Following the financial law 2018 which came into force in France on the 1st January 2018, the former French Wealth Tax ("Impȏt de solidarité sur la fortune or ISF") has been repealed and replaced by the new Real Estate Wealth Tax ("Impȏt sur la fortune Immobilière" or IFI).
What is the main difference? Its title says it all (almost)! Indeed, whereas the ISF was applicable to all assets (moveable, immoveable and financial assets with some exceptions) located in France for a non-resident or worldwide assets for a resident in France, the IFI is only applicable to real estate assets, meaning that all other financial wealth (such as securities, bank and financial investments) or moveable assets (jewellery, furniture, cars, boats…) are now exempt from this tax.
The IFI is an annual tax payable in France when the total value of the real estate assets is superior to €1.3 M euros.
Taxable Assets
Non-Residents will pay the IFI on their real estate assets located in France only, while residents in France will pay the IFI on their worldwide real estate assets. There is a partial exemption for five years from French wealth tax for individuals relocating to France. This exemption applies only to assets outside France.
The taxable assets of the tax household are taken into account for the calculation of the IFI. Couples must therefore make a joint declaration and assets held by children below 18 years old must also be included.
If you own a French property via a holding company registered in France or overseas, your wealth tax declaration must include the current value of the underlying property.
Commercial properties are exempt from wealth tax. Buy-to-let investments of furnished properties are exempt under the status of LMP ("location meublée professionnelle"). Non-professional furnished lettings such as “leasebacks” will not be exempt. Exemptions also apply to woodlands and rural assets.
When individuals have different interest in a property asset ("démembrement de propriété"), for instance when the surviving spouse owns a life interest ("usufruitier") while the children own the freehold ("nue-propriétaire") following a French succession, the financial Law 2018 provides that the legal interests of the "usufruitier" and "nue-propriétaire" will be taken into account for the determination of the taxable assets. Before 2018, only the life interest was subject to wealth tax when there was a "démembrement de propriété".
For instance, let’s take the example of Mr Smith who died without a will and left a holiday home of 1M euros in France. His surviving spouse inherits 1/4 of the freehold (€200,000) and his only child inherits 3/4 of the freehold (€800,000). Both figures are under the taxable threshold of €1.3M. The surviving spouse does not have any other real estate assets in France, however the child owns another holiday apartment in Nice of €600,000. If we add the value of the freehold he inherited from his late father’s estate, the total value of his French assets is over the threshold. The child’s French real estate assets would therefore be subject to wealth tax whereas it would not have been the case under the former wealth tax regime.
However, the financial law 2018 provides that in the event of planned successions via a Will or a Gift between spouses/civil partners taking effect on the first death ("donation au dernier vivant"), only the value of the life interest would be taken into account for the determination of the taxable assets. Taking the previous example, Mr Smith owns a French holiday home of €1M in his own name. He makes a Will leaving the life interest of the property to his wife and the freehold to his child upon his death. Mr Smith dies in 2018. By application on the Financial Law 2018, only the life interest would be taken into account for the determination of the taxable assets. Therefore, the freehold of the property that Mr Smith’s child inherits will not be added to the value of his apartment located in Nice. Mr Smith’s child will not be subject to French wealth tax.
This example shows how essential careful estate planning is for all future and existing French property owners.
Calculation of IFI
The IFI sliding scale is the same as the former wealth tax:
| Taxable net Assets (euros) on 1st January 2018 | Tax Rate |
| Up to €800,000 | 0% |
| Between €800,001 and €1,300,000 | 0.5% |
| Between €1,300,001 and €2,570,000 | 0.7% |
| Between €2,570,001 and €5,000,000 | 1% |
| Between €5,000,001 and €10,000,000 | 1.25% |
| Above €10,000,000 | 1.5% |
For assets with a total value above the taxable threshold €1,300,000 and under €1,400,000, a tax reduction (décote) will apply.
The value of the net assets is determined by deducting the debts existing on the 1st January 2018 from the value of the real estate assets.
According to the Financial Law 2018, the following debts can be deducted:
- Purchase cost of the property;
- Maintenance, reparation cost of the property;
- Extension, refurbishment cost;
- Property Taxes.
However, the following debts are no longer deductable:
- Private loans between members of the same tax household (e.g. spouse, dependent…);
- Private loans between family members or from a company controlled by the tax payer or by a member of his/her family, unless the loan has been contracted under normal conditions (loan amount, due dates…);
Further restrictions have also been added regarding the deductibility from French interest-only mortgages from the value of the taxable assets. Interest-only (in fine) mortgages are no longer fully deducted from the taxable real estate assets and are now depreciable.
If your main home is located in France, its value will be reduced by 30% to calculate the IFI.
The IFI 2018 is capped according to the amount of French taxes paid by the tax payer. The combined income tax for the year 2017 (including social charges) and the IFI 2018 cannot exceed 75% of the income perceived in 2017. Any amount going over that cap would be deducted from the IFI.
75% of the value of gifts to charities can be deducted from the IFI within the limit of €50,000.
Tax declaration
The former tax form 2725 has been replaced by the form 2042. The declaration must be made if the value of the real estate assets exceeds €1.3M euros on the 1st January 2018.
If you require advice on French estate planing & Tax, please contact Loic Raboteau via email at loicr@bandmlaw.co.uk or tel on +44 (0) 20 7356 0833.
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