Buying and transferring a second residence in France
"However, a number of factors must be considered when making such an investment," explained Pierre Le Pahun, Senior Estate Planner at Degroof Petercam.
France offers many attractions, hence why "many of our Luxembourg clients, be they resident or not, are keen to buy a second residence in France, be it in Paris, on the coast, or in the many attractive inland locations", said Pierre Le Pahun. However, several factors need to be taken into account when making these investments.
Before buying, what should you look out for?
As a major player in wealth management in Luxembourg, Degroof Petercam advises its clients every step of the way when making their purchases. This takes into account questions about financial, legal, and tax, as well as complications around transferring the property to other people.
"Depending on the objectives, one must first consider how the purchase will be made, either by owning it directly or through a company with the equity shared between family members, for example. Then there is a decision on how to finance the purchase, including whether to take on debt. These choices will have an impact on the tax bill associated with owning a second residence.
Consider total costs and tax
The first challenge is to ensure that legal guarantees protecting the purchaser are respected. The French legal framework is very protective on this point. Beyond this, the overall cost of purchase must be considered. In addition to the listed price, there are the acquisition charges (around 7% of the purchase price) and intermediary fees.
Owning a property in France also entails recurring costs (insurance, maintenance, etc.) and a range of tax considerations. "Although income tax on property used for pleasure has been abolished in France, owning a second residence can lead to various taxes, in particular property tax, tax on real estate wealth, etc.," Mr Le Pahun explained.
Have an optimal acquisition strategy
You also have to take tax considerations into account if you expect the property might be inherited or gifted at a later date. “Everyone should adopt the best acquisition strategy," added Mr Le Pahun. Debt financing, for example, can reduce the extent to which the asset is liable for tax. One strategy is a "split" acquisition whereby the parents buy the usufruct of the property while the children have property ownership. This way, on the death of the parents, the children gain full ownership without having to pay inheritance tax in France.
Owners of a second residence in France also need to be careful when selling their properties. "The capital gains regime on private property is much more unfavourable in France than in Belgium or Luxembourg," explained Mr Le Pahun.
Beware of taxation on rental income
Renting out your property to offset the purchase costs may look tempting but entails other risks, particularly if the property is held through a company structure. "First of all, it is necessary to ensure that the strict regulatory framework in force is respected. Furthermore, the hybrid nature of furnished rental in France (which is civil in legal terms for the management of property assets, but commercial in tax terms), brings with it certain opportunities but also many difficulties and uncertainties," explained Mr Le Pahun.
For example, a non-trading company used for carrying out tax-transparent property transactions could, because of the commercial rental income generated, be subject to corporation tax and all its consequences. Being aware of these charges and potential difficulties, some people prefer to rent out a few days a year for simplicity's sake. For those wishing to acquire, the purchase must be planned and properly structured to take all these aspects into account, or risk unfortunate consequences. If in doubt, acquisition of a second residence should most often be done directly.
Banque Degroof Petercam Luxembourg can help you turn your plans into reality when acquiring a second residence in France. Consult Pierre Le Pahun, our wealth planning expert, directly: firstname.lastname@example.org