Traditionally, France has not had a reputation as a tax-efficient country for wealthy residents. In particular, France’s wealth tax on world-wide net assets, the Impot de solidarité sur la fortune (ISF), made headlines for chasing away celebrities such as Gerard Depardieu.
However, as of the 1st of January the ISF was transformed into the Impot sur la fortune immobilière (IFI). Now, only the net value of real estate assets and direct and indirect shares or interests in real estate and real estate companies (SCI, SCPI et OPCI), held as of the 1st of January of each year, will be subject to an annual wealth tax. The threshold, bands and tax rates remain the same as they were for the ISF.
The government’s estimate is that the reform will result in approximately 40% fewer households paying wealth tax. For the well-off, this reform makes France a significantly more attractive country to move (back) to.
How Does IFI Tax Affect Holiday Property Owners and French Residents?
Non-residents* with property in France were already only liable for wealth tax on net real estate assets physically situated in France. Not much changes for them, other than the deductibility of debt, as explained below.
For newly-arrived tax residents in France, the existing five-year exemption for assets outside France continues to apply. This exemption only applies if the individual wasn’t domiciled in France during the five years before they became tax resident again.
EXAMPLE: French taxpayer X moves to Manhattan and buys an apartment. After three years he returns to France and keeps the NY apartment. The exemption on foreign property would not apply to taxpayer X. If he returned after five years, it would apply for a period of five years.
After the five-year exemption from IFI tax on property abroad, French tax residents will incur IFI on all their net (i.e. net of relevant debt and exemptions) real estate assets and direct and indirect real estate rights held in France and abroad (subject to the thresholds and calculations explained below).
Deductibility of Debt
The new IFI is calculated over the taxpayers real estate assets, net of debt and other exemptions. Only debt for the purchase of the assets or the maintenance and improvement of the assets can be deducted from the value.
Previously, when buying a property in France at a price beyond the €1.3 million ISF threshold, buyers would often take out an interest-only mortgage loan at the time of purchase in order to reduce the equity in the property by the principal of the loan for the entire duration of the loan. They were thus able to minimise the amount of ISF, or avoid paying it altogether, for the entire duration of the loan.
Property owners in France with such interest-only mortgages in particular should pay attention. As of January 1st 2018, there will be important changes to the deductibility of this type of mortgage loan (and certain other types of debt) for IFI purposes:
- Firstly, mortgage loans that are “interest only” will no longer be treated in the same manner, where the loan principal could “forever” be deducted from the market value of the house. Instead, from now on, the loan amount will be amortised over the period of the loan, notwithstanding it being an interest-only loan. This means that the outstanding amount of an interest-only loan with a ten-year term will be deemed to decrease each year by 10%. In case of a 20-year term, the loan amount will decrease by 5% each year.
- The second change is only relevant for higher value properties or portfolios. If the market value of a taxpayer’s real estate assets is greater than 5 million euros, debt exceeding 60% of the market value of such real estate assets is deductible at only 50%.
EXAMPLE: home on the Côte d’Azur bought for €9 million. After improvements, the current market value is €10 million. 60% of the market value is €6 million. The outstanding loan amount is €7.8 million. This loan exceeds 60% of the market value by €1.8 million. Only 50% of this €1.8 million can be deducted from the market value of the house. Total deduction from the value: €6 million plus €900K = €6.9 million. Taxable amount for IFI (see threshold and rates below): €3.1 million minus 800K = €2.7 million euros.
In addition, a loan issued by an entity that is directly or indirectly controlled by the taxpayer or their nearest family members cannot be deducted from the property value anymore. And loans issued directly or indirectly by an ascendant, descendant, brother or sister are no longer deductible, except if the loan has normal market interest rates and conditions.
Calculating your IFI Tax Liability
For 2018, the threshold, bands and rates remain the same as they were for the ISF. This means that the tax liability only kicks in at net assets of €1.3 million. In that case, the tax is calculated at different rates over several bands, starting at €800 000.
Note that assets must be consolidated for all members of the household, couples must make a joint declaration whether married or not, and assets held by children below 18 years of age must also be included.
- There will be no change to the current 30% discount of the market value of the main residence.
- The premises used for the taxpayer’s main professional activity remain exempt. This also applies to property used for furnished rental activity, provided that the landlord is a registered professional landlord (LMP).
- The 75% exemption of the value of woodland remains in place.
- The taxe foncière (property tax payable by all owners in France) remains deductible from the value of the relevant property.
IFI Rates for 2018 (only if net assets ≥ €1.3 million):
|Tranche of taxable assets||Applicable Tax rate|
|> 800 000 € and ≤ 1 300 000 €||0,50 %|
|> 1 300 000 € and ≤ 2 570 000 €||0,70 %|
|> 2 570 000 € and ≤ 5 000 000 €||1.0 %|
|> 5 000 000 € and ≤ 10 000 000 €||1.25 %|
|Above 10 000 000 €||1.50 %|
EXAMPLE: Couple A from London bought a holiday property near Nice for €2 million (net of agency fees) in September 2017, with a €1.6 million 10-year interest-only mortgage loan from a French bank. They undertake extensive renovations early 2018, for which they do not take out a loan. This house is their only property in France.
What is their IFI tax liability in May 2018, if any?
- What matters is the value of the property as of the 1st of January 2018. Since the purchase is recent, the couple can take the purchase price of 2 million as the value of the property on January 1st The renovations won’t be taken into account until the tax filing of May 2019, with a valuation of the property as of January 1st of the following year (2019).
- The mortgage loan principal of €1.6 million is not yet amortised and can be deducted in its entirety. This leaves a net amount of €400 000 euros in assets.
Conclusion: for 2018, Couple A do not have any IFI liability.
Let’s fast forward to the hypothetical 2023 IFI tax filing of Couple A:
- After renovations and property price increases in the Nice area the property is valued at €3.3 million euros as of January 1st 2023.
- The loan principal is amortised pro-rata for five years and can only be deducted for 50% of the principal, i.e. €800K.
- The net value of the property for IFI calculations is €2.5 million (the yearly tax foncière is deductible from the value, but we’re leaving that out of this example).
What is Couple A’s IFI tax liability for May or June 2023, assuming the tax rates and bands remain the same?
|Taxable assets for Couple A||Applicable tax rate||Tax payable in €|
|> 800 000 € and ≤ 1 300 000 €||0,50 % x €500K||2 500|
|> 1 300 000 € and ≤ 2 500 000 €||0,70 % x €1.2 M||8 400|
|Total tax payable for 2023:||10 900|
How to Determine Market Value for IFI?
The burden for determining the market value of a property as of the 1st of January of the relevant year is on the taxpayer. The filing must be done at the time of the French income tax return in May (paper) or June (online) on form 2042 and its annexes.
The taxpayer can ask an evaluation of the market price from a notaire, a licensed listing agent (agent immobilier), or a licensed buying agent (chasseur immobilier) with knowledge of the local market. For larger towns and cities, they can also check on the government’s Patrim database (see info HERE), and other online tools such as Meilleurs Agents, PAP and the property price database of the notaires. For rural properties, an accurate valuation is much harder to establish, due to the dearth of accurate comparables. For such properties it’s a good idea to get the opinion of two or more local agents. When the property is below average for its region and type in the sense of features, interior and surroundings, you may adjust down from the average price, and vice versa – for instance a stunning view, recent renovation and above average pool all add to the market value and should be taken into account.
Once you have the valuation for a specific year, and provided nothing major takes place that would increase or decrease the market value, you should increase or decrease the value each year in accordance with the publicly available property price data.
What Are the Penalties?
This type of tax, based on subjective evaluations of real estate assets, is of course prone to evasion. As was the case with ISF, it will be tempting to undervalue property. The French tax authorities are aware of this and have a toolbox of penalties to address tax evasion.
- If you pay the correct amount, but are late, or if the authorities decide that you’ve undervalued your assets, the initial penalty is 10%. Each consecutive month of delay incurs a 0.20% penalty. If the absence of a filing persists, the (additional) taxes due can be increased by a maximum of 40%.
- In more extreme cases, they also can impose an estimated tax assessment.
Footnote * “Residency” is defined by French law and is not simply a matter of being in France more than 183 days.
NB: This guide is for your general information only and is not intended to be individual legal or tax advice. If you’d like more specific advice from a professional, or information on French mortgages, inheritance planning, long-term visa for France, or assistance with a property search and purchase in France, please feel free to contact us.
Sophia Mose is a lawyer and licenced French property professional (buying agent – chasseur immobilier). She runs PROVENCE SEARCH, a property search agency and acquisition consultancy based in Aix-en-Provence, covering Provence and the Côte d’Azur. Get in touch for a no-obligations initial consultation on any subject relating to a property purchase in France.