By Fred Mege, Director at Moores Rowland
For many wealthy individuals and families, an apartment in Paris, a chalet in a ski resort or a villa in the French Riviera are essential elements of their property portfolios. An estate somewhere in the countryside may also be included; a French vineyard or a stud farm for example.
Whilst the search for suitable properties may appear to be the priority, a potential purchaser should also take advice as to how a property should be purchased and owned in order to maximise its tax-efficiency. Depending on individual requirements and how it fits into the wider portfolio, an optimal property ownership structure may prove advantageous.
For example, French or Monegasque civil companies (known as "SCIs" or "SCPs") are types of company commonly used to own French residential properties.
SCIs or SCPs allow for a simple structure of ownership which does not require a lot of formalities or costs. Provided that some tax formalities are undertaken on constitution, the ongoing filing obligations can be minimal (or even non-existent!). There is, in principle, no need to annually file an income tax return for the SCI or a 3% tax return.
When it comes to French inheritance tax, the use of a Monegasque company may be preferred in order to mitigate French inheritance tax in some cases.
In addition to the French inheritance tax, the other main tax that non-French tax residents face when owning French residential properties is the real estate wealth tax which applies to properties whose value exceeds €1,300,000, with progressive rates from 0.5% to 1.50% for values exceeding €10,000,000. This tax mainly affects residential properties. However, if the real estate is owned for the purposes of a business activity, this will be excluded from the scope of the tax.
In fact, when a property is owned by a company, taxation applies on the net value of the shares. In this respect, French tax legislation provides restrictions in respect of the deductibility of debts. In particular, shareholders loans are not deductible (but shareholders loans in existence before 1 January 2018, might, in certain circumstances, be deductible). In certain circumstances, company debts not linked to the acquisition of a French residential property may also be deductible.
Finally, it should be noted that certain charitable gifts can give rise to a tax credit against the real estate wealth tax liability. The tax credit may be very high and may completely absorb the tax liability. Splitting the ownership of a property between different shareholders of a company can also be a solution to avoid or mitigate the tax liability.
In conclusion, there are a number of solutions available but no-one-size-fits-all when it comes to property ownership structures. If you are looking to purchase, make sure you speak to a specialist for tailored advice about structuring your property investments and to discuss how different ownership structures may affect your tax obligations. As with other types of assets, it is essential to consider the tax efficiency of the acquisition structure at an early stage, and definitely before signing any pre-sale contract.
If you have any questions or simply want to discuss with an experienced tax and estate planning specialist, do please email our Director, Frederic Mege, at email@example.com
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