Complete Guide to the Taxation of Rental Income
As part of our Guide on buying a rental property in France, this article focuses on the taxation of rental income for those owning a property in their own name or via French transparent real estate company (a société civile immobilière or ‘SCI’).
French Income TaxWhen a SCI is tax transparent you look through the company and the tax implications are broadly the same as if the property was held directly. There is no benefit in kind charge if the property is owned in its own name(s) or in a tax-transparent SCI so that shareholders can occupy the property.
Non-French residents are subject to a minimum income tax charge of 20% on their net French rental income not exceeding €27,478, and 30% thereafter. Higher rates apply to taxpayers in receipt of net rental income in excess of €78,571 (the rates vary from 41% to 49%)
In addition to income tax, France levies social charges at a rate of 17.2% on rental income. However, UK residents may be subject to social charges at a reduced rate of 7.5% when they are not affiliated with the French social security system.
Furnished LettingsThe letting of furnished property is viewed as a business in France and several options are available.
Firstly, taxpayers can elect to be taxed according to the régime réel (‘standard method’) whereby the actual expenses are taken into account when assessing the net taxable figure. This is broadly similar to the UK position where you deduct regular expenditure from the total income to assess the taxable income. This expenditure includes upkeep of the property, repairs and maintenance, improvements, property taxes and agent’s fees to the extent that it is related to the renting activity.
If the property is also for the owner(s)’s personal use, the property’s expenses that are not incurred for the business of the letting will not be deductible. The property expenses will then be apportioned based on the letting period. For example, if you rent out the property 10% of the year, 10% of the repairs for the year will be deductible.
Alternatively, if you meet certain criteria, you can opt to be taxed according to the ‘Micro-BIC’ regime. For furnished letting, generally, the income from the property must be under €77,700 per annum. When this applies, a notional expense deduction of 50% is applied to the turnover and this figure is taxed at the income tax scale rates. This has the advantage that no detailed accounting is required, and taxpayers automatically have a deduction for expenses, even where the actual expenses are lower than 50% of the turnover. This regime is generally beneficial, although you should note that you cannot realise losses under the Micro-BIC
Please note that if you plan to let out a property on a furnished basis and the property is held through an SCI, the company will cease to be tax transparent and will become subject to French corporation tax (including the benefits in kind legislation, see next article). There are a number of strategies to deal with this issue, for example giving exclusive use of the property to a shareholder, and the shareholders would then carry on the furnished rental activity instead of the SCI.
Unfurnished LettingsWhen the property is let unfurnished, the rental income will be calculated under the standard method or the ‘Micro-Foncier’.
With the standard method, the actual expenses are taken into account when assessing the net taxable figure. The rules are broadly the same as for furnished lettings.
The Micro-Foncier is available to those with unfurnished rental income not exceeding €15,000 per annum. Under this regime, a notional expenses deduction of 30% is applied to the turnover and this figure is taxed at the income tax scale rates.
UK Income TaxUK residents are subject to UK income tax on their worldwide income. This means that French rental income will not only be taxable in France, but it will also be taxable in the UK.
To avoid double taxation, the UK / France double tax treaty provides that French income tax and social charges payable at 7.5% can be offset against the UK liability.
In the UK there are no simplified accounting methods. Expenses are deductible from rents only if those expenses are incurred “wholly and exclusively” for the business of the letting. Examples of deductible expenses will include water charges, council tax, insurance premiums, commissions, and genuine repair expenses. Since April 2020, mortgage interest is no longer deductible from rental income. Instead, there is now received a tax-credit, based on 20% of the mortgage interest payments (subject to limitations).
Rental income more than the personal allowance (£12,570 in 2023/24) is taxed as follows:
- 20% when falling in the basic rate band (£12,570 to £50,270 in 2023/24)
- 40% when falling in the higher rate band (£50,271 to £150,000 in 2023/24)
- 45% above the higher rate limit
The UK treats SCIs as opaque which means that they are not normally chargeable to UK tax on income and capital gains realised overseas. however, distributions to UK resident shareholders will be taxable in the UK.
Hence, no tax credit is available for the shareholders for the French tax and this can strongly increase the total tax due on income and capital gains. There are several ways to deal with this complex issue, we recommend that you talk to a professional tax expert.
For Expert French Tax AdviceWe regularly receive enquiries from property owners and buyers wanting to learn about tax liability on holiday and long-term rentals; some are recent villas with a swimming pool, others wanting to plan for a chateau purchase with an SCI, a property near a ski resort in the Alps or for investing in off-plan properties.
Our UK-based French legal partners specialise in taxation, acquisition of rental property, succession, wealth tax and more. They have extensive knowledge of the tax and legal system in France, for more expert advice contact François Mouniélou or his colleague Romane Giet at RWK Goodman Lawyers in London.
By working with experts, it becomes easier to navigate through the intricate web of regulations and ensure that your investment in France is protected.