British proprietors of holiday residences in the Dordogne have a tendency to feel that French tax does not matter to them. It can come as a surprise when they’re instructed on a sale that French cgt will have to be paid. It may come as a further shock after they discover the conditions with regard to deductible capital expenses. But the real sting in the tail is having to pay somebody else to validate the figures they produce.

The basic concept

Capital gains taxes is levied on the variance between the purchase and sale prices, less permitted capital costs. The purchase cost is elevated by the agency payment and notarial fees so as to give the genuine cost of purchase. The sale cost is reduced by charges incurred in relationship with the sale – principally the survey costs associated with the obligatory “vendor’s pack”. The difference between these two numbers will produce the gross capital gain.

Deductible costs

A vendor will be able to deduct from the gross capital gain certain capital expenses – subject to conditions. First, the costs must relate to “construction, reconstruction, augmentation or improvement”. Construction, reconstruction and enlargement are easily comprehended: they will include the extension or reconstructing of a property or building. “Construction” will stretch to the installation of a swimming-pool.

The misleading term is “improvement” – the french phrase used is actually “amilioration”. You would have believed this broad enough to cover replacing the kitchen and bathrooms. However, “improvement” is described as putting in equipment or raising the degree of ease and comfort without altering the actual structure of the residence. Installing an elevator, central heating or perhaps air-conditioning are recognised as improvements, as would be the installation of a new bathroom. The refurbishment of an existing kitchen in that Dordogne home of yours may however not meet the requirements.

Secondly, the work involved must have been completed by a French-registered tradesman. You cannot subtract supplies you’ve bought yourself even if they are for usage by the tradesman. Thirdly, you must be able to deliver supporting evidence of the costs in the form of invoices from the workmen concerned, and bank transactions showing the payment.

If you are not able to satisfy these conditions, you can use instead a lump-sum allowance for costs of 15% of the original purchase price, net of agency percentage and notarial fees. Subtracting allowable capital expenses from the total capital gain brings you to a net amount.

Period of ownership

There is then a further allowance depending on the period of ownership. For every full year of ownership after five years the gain is decreased by 10 per cent. This will mean that if you own the house for fifteen years or more no tax on value appreciation will be payable in France.

Lump sum allowance

When you have calculated the net capital gain you are allowed to deduct from it a fixed sum of 1,000 euros for each individual owner. i.e. in the event the sellers are a married couple they will be able to withhold 2,000 euros.

Sting in the tail

Some of our English customers, selling their Dordogne homes, find the conditions for deductible charges not only confusing but difficult to comply with especially where they’ve imported foreign labour or performed work on their own. Or they may not have kept the information required by means of proof. But the real sting in the tail arrives with the necessity to employ a French-resident tax consultant in the situation of all sales over a limit of 150,000 even if you are making a capital loss.

The tax agent assumes personal legal responsibility to the French tax regulators for the correctness of the return. And it’s obvious that he will charge a fee. In a recent straightforward case that we experienced, a vendor selling at a substantial cash loss has had to pay the tax consultant close to 1,000. If non-residents resent the system in the first place, the expense of a tax consultant adds insult to injury.

It is very clear that the Dordogne region of France is a fantastic place to live. Why not take a look at a selection of Dordogne Property and dream about that perfect place in the sun? MCM Dordogne Property have an extensive selection of properties available just waiting for the chance to push you into fulfilling the dream.