Tips for French property investors

 

Useful information for French property investors
Buying a property in France is not complicated, but if you are a first time buyer there are a few things you need to know. In this section you will find information on the different ways to finance your property, the differences between the two main types of mortgage – IO and repayment mortgages – and information about income tax in France.


Financing your property
The first step when purchasing a property is to decide how you will finance it. If you have the available capital you may choose to make a cash purchase which means buying the property outright. The alternative is to take out a mortgage.
 If you decide you require a mortgage, you then need to decide whether you would like your mortgage in Euros, Pounds Sterling or US Dollars. Most of our customers choose to have a French mortgage (which is in Euros) as they are normally easier to get and offer better rates than UK mortgages. A French mortgage also has the advantage of protecting the buyer from currency fluctuations:

graph-fluctuationGBP-EUR

With a UK mortgage, the buyer is left vulnerable to the variable exchange rate from Pounds Sterling to Euro. With a French mortgage, however, it is possible for a broker to set the exchange rate for up to two years, thereby protecting the buyer. A French mortgage is also more convenient if you choose to let your property and intend using the rental income to cover any mortgage repayments as both the rent and the repayments due will be in the same currency.


Differences between the two main types of mortgage: the interest-only (IO) mortgage and the repayment mortgage
With a traditional repayment mortgage, the borrower pays off the interest and a part of the borrowed capital every month. Thus with every payment made, the remaining capital and interest due decreases.  
With an Interest-Only (IO) mortgage, the borrower only pays off the interest (calculated over the duration of the borrowed capital) on the mortgage each month, repaying the borrowed capital in a single payment when he/she comes to sell the property. Although the overall cost of an IO mortgage is higher than that of a repayment mortgage, the lower monthly repayments (which could be covered easily by any rental income should the property be let out) make this a popular option. The owner can also deduct the interest from his French income in order to pay fewer taxes in France.
 The following two graphs further illustrate the differences between repayment and IO mortgages and are based on a loan of 150,000 euros, over 10 years at a fixed rate of 5%. These graphs show the repayments due for each mortgage on a year by year basis and what these repayments comprise of. Capital repayment is shown in red and the interest is shown in yellow.

Repayment mortgage

repayment mortgage

(Total interest payable on this mortgage: 49,837 Euros)

 

Interest Only mortgage

interest only mortgage

(Total interest payable on this mortgage: 90 000 Euros)


References: http://www.sicavonline.fr


Income tax in France (2012 rates)

 French tax law is very complicated. Following enquiries from a number of property investors, we have decided to clarify how French income tax is calculated for those investing in France or who currently have a French income.
The French income tax system is based around the family unit with the total net income of the household divided by the family tax unit (1 for a single person, 2 for a married couple and 2.5 for a married couple with a child, adding a further 0.5 for each child thereafter). The resultant income is then broken down and taxed in bands much like the English PAYE system. This amount is then multiplied by the family tax unit to give the total income tax due. The more you earn per family member the more tax you pay. 
Nobody can avoid paying taxes, however due to a tax treaty between the UK and France only income that has been realised in France will be taken into account when calculating how much income tax you should pay. 
The best way to understand the French income tax system is to look at a few examples:

 

Example 1: a married couple without children (=2 shares) has a total net income of 100,000 euros. They have a shared income of 50,000 euros each.

Each of their shared income is imposed by band according to the scale below (valid for 2010 tax year):
arrow2 Up to 5,963 euros: 0%
arrow2 From 5,964 to 11,896: 5.50%
arrow2 From 11,897 to 26,420: 14.00% 
arrow2 From 26,421 to 70,830: 30.00% 
arrow2 Beyond 70,831 euros: 40.00%

They will pay less taxes than a single income person earning 100,000 euros per year because he will have to pay 40% taxes while their individual incomes are lower than 70,831 euros each so they will pay only 30% saving 10% taxes.


Example 2: the total taxable income of a single person is 35,926 euros. He will pay:
arrow2 0% on the band lower than 5,963 euros
arrow2 5.50% on the income bracket ranging between 5,964 and 11,897. That is to say 5.50% X (11,896 – 5,964) = 5.50% X 5,932 = 326 euros
arrow2 14% on the income bracket ranging between 11,897 and 26,420. That is to say 14% X (26,420 – 11,897) = 14% X 14,523 = 2,033 euros.
arrow2 30% on the income bracket higher than 26,421. That is to say 30% X (35,926 – 26,421) = 30% X 9,505 = 2,851 euros

So the total tax income to be paid by this single person will be: 326 + 2,033 + 2,851 = 5,210 euros.

 

Example 3 for property investor: Mr. Smith (UK resident) owns a French property investment with an annual rental income of 8,000 euros and has an interest only mortgage which cost 3,000 euros/year. He can deduct the interests from his French income: 8,000 – 3,000 = 5,000 euros per year. It is below 5,963 euros which is the lower tax band at 0%. Thus he does not pay income tax on his investment.

 

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