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PROPERTY

New tax laws create hidden costs for second home owners in France

Owning a second home in France is a common dream for many, but while you might be able to save enough for a deposit, it's important not to forget about those - sometimes significant - hidden costs.

In France there are some extra costs specifically associated with owning a second property – and it's crucial to know about these before you lose all of your hard earned cash to the French taxman. 

The taxe d'habitation (local tax or council tax) is being phased out in France and will be completely abolished by 2021… but this is only the case for principle residences and not second homes. 

The taxe d'habitation can add a lot to your annual outgoings and is calculated according to the rental value of properties in your area which have been mapped out and have tax rates associated with them which have been voted on and approved by local authorities. 

READ ALSO: 

From taxes to toilets: All you need to know about renovating a house in FrancePhoto londondeposit/Depositphotos

It's a complicated and outdated calculation system – which is one of the reasons it is being scrapped for the majority of people in France – but the reforms have actually increased tax bills for many second home owners.

This is down to the fact that not only did President Emmanuel Macron want to scrap the tax for principal residences, but he also allowed city councils across France to drastically increase their tax on second homes.

These areas are known as zones tendues in French which is simply the names for an area where a tax on empty buildings is enforced. 
 
With the aim of discouraging short-term holiday rentals that are disrupting the housing market and increasing costs for full-time residents in areas that are already short on housing, Macron authorised the move in the national budget in 2017.
 
 
It took immediate effect in Paris and ever since city councils across France have been following in the footsteps of the capital and tightening their grip on second home ownership.
 
And places that are very popular with people looking for second homes, such as Nice, Saint Jean de Luz and Bordeaux were among those that followed suit. 
 
A total of 1,151 French councils, towns and cities with a population of more than 50,000 are eligible to impose the tax hike. Here's a complete list of the French towns and cities considered a zone tendue.  
 
READ ALSO:
Photo: AFP
 
This can legally be of up to 60 percent on the basic council tax rate (up from 20 percent previously).
 
When the move was announced back in 2018, French financial daily Les Echos labeled the law as “irresistible” for local councils, alluding to the fact that cash-strapped mayors across France would be willing to take full advantage of this legislation.
 
Macron's move was also considered as his offering an olive branch to appease local officials who were up in arms last year after he announced his plans to scrap council tax for home owner-occupiers, without announcing a plan for how they would make up for the financial shortfall. 
 
The tax hike on second homes is also widely popular among French voters, especially for long-term residents of France's main tourism hotspots, where finding a well-priced home or finding one at all, is becoming increasingly challenging, largely due to the monopoly imposed by the short-term rental market.
 
In the case of Bordeaux, it was the increase of student numbers by 15,000 and the difficulty in finding housing for them that spurred them to adopt the legislation.
 
According to Les Echos, by raising the tax Bordeaux city council aimed “to encourage owners to sell their property/ies, or dissuade them from offering them up for rent on Airbnb-style platforms, in a city that is truly lacking housing”.
 
France's national stats body INSEE reported that there are 3.4 million second homes in France, one in ten of all housing units. Paris has approximately 110,000 second homes. 
 
But there is one bit of good news for people doing a renovation – the taxe d'habitation only needs to be paid on homes that are habitable.
 
The French tax office says that a property is classed as uninhabitable if the total value of works needed on it make up more than 25 percent of the value of the property itself. If this is queried, than you may need to get a builder's estimate to show the financial value of the work that still needs to be done on your dream home before its is ready to move in to.

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PROPERTY

French property: What is buying ‘en tontine’?

If you're buying property in France, you might be thinking about buying 'en tontine' - this has advantages especially when it comes to France's strict inheritance laws, but can also have tax implications.

French property: What is buying 'en tontine'?

What is it?

The ‘clause de tontine’ sometimes also known as a ‘clause d’accroissement’ is a clause that is inserted into the property deeds when you are buying a house or apartment.

It can only be inserted during the purchase, and cannot be added later.

It’s basically a ‘group purchase’. It’s most commonly used by unmarried couples who are buying together but it can be used by larger groups too – for example a group of friends buying a holiday home together.

You will have to ask a notaire to draw up the tontine clause during the property purchase and it can only be used if 

  • the parties are equally involved in the financing of the purchase
  • the parties involved have a roughly equal life expectancy (for this reason tontine clauses may be rejected if there is a significant difference in age between the purchasers)

What’s the point of it?

The main reason that people use it is to sidestep France’s strict inheritance laws, which assign that a certain portion of every estate must go to children, at the expense of a partner. 

READ ALSO How France’s strict inheritance laws work

For this reason it is particularly used by couples who have children from previous relationships.

On a property with a tontine clause in effect, when one owner dies their share of the property passes in its entirely to the other member/members of the tontine.

This cuts out children from inheritance, but means that a surviving partner is not evicted from their home in favour of the children of the deceased. 

It also has the advantage of making the intentions of the deceased clear, to avoid arguments among heirs after their death.

It should be noted, however, that the tontine clause only takes in the property that it covers – other assets may be subject to French inheritance law so it’s therefore probably wise to arrange a will, to ensure your wishes for your estate are met.

The surviving party can ask a notaire to update the property deeds to show that they are the sole owner, if they want. Be aware there will be a fee, which could reach four figures for the privilege – and it doesn’t actually involve any change to the property title.

Drawbacks

The advantages of the system are clear, especially for blended families, but there are some potential drawbacks too, which mean that anyone considering buying in this way would be well advised to take proper legal advice before they start.

Inheritance tax – while a tontine will help you to avoid restrictions on inheritance, it does not exempt you from inheritance tax. French inheritance tax is structured according to your relationship to the deceased, and people who are neither married nor related to the deceased pay an eye-watering inheritance tax rate of 60 percent.

The only exception to this top rate of inheritance tax is if the property is your main residence and it is valued at under €76,000 – in that case, tax is paid at a rate of 5.8 percent.

Married couples and family members pay a much lower rate or not tax, but if you’re not married to your tontine co-purchaser, be careful that you’re not lining yourself up for a massive tax bill in future years.

Wealth tax – depending on the value of the property, it could tip you over into the ‘wealth tax’ category when you inherit. France’s wealth tax is a real estate based tax and is levied on anyone who has real estate assets (property and land) worth €1.3 million or more.

The calculation includes property held en tontine.

Tax savings – you might hear tontines being advised as a way to limit your French tax liability.

While this used to be true, changes to tax laws means there are no no significant tax advantages to buying this way – the same is true for buying a property via an SCI, which used to represent a tax saving until the law was tightened up.

Disinheriting family membersOne side effect of the tontine clause on mixed families is to effectively disinherit any children of the first person to die.

Because the property passed to the survivor, under French law, only their direct descendants – rather than any family by marriage – are entitled to automatic inheritance.

That means that the children of the surviving partner will be entitled to the statutory share of the entire asset (between 25 and 30 percent depending on the number of children), but the children of the first person to die will be entitled to nothing. Obviously you can choose to leave them something in your will, but you can only leave them some or all of the estate which is not automatically given to the children on the survivor.

Divorce/dispute – if the members of the tontine split up or (in the case of friends) fall out, then they can either sell the whole property or agree to buy each other out.

However, if one party refuses to sell, then you have very limited legal options – unlike a standard property purchase a tontine is not regarded as joint ownership, so one partner cannot be forced to sell as part of a divorce procedings, for example.

Basically the tontine can only be ended or changed with the agreement of all parties – so if you can’t agree between yourselves then you may be stuck with it.

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