Changes to the wealth tax laws make structure and timing of property purchase key to good value

With the publication last Friday of the Amended Finance Law (Loi de Finance Rectificative 2012), the French government instituted an “extraordinary wealth contribution” retroactively effective as of January 1, 2012.

Is there a way for non-resident real estate purchasers to avoid the French wealth tax in the long term?  The simple answer is that taking a mortgage to reduce the equity in your apartment below the 1.3 million euro threshold will exempt you from wealth tax in France if you are a non-resident.   Our notaire adds that, “if you are eligible for a mortgage on the property, the ISF book value of the asset is reduced by the amount of the loan, whether the property is owned outright by its owners or through an SCI [Societe Civile Immobiliere]. Whether your transaction costs and interest on the loan make this the right choice for you is an individual question, but the wealth tax has inspired a number of my clients to explore financing who might otherwise have paid for their purchases without a loan.”   Current owners might look at equity release loans to achieve the same result, although the terms of such loans are often less favorable than mortgages secured at the time of purchase.  With mortgage rates currently at record lows, it is worth inquiring about if you are purchasing an apartment.

If you are a non-resident of France and already own an apartment or have other assets in France worth more than 1.3M euros, the net wealth taxable is the value of the applicable assets owned as of the 1st of January 2012.

For French residents, the calculation is based on their worldwide assets. For non-residents, the calculation is based on assets located in France, including:

• furniture and movable property located in France;
• real estate assets held directly or through a real estate company (such as an SCI);
• net value (the value of the credit account in favor of the shareholder, in French the “compte courant d’associés”) of shares of a company located in France;
• net value of shares of a company located in another country where the majority of the real estate assets are located in France.

The supplemental tax is progressive, and is calculated on the following schedule:

To take the example of a non-resident with a Paris apartment valued at 4.5 million euros on January 1, 2012:

Under the existing wealth tax, the total amount owing would be 0.5% tax on the entire sum, or 22,500 €.

The new extraordinary contribution is calculated as follows:

First 800,000 € = 0.

The next 510,000 € x 0,55 % = 2,805 €

The next 1,260,000 € x 0,75 % = 9,450 €

The next 1,470,000 € x 1% = 14,700 €

The remaining 460,000 € x 1,3% = 5.980 €

Total = 32,935 €

This is the total amount payable, replacing the 22,500 € that would have been due under the existing law; so the “extraordinary contribution” is 32,935 – 22,500 = 10,435 €.

The extraordinary contribution zeros out at just over 1,400,000 € in assets. Not clear why they didn’t just write the law to say that it starts there, instead of laying out a complicated math problem that ostensibly starts at 800,000  €. Being that it’s part of President Hollande’s generally populist drive, it was more important that it look on paper like it would be felt more widely than it will be. Whatever the reason, wealthy residents who end up making good on their threat to abandon their French residency in light of Hollande’s across-the-board tax increases will not escape the payment for the 2012 tax year.

In a ruling earlier this month, the Constitutional Court required that the “extraordinary contribution” be temporary. It is designated as such, although there is no set expiration date. Rather, “the contribution is considered exceptional for 2012 because a major overhaul of the wealth tax is expected for 2013” explains a notaire in Paris’ 8th arrondissement, who specializes in international clients (and does a fantastic job working  with ours). But the same contribution schedule may still apply for assets as of January 1, 2013.

She clarifies that, “for property buyers or sellers subject to the wealth tax’ 1.3 million euro threshold, the timing of their sale or purchase can result in a significant savings. The tax is computed on assets owned as of the 1st of January each year. So, to the extent that a non-resident seller can close before the end of the year and remove the funds from France before the end of the year, they can avoid the wealth tax assessed in January. For non-resident or resident buyers, a closing date of January 2nd allows them to keep the asset off their books for that year.” The same holds true for the taxe d’habitation, or occupancy tax, which is also assessed on French properties on January 1st. For Paris apartments, that tax is comparatively small.

If you have questions about this issue, or would like to know more, feel free to contact us or Ask Miranda.