What to know about double taxation…
The French & UK Tax treatment of capital gains & social charges
On the sale of a French property:
Gains made from the sale of a property situated in France are liable for French Capital Gains Tax (CGT) + French ‘prélèvements sociaux’.
Therefore a UK resident selling a property situated in France will be subject to French CGT & social charges. But equally and due to the fact he/she is a UK resident, he/she will also be subject to UK Capital Gains Tax on the same sale.
On the sale of an English property:
Gains made from the sale of a property situated in the UK are liable for UK Capital Gains Tax. No English equivalent of ‘prélèvements sociaux’ are due.
Therefore a French resident selling a property situated in the UK will also in theory be subject to English CGT. But he/she will equally be subject to French Capital Gains Tax & ‘prélèvements sociaux’ because he/she is a French resident.
=> In effect we are potentially looking at taxation on both sides of the Channel, and that’s where the double tax treaty comes into play.
Double Tax Treaty (DTT) or Double Taxation Convention (DTC)
A double tax treaty was signed between France & the UK for corporation tax, income tax and capital gains on June 19th 2008.
The purpose of the Double Tax Treaty is not to allow the taxpayer to choose in which country he/she would rather pay tax, nor does it elect in which country (either the UK or France) tax should be paid – but it simply allows that:
– for a UK resident, any French tax paid will be credited against the UK tax arising from the same gain,
– & vice-versa, for a French resident, any UK tax paid will be credited against French tax arising from the same gain.
Let’s take a more detailed look at the possible situations:
French taxpayers such as British nationals residing in France
I./1 If no tax was effectively paid in the UK on the sale of a UK property
As a result of the new Franco-British DTT no tax credit can be granted in France and the gain is taxable under French law.
Therefore French Capital Gains Tax and social charges are due on an English gain.
How to declare & pay said gain?
In practice a certain amount of forms will need to be filed out:
– One specific form that must be filed at the local tax office within two months following the sale, accompanied by the corresponding payment of the tax.
You may ask your notaire or accountant to help you with this procedure.
– And two general tax returns to report the gain. The aim is to take said gain into account when determining the general tax rate of the household for that year.
I./2 If tax was effectively paid in the UK on the sale of a UK property
Principal of elimination of double taxation
In contrast to the situation we have just seen above, here the gain actually supported tax in the UK, therefore France (State of residence) will apply rules to eliminate the double taxation, with a system of tax credit.
The vendor will be entitled to a tax credit against French tax, equal to the amount of the foreign tax paid. However such credit shall not exceed the amount of French tax attributable to such income. Therefore if the foreign tax exceeds the French tax no deduction on the global tax due by the household will be granted and no refund will not be achieved.
British nationals residing in the UK selling a property in France
On the sale of a French property by a non-resident basic French rules of taxation and rates, main exemptions and taper relief apply.
However capital gains made on an occasional basis by taxpayers domiciled outside France are subject to some French specificities.
- French tax is due & some specific measures will apply
– ‘Prélèvements sociaux’
Since August 2012, non-residents have been made liable for the social charges, where previously they were merely liable for the main capital gains tax.
Therefore the basic gross tax rate for residents of France and the European Economic Area (EEA) residents is 34.5%, whilst for those from outside the EEA it is 48.8%.
In the same manner as capital gains tax, tapered relief is granted on social charges but over a longer period of 30 years (against 22 years for CGT).
What are social charges?
‘Prélèvements sociaux’, also known as the ‘contributions sociales’, actually comprises 5 different taxes. They do not all generate an entitlement to social security benefits, therefore it is incorrect to say that said charges are social security contributions.
However several court cases are currently pending before the Court of Justice of the European Union because the application of said charges to non-residents is deemed unjust, and contrary to the EU principal of free movement.
France faces a bill of 344 million euros for 2012.
– Représentation accréditée
Non-resident individuals subject to French CGT must under certain circumstances appoint a tax representative who will be jointly liable on said tax until its prescription date.
If the tax representative is a legal entity they charge for their intervention.
This measure is also under the spotlight of Europe.
Portugal was condemned by the European court in 2011. In anticipation of a French condemnation the French amending Budget Act for 2014 proposes to remove the requirement for EU resident taxpayers.
- UK CGT may also be due
So we have seen that if you are a non-resident selling a property in France you will be subject, for the moment to French CGT & social charges.
But that is not all you will be subject to: UK CGT may also be due.
I will not go into the basics of UK CGT here that is not the aim of this article. More importantly let’s look at what the double tax treaty states.
Following the sale of a French property the treaty’s provisions allow for the French tax already paid to be offset against the UK tax. If the French tax is greater no deduction against similar tax is granted in the UK. In such a case, there would simply would be no tax to pay in the UK.
Note: The amount of French tax paid can only be taking into for the CGT part and not the ‘prélèvements sociaux’ part. HMRC has a clear position when it comes to French ‘prélèvements sociaux’: they are not considered as ‘tax’, therefore they are excluded from the charges for which credit is allowed against UK capital gains tax.
If you are affected by any of the situations mentioned above – be it a French resident selling a property in the UK, or a UK resident selling a property in France – you may need to be more vigilant when it comes to your tax obligations.