Viewing posts from: November 2000

Is Buy To Let still a good investment?

By Katriona Murray-Platon
This article is published on: 11th April 2018

11.04.18

Given concerns over the effect of Brexit on UK house prices, together with recent changes to the tax treatment of UK rental income and the various tax increases and reforms applicable to French property rentals, now may be the time to reconsider if Buy to Let is a good investment, both in France and the UK.

General arguments against rental investments
Most of us have an opinion on property as a means of generating long term investment returns. For some, a tangible asset such as property represents security, for others it is simply an inflexible and physical tie to a specific location.

Rental properties need regular maintenance and repairs, which can be expensive, and meeting such costs can divert cash from savings and other investments. Private landlords often underestimate the costs of maintaining a rental property, one consequence being that net returns fall short of (sometimes) unrealistic expectations.

It is a basic investment principle that we should not rely exclusively on property (or any single asset) for our future financial security, yet frequently we do, particularly where Buy To Let is involved.
Liquidity, or access to capital, also needs to be considered. Whilst you can usually withdraw funds quickly and easily from an investment portfolio (in France one often uses the Assurance Vie structure), you cannot generally sell part of a house. Re-mortgaging or equity release are possibilities, but for some the only option for capital access is sale of the property and acceptance of the associated expense and possible delays. Furthermore, a forced sale will typically result in lower than market value being achieved.

Both the French and UK governments are under pressure to boost national housing supply so are taxing second homes and rental properties in an effort to bring more residential property to the open market.

By comparison, for French residents (including expatriates), Assurance Vie remains as possibly the single most flexible and tax efficient investment available – a valuable planning opportunity which can be overlooked when property is perceived as a ‘safe bet’.

Keeping your UK property and renting it out
Legislative changes introduced in April 2017 significantly increased tax liabilities for residential landlords. Previously, allowable expenses and mortgage interest payments could be deducted from rental income as part of the tax calculation. However, the phasing out of tax relief on mortgage interest payments means that by 6 April 2020 mortgage costs will no longer be deductible, instead replaced with a 20% tax credit.

For many people, once settled in France, a UK rental property becomes impractical and difficult to maintain. Frequent trips back to the UK, for a variety of reasons, just don’t seem worthwhile. Being a landlord can be stressful and time consuming, especially when you want to be enjoying a more relaxed life in France and/or you are busy running your business here.

If your UK property remains vacant for occasional use during trips back to the UK, you could be affected by measures introduced in November 2017 which allow councils to charge a 100% Council Tax premium on homes that have been left empty for two years or more.

Additionally, since April 2015, non-residents are liable for capital gains tax (at either 18% or 28%) on the increase in property value since 2015. And from April 2019, the UK government plans to introduce capital gains tax for non-resident landlords of commercial properties.

Whilst house prices in some parts of the UK have increased substantially over recent years, there are wide regional variations and prices can of course go down as well as up. Flooding from adverse weather conditions has negatively impacted prices in many parts of the country. Brexit brings its own uncertainty for the housing market and there is also exchange rate risk to consider, with GBP/EUR volatility likely to continue in the short term at least. Finally, even with carefully managed quantitative tightening by central banks, interest rates appear to be going in only one direction from here.

Things to be aware of when renting property in France
Whilst the Finance Law of 2018 has increased the micro threshold from €33,200 to €70,000 (with a 50% abatement for costs), and from €82,800 to €170,000 for seasonal “classement” rentals (with a 71% abatement), it has also made furnished rentals more complicated for landlords, particularly for those offering short term lets.

To receive the higher abatement for furnished rentals, there is the challenge of arranging an official visit to obtain a recommended star rating. Since 1st December 2017, Paris requires property owners renting for short seasonal lets to register this activity and to display registration numbers on rental advertisements. Lyon did the same in February 2018, Bordeaux in March 2018 and Lille is in the decision process. Only 12,000 properties have been registered whereas 100,000 or more appear on rental websites. On 11th December 2017, Paris officially notified the largest rental sites (Airbnb, HomeAway, Paris Attitiude, Sejourning and Windu) that advertisements for unregistered properties were in breach of regulations.

Recent Finance law also approved a proposal to increase the taxe de sejour which today represents between 20 and 75 centimes per person, per night – it could increase by 1% to 5% if local authorities so decide.

The French government recognises that rental income made via websites such as Airbnb or HomeAway has often not been declared. Since 1st July 2016 these websites must inform members of their tax obligations and in January each year must send a document showing gross income received through reservations made via their site in the previous tax year.

There is also the risk that between November and March tenants will stop paying rent, with landlords powerless to evict until the winter period is over.

2018 changes to Wealth Tax have been particularly unfavourable for property holdings. Note too that social charges, which don’t apply to UK rental income but are chargeable on French furnished rentals, have risen to 17.8%. And that tax offices sometimes mistakenly apply social charges to UK rental income, which is then time-consuming to recover. However, since the Finance Law of 2018, social charges on investments are included in the flat tax of 30% thus reducing the income tax liability to only 12.2%.

Whether to sell or retain a rental property can be a difficult decision, for both financial and emotional reasons. For practical guidance on this complex matter, please contact me to arrange an initial discussion or meeting, free of charge and without obligation.

Wills for Expats in France

By Katriona Murray-Platon
This article is published on: 1st March 2018

If you have been reading the news recently you will know that a legal battle is about to start between the wife of the much beloved deceased French Rock Star Johnny Hallyday and his two children from his previous relationships, Laura Smet and David Hallyday. Johnny Hallyday’s children will reportedly contest the decision in his will to leave all his property and artistic rights to his widow Laeticia and their two adopted daughters. Whilst many of us do not have the same level of wealth as Johnny Hallyday, this case does highlight the issues around proper legal wills and more especially in situations where one has assets in more than one country.

Why is it important to have a will?
No one is legally required to have a will; however, most people want to be able to leave instructions on how their assets should be handled in the event of their death. A will is a legal document allowing you to communicate what you would like to happen to your personal possessions after you die. When you purchase a high value, physical asset, such as a house, it becomes even more important to be able to decide who would receive such assets should something happen to you.

If you are resident in France and do not have a valid will in place, then your property would be shared out according to the French rules of intestacy, granting automatic inheritance rights to any children you may have had, your surviving spouse, or to other relatives in the absence of a surviving spouse or child. If you do not have children and are not married or in a civil partnership, your assets would go to your nearest relative.

Do I need to re-do my English will now that I have bought a property in France?
If you have bought a property in France and not updated your UK will it would be advisable to speak to a UK cross border specialist who would be able to advise on whether your existing English will is suitable, or whether it may need replacing or updating in any way.

An English will – if properly drafted and executed in accordance with the UK Wills act of 1837 – would be recognised in France. France has signed the 1961 Hague Convention concerning wills and therefore recognises wills that are valid under UK law. Your French assets could therefore be dealt with together with your English assets under a carefully drafted English will, however this is not recommended in every case and you should seek proper legal advice to ensure that this would be the best solution in your personal circumstances.

When drafting a new will, it is important to inform your lawyer or notaire of the existence of any previous wills in any other country, to avoid revoking a will you have already made in the other country. They would be able to assist you in drafting a new will which takes into consideration any other wills specifically dealing with property in another country.

Do I need to do a French will?
This will depend on your individual circumstances and you should always seek professional advice from a properly qualified lawyer experienced in dealing with cross-border matters. “The inheritance and tax laws of the two countries are very different and each case needs to be examined individually before making a decision” says Matthew Cameron, Partner at Ashtons Legal, specialist in French law and cross-border legal issues. For example, whilst trusts are used very frequently in UK wills, they can cause all kinds of additional administrative and filing obligations in French law. A UK testator usually appoints executors to administer his/her estate after death and distribute the assets to the beneficiaries. In French law the notary is responsible for distributing the estate and assets can be held “jointly” or in “indivision” until the estate is wound up.
You should also note that under French law you cannot leave your estate to whomever you wish. The children have priority over the estate and the surviving spouse is only entitled to a fraction of the whole amount. So whilst you can, in a French will, give certain assets to friends and relatives, you cannot override French inheritance laws in the terms of your will.

I have heard that I can have English law apply to my French will is this true?
The European Succession Regulation 650/2012, also known as ‘Brussels IV’, which came into force on 17 August 2015, allows one law to apply to the whole of the deceased’s estate regardless of the location of the asset. International private law states that French law applies to immovable real estate assets situated in France and English law applies to real estate assets situated in England. Under this regulation the laws of the country in which a person is habitually resident at their death will apply to them unless they have made a declaration during their lifetime. This means that if you wish to elect for the law of your nationality to apply to the disposal of your estate, and for it to be recognised in France, it must be written into your will. However, the inverse cannot apply as the UK opted out of this EU regulation, so only English law can apply to an English estate. As Caroline Jeanson, notaire in Bordeaux who worked for over 12 years with English speaking clients in the Duras area, said “I have never yet, since the Regulation was enacted, advised a British national resident in France to opt for English law in their French will”. Whilst in theory you can choose which law will govern how you leave your assets, this will not avoid French inheritance tax. Under French tax law, if you leave your assets to someone who is not a direct blood relative, there can be substantial tax consequences. That beautiful chateau you own would probably have to be sold to settle the tax liability.

Do I need to do a will with a French notaire?
Strictly speaking you do not need to go to a French notary to write your will. You can do a hand written will called a “Testament Olographe” (holographic will) which is perfectly valid under French law. There is no legal requirement for it to be in the French language, it does not need to be witnessed nor does it have to be registered anywhere, however it is advisable to have it registered with the Central Wills Registry (Fichier Central des Dispositions de Dernières Volontés) which would enable any notary to access it. In any case it is best to seek the advice of a French notary before drafting a will. The first consultation is free and once the notary fully understands your specific situation they would be able to advise you on how best to draft the terms of your will.

Anyone who has ever lost someone will tell you that not only is it difficult to manage emotionally, but just at this very difficult time, there are a whole range of administrative matters that have to be dealt with. If the person did not make provisions in their will it is left to their friends or loved ones to deal with their assets, causing further upset and difficulty. To avoid this and to fully understand your personal situation it is best to seek professional advice from an independent financial adviser specialised in French tax matters, a UK solicitor specialised in French law or a French notary with several years’ experience advising English speaking clients.

For any questions or to make an appointment, please do not hesitate to contact us.

Trusts – and French residency

By Katriona Murray-Platon
This article is published on: 28th November 2017

28.11.17

I remember during my legal studies, Trust law was not a popular subject. The French authorities do not like Trusts either. They don’t understand them, they mistrust them (pardon the pun). Interestingly Trusts originated in France, in Normandy, during the crusades. Crusaders entrusted their property to trusted third parties to manage until their return and the “trustees” had to pay the income to the crusader’s family. However today, the French authorities view Trusts as a way to hide assets (to avoid Wealth Tax for example) whereas from a UK perspective Trusts are a very useful way of managing assets for people who cannot manage them themselves and/or require protection. They are very often used in wills but when the beneficiary, settlor or trustee decides to go and live in France they may have forgotten all about the Trust and have no idea about the reporting obligations for Trusts in France.

Things are even more complicated by the notion of “deemed settlor”. When a settlor dies, the beneficiaries are deemed to be the settlor of the trust assets. Article 885 G ter of the French Tax Code states that the settlor or the “deemed settlor”, if their assets exceed the wealth tax threshold, must include the net value of the assets of the trust in the assessment of their assets on 1st January of the tax year.

Trusts are very often managed by solicitor’s firms and may contain investment portfolios. If a beneficiary is resident in another country the Trust falls under the requirement to report under the Common Reporting Standard Automatic Exchange of Information rules introduced by the OECD (please see my colleague Derek’s article).

There are two declarations which have to be filed. One for every event i.e. when the trust is created, amended or terminated, which must be filed in the month following the event. The other declaration is annual and must be made by the 15th June of each year and show the assets in the Trust as at 1st January of the same year. There is no income tax return for the Trust itself but beneficiaries should declare the income they receive from the Trust (whether it is dividends, interest, proceeds from sales of shares or rent from a property within the Trust) on their annual tax return form. If distributions are made to the beneficiaries, it may also be worth filing an event return mentioning the amounts distributed throughout the year.

Both of the Trust declarations require details (names, dates of birth, addresses etc) of each and every settlor, trustee and beneficiary whether or not they are French tax resident. It is the Trustees responsibility to file the information and the Trustee who will be liable for failure to declare, late declarations and for any penalties.

Since 8 December 2013, Trustees who failed to comply with their reporting requirements could have been fined €20,000 or 12.5% of the total value of the assets held in the trust, whichever was higher. For declarations due before this date the fine was only 5% of the assets in the trust or €10,000.

In March 2017 the French Constitutional Council ruled that the 5% or 12.5% penalties were unconstitutional with effect from 1st January 2017. The €20,000 fine does still apply however and can be cumulative, applying to each return that has not been filed on time.

With the Common Reporting Standards currently being enacted by the UK (including Jersey, Guernsey and the Isle of Man) and France, I believe that there will be a lot more questions from the French tax authorities in the near future and in particular regarding undeclared bank accounts and trusts. Whilst the French tax authorities ask nicely the first time, if they suspect that assets or income have not been declared they do have the power to apply these fines. To better understand your tax obligations as regards Trusts, please do not hesitate to contact me.