French Wealth Tax on Real Estate modified in 2018
By Alexane Palide, edited by Prof Robert Anthony, Anthony & Cie
A New Year with new resolutions and new rules! January is the time for adopting new ideas and this is especially so in the implementation of amendments to the tax system animated politically by the French government, as mentioned in their election manifesto.
The French president Emmanuel Macron once again proved his commitment to these changes, when presenting his wishes for 2018, by announcing his intention to ensure that his programme is successfully approved by the French government.
IFI: a new version of the French wealth tax?
The application of the new financial bill will have direct repercussions on the French wealth management strategies. The necessity of knowing the new laws is essential, especially if one has to plan in order to optimise and appropriately organise client’s assets.
International ultra-high net worth individuals, UHNWIs, are concerned about the impact of the taxes possibly due. This is a challenging time for wealth managers. Certain clients faced the French wealth tax ISF (Impôt de Solidarité sur la Fortune), which was a tax for French residents on the global capital of assets and only applicable on property in France for nonresidents.
The new changes are for 2018, and will have a direct consequence on future advice as the modification will tax real estate assets only. This new tax reform maintains the principles of the previous wealth tax as it concerns real estate values greater than 1.3 million euros, with the same tax rates. The originality of the IFI (Impôt sur la Fortune Immobilière) and the restrictions due to this modification will have a direct effect on the calculation of tax due. Regarding the deduction of debts relating to the real estate assets (whether held by a real estate company or directly owned), the new finance act introduces a cap on the deductibility of the borrowing.
The change will concern real estate with a market value over and above EUR 5 million when this has bank financing of in excess of 60% of the value of the property or of the shares of the company. The new rules will result in a ‘hair cut’ of the deductibility for tax purposes. The exceeding fraction will be deductible only by half. This mechanism is changing in order to handicap interest only or large loans. It will be no longer be possible to optimise fiscally by a full deduction of debt.
This new tax legislation will then increase the amount of tax liabilities. To make matters worse, the drafted legislation also includes an amortisation of the debt over the term of the loan. This means that ultimately there will be no debt deductible for tax purposes. It is not clear as to when this will apply or how it will be implemented for existing loans.
Illustration of the new IFI law’s effects
In order to explain this in detail, let us take, for example, the value of property which is EUR 10 million and completely financed by a loan.
The new IFI law will allow a 60% deduction on the EUR 10 million property value; this would effectively total EUR 6 million. The residual would subsequently represent EUR 4 million and only half of this would be deductible, which is EUR 2 million. The total amount of debt deductible would be EUR 6 million plus EUR 2 million, representing a total of EUR 8 million euros; which means that 80% of the value of the property would benefit from the deduction and a tax would be due on an amount of EUR 2 million at the appropriate rate. This, however, does not take into account the term of the loan and the period of depreciation, even for interest only loans. Each year the assessable amount will increase due to the depreciation of the loan.
What about the consequences of IFI?
The new legislation has been amended to exclude other investments. This has been criticised as a tax giveaway for the richest people. These people will no longer pay wealth tax on their securities.
The new tax is not seen as a gift for taxpayers subject to real estate tax. It is extremely harsh on those persons who mainly have real estate investments. This will cause a problem for taxpayers without enough liquidity to provide the payment of taxes. It is clear that President Macron has not thought out the consequences. It will discourage rich foreigners from investing in property in France and hit wealthy French residents invested in property. This clearly indicates that the French president is not supporting rich people.
Whilst Macron is determined about his programme, he has been partially inspired from the US. The new reform establishing a ‘Flat Tax’ of 30% on investment income is also seen as a method of tax optimisation but is additionally intended to simplify the taxation of capital on investment income.
One assumes the law will be effective from 2018. It is well known that the purpose of these modifications is to attract and bring back investors to France. It is debatable where property is concerned if this has been achieved in view of ‘IFI’. Corporate investors, however, are clearly more motivated as the government has put forward a strategy to attract investors not into the real estate sector but into the corporate sector.
The complications created by these changes according to a wealth manager’s point of view necessitates planning and modification by anticipating these changes. This could mean not only providing good advice but the need for arbitration of a client’s investment portfolio and modifications to their investment strategy in order to be fiscally efficient. The dependence on property could penalise clients accordingly.
A good understanding of all detailed aspects of French taxation and its likely evolution is essential. One cannot emphasise enough the effect of the new IFI on taxing property and the need to evaluate and change one’s portfolio in the future new tax reforms. This could mean reducing property exposure and investing in other assets instead. We do not know what the future has in store but we will assist our clients as the legislation evolves, as this could be simply the beginning of several more changes to come.
Prof Robert AnthonyAnthony & Cie, Valbonne, Sophia Antipolis, France
T: +33 4 93 65 32 23
Published: January 2018 l Photo: Tiberius Gracchus - Fotolia.com