard tax charge is applied, whether or not you realised a capital gain. Jewellery and works of art or antiques are charged a flat rate of 5% without allowances. You can also elect to choose the standard form of capital gains tax if you so wish, against which you can offset eligible costs.

Building Plots
If you own land which becomes zoned for construction through a local plan, then local councils have discretion to impose a tax on the subsequent first sale of this land, to reflect the increased value of the land. 

The tax is levied at the rate of 10% on two thirds of the selling price of the land, less VAT payable, transaction costs and cost of purchase. Accordingly, it is therefore only payable on the capital gains, at a rate of 6.6% of the sale value, less costs.

The discretionary power of the local mairie can only be used on a general basis to all such sales by individuals, following deliberation and a decision by them to introduce the tax. 

Accordingly, this tax only concerns the sale of land owned by individuals, not the activities of developers, who are taxed as part of the general system of business taxation. 

There are a number of important exemptions from the tax, as follows:
Sale by an elderly or disabled person on low income (on the same terms as capital gains tax);
Land transferred free of charge to a family member;
Land sold for less than three times the original purchase price;
The sale of the land for less than €15,001;
Sale of building annexes belonging to the owner;
If you have not owned the land for at least 15 years, then normal capital gains tax is also payable should you decide to sell the land.

Former Home
If you become permanently resident in France, and then subsequently sell your former home, you could become liable for capital gains tax on the sale proceeds. 

The trigger point for liability will depend on the terms of any double taxation treaty between France and your home country.
In the case of former residents of the UK a tax treaty signed between France and UK, operative from 18th December 2009, makes you liable for capital gains in France on the future sale of your former home.
However, you will be entitled to the same relief as you would otherwise receive if the property was located in France. 

That is to say, from the sixth year of ownership there is 10% relief for each year you have owned the property, with full relief after 15 years ownership. You need to read our other pages on the French capital gains tax to get a full appreciation of this rule. 

The new treaty overturns a previous rule in which there was an exemption from capital gains tax by the UK tax authorities on the disposal of the main residence for a period of five years, and which was exempt from capital gains tax in France.

Gift Tax
Gift Tax in France
A 'gift' in France is called a donation, and French 'gift tax' the droits de donation. 

The definition of a ‘gift' for the purposes of the tax excludes those gifts which may ordinarily be made in the course of daily life. 

So, for instance, wedding and birthday gifts do not come within the gaze of the French tax authorities, provided the gift is reasonable by the living standards of the donor. 

Such a gift may be in the form of cash, but it may equally take the form of the transfer of real estate, e.g. transfer of all or part of the family home to your children.
As there is no inheritance tax between married couples or those in a civil partnership, and with generous inheritance tax allowances for children, the use of gifts as a tax planning strategy is probably only of importance to those with substantial wealth or who do not benefit from the above concessions.
That said, the generous provisions on French inheritance tax contrasts with tough French inheritance laws, so the use of gifts remains important for those who wish to obtain greater freedom in the disposal of their estate.

Gift Tax Allowances
In order to assist with inheritance planning the law grants quite generous tax allowances for gifts made between family members.
These allowances can be used every six years. So a gift made every six years is free of gifts tax, provided it does not exceed the exemption limits.
The limits on the amount that can be gifted free of tax depends on the relationship between the parties and, in some cases, on the age of the donor. 

The thresholds for 2010 are as follows:

•   Spouses/Partners - €79,533 between spouses and those in civil partnership.
•   Children - €156,974 from each parent to each child (or child to parent).
•   Grandchildren - €31,395 from each grandparent to each of their grandchildren.
•   Brother/Sisters - €15,697 to brothers and sisters.
•   Nieces/Nephews - €7,849 to nieces and nephews.

In addition to these allowances, it is also possible to make a one-off gift in cash of up to €31,395 to each child, grandchild/great grandchild or, in the absence of these descendants, to a neice or nephew, free of gifts tax. This separate allowance is conditional on the donor being less than 80 years old and the beneficiary over 18 years old. The gift of the cash must also be declared to the tax authority. 

A registered disabled person, whatever their relationship to the deceased, receives an allowance of €156,974 by reason of their disability, to which they can add any other allowance to which they may ordinarily be entitled by virtue of blood link. Thus, a disabled child is entitled to an allowance before gifts tax of €156,974, as well as a further €156,974 from each of their parents. 

These allowances are cumulative so that, for instance, a child may receive gifts from both parents and grandparents, without one affecting the exemption limits of the other. 

If you are gifting real estate then the situation can be made easier by gifting to your children the 'reversionary interest' in the property, whilst you retain the 'life use' of the property. You can read more about this in on the next page.

Gift Tax Rates
If the gift is larger than the allowances that are available then the recipient is liable to gifts tax on the value of the gift over the allowance. 

The rate of taxation applicable depends on the type of gift, and the donee. 

The taxable amount is then reduced by an age allowance, available to the donor.
Gifts benefit from a tax reduction of 50% if the donor is less than 70 years old, and 30% where donor is aged over 70 up to 80 years.
The taxable amount is the sum applicable after deductions of the permitted allowance. 

In addition, the tax is applied on a 'sliced' basis so that each slice of the total sum is taxed at a different rate. 

The rates are as follows: 

Gifts between parents and children

Gifts between married couples/civil partners

Gifts between brothers and sisters

Other family members are taxed at the rate of 55% and those outside the family at the rate of 60%.

Gifts of Real Estate
Where the gift takes the form of the transfer of interest in real estate in France then the French gift tax allowances depend on:
i. The type of interest granted in the property and;
ii. The age of the donor.

12.4.1. Types of Property Interest
At the outset we need to define and distinguish three types of interest in property. This is tricky, but you need to grasp it if you are considering the gift of real property. 

In plain terms we can say that the first type of interest is to live in the property; a second type of interest is to be able to rent it, and the third type of interest is to be able to sell it. 

Using this basic division of interests, it is possible to distinguish three types of legal interest that can be created in property.

12.4.2. Age of Donor
There are tax allowances available depending on the age of the donor. 

In the case of the transfer of reversionary freehold (the nue-propriété), where the life interest (the usufruit) is retained, gifts benefit from a tax reduction of 35% where the donor is aged less than 71 years and 10% where aged between 71 and 80 years. 

In the case of the grant of the life use (the usufruit) or the freehold (plein propriété) of a property, gifts benefit from a tax reduction of 50% where donor is aged less than 70 years and 20% where donor is aged over 70 up to 80 years. 

Things are further complicated by the fact that, in the case of transfer of either the reversionary interest or the life interest, it is necessary to determine the value of the interest that is to be transferred. 

This is done by way of a scale established by the tax authority based on the age of the usufruitier, as follows:

So, for example, a person of 62 years gifts the reversionary interest in a second home to a member of their family. The donor remains usufruitier of the property to benefit from any rental income received, or to use the property themselves. 

The value of the reversionary freehold interest is then a function of the value of the usufruit – in this case it is 60%. This is the figure that is then used to calculate liabilty to gifts tax. 

On the death of the donor the freehold interest in the property is automatically transferred to the recipient, without the need to undertake any formalities or pay additional taxes. 

In the case of a gift of the freehold of a property, it is not necessary that the whole of the freehold interest is transferred. If you do not wish to exceed the tax free limits, then you can transfer up to the maximum of these limits. 

There is no capital gains tax payable on the gift of real property.
However, you need to do this with care, for if the tax authority consider that a gift has been made with the specific purpose of avoiding capital gains tax, they can ignore the gift and apply the capital gain. 

Whilst these tax concessions are going to be of interest to those doing inheritance planning, it should be noted that transfers of real estate by way of gift attracts the legal registration and notaire fees – 5% to 10% of value.

Inheritance Laws
There are two important points to bear in mind concerning the relationship between gifts and French inheritance laws.
First, whilst there are relatively generous gift allowances, French inheritance law places a limit on the amount of your property that you can freely dispose of by way of gifts.
This is because children are protected heirs, with entrenched inheritance rights. 

Thus, for example, if you are married, then the maximum amount that you can gift to your spouse will depend on the number of your children, as follows:

• One child – half your estate
• Two children – third of your estate
• Three or more children – quarter of your estate

Second, even though you can make a gift free of tax every six years, if you die before the expiry of the six year period then the gift is added to the total value of the estate for the calculation of inheritance tax.





Making Gifts
No particular procedure is necessary to make a gift, other than gifts involving the transfer of real estate, where it is obligatory to precede through a notaire. 

In this case, there are transfer fees and taxes that are payable, on a scale related to value. 

Neither do you need to undertake a formal valuation of the property, but if the tax authority later considers that an incorrect valuation has not been made, they can make a retrospective valuation of the property, on which liability to gifts tax is then assessed. 

In practice this situation rarely occurs and the valuation of residential property in France is certainly more of an art than a science, and opens to a wide degree of interpretation. 

If the gift is not real estate, but a substantial cash gift, you may feel it in the interests of all parties that the act is properly recorded. 

In which case, you can either arrange between you to prepare and signed a document, or go in front of a notaire for the documentation to be prepared and signed. 

The gift will later be taken into account by the tax authority in calculating inheritance rights and taxes on the death of the donor. This is because the rights of inheritors and taxes that apply on inheritance relate not only to those assets owned on death, but also those disposed of during one's lifetime. 

Needless to say, it is not always easy for the tax authority to establish a full and proper record of gifts made during a lifetime (many are made precisely to avoid taxes and entrenched inheritance rights!), unless they are declared, either by the donor at the time they are made or the recipient on their income tax return. 

It is, therefore, not unusual for disputes between inheritors that to bring to light unrecorded gift transactions! 

Moreover, in making a gift, if you wish to favor one potential inheritor over another, then it may well be best that this is properly recorded. Such a gift is called la donation hors part successorale and is best made in front of a notaire.

Tax Inspections
Tax Control
There are three levels of control exercised by the tax authorities. 

At the first level they will undertake verification that you have correctly completed the return and, if so, you will hear no more from them until your receive your tax notice.
At a second level you may later receive a letter from them asking for clarification, or further details, often in the form of a questionnaire, which you will need to complete and return to them.
At a third level they will undertake a detailed investigation, into your case, about which you will be specifically informed. These investigations are undertaken by a specialist branch of the tax authority called l'Inspection générale des Finances.

Tax Penalties
If the tax authority decide you have underpaid your taxes then their response will depend on the gravity of the offence, as they see it. In particular, whether or not they judge it is an error or omission made in good or bad faith. 

If it is minor and if the return was judged to have been made in good faith, then they will probably do no more than send a letter asking you to pay the outstanding sum, without penalty.
If the offence is more serious they will open a recovery procedure called a une procédure de redressement. 

When this procedure opens you will be sent a letter from the tax authority setting out their demand, to which you have 30 days to respond. 

You could be liable to an interest charge of 0.40% per month (4.80% per year) on the underpaid tax. 

More seriously, there is also a penalty of either 10%, 40% or 80% of the underpaid tax. 

A penalty of 80% is only likely to be demanded where you have failed to pay, despite previous reminders to do so, or in the case of a clear act of bad faith. 

In serious cases of manifest and blatant fraud, known flagrance fiscal, the tax authority may act immediately to seize effects and impose a fine of up to €10,000. 

As a rule, this substantial power, introduced in 2007, is expected to be used only very rarely, and then only against business activities, where there is the risk that the ability of the tax authority to may not be able to recover unpaid taxes if it does not act immediately e.g. liquidation of business. 

If the authority conclude that there is a case of serious and deliberate fraud, involving a significant sum of money, then, if you are found guilty, as well as a major fine, you are liable for up to 5 years imprisonment.

Recovery of Unpaid Taxes
The tax authority can go back three years for unpaid taxes. For local taxes the recovery time is just one year.

Tax Claims
If you think there is a mistake in your tax assessment you have two years in which to dispute the assessment.
You must submit your request to the tax office that have up to 6 months to reply.

Tax Status
If you are unsure of your tax status of a transaction, the tax authority is required to declare their position on your situation.
This procedure grants you exemption from further sanctions.

Tax Complaints
If you have a complaint about your tax affairs then you can take your case to a conciliation connected to the main tax office, or to the independent ombudsman.
Even if you contest an assessment you are still required to pay taxes.
First you should try and resolve your complaint with tax officials, then if not resolved you should take your complaint to the national ombudsman.