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:



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.

Income tax in France (2009 rates)
 French tax law is very complicated. Following enquiries from a number of property investors, we have decided to try and 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:
The total net taxable income of a single person is 35,926 euros (÷ 1).
He will pay:
  0% on the band lower than 5,852 euros
  5.50% on the income bracket ranging between 5,852 and 11,673. That is to say 5.50% X (11,673 – 5,852) = 5.50% X 5,821 = 320 euros
  14% on the income bracket ranging between 11,673 and 25,926. That is to say 14% X (25,926 – 11,673) = 14% X 14,253 = 1,995 euros.
  30% on the income bracket higher than 25,926. That is to say 30% X (35,926 – 25,926) = 30% X 10,000 = 3,000
So the total tax income to be paid by this single person will be: (320 + 1,995 + 3,000)  x 1 = 5,315 euros

Example 2:
The total net taxable income for a married couple without children is 100,000 euros (÷ 2 = 50,000 euros each).
Each person will pay:
0% on the band lower than 5,852 euros
  5.50% on the income bracket ranging between 5,852 and 11,673. That is to say 5.50% X (11,673 – 5,852) = 5.50% X 5,821 = 320 euros
  14% on the income bracket ranging between 11,673 and 25,926. That is to say 14% X (25,926 – 11,673) = 14% X 14,253 = 1,995 euros.
30% on the income bracket ranging between 25,926 and 69,505. That is to say 30% X (50,000 – 25,926) = 30% X 24,074 = 7,222
40% on the income bracket higher than 69,505.
    
So the total tax income to be paid by this couple will be: (320 + 1,995 + 7,222)  x 2 = 19,074 euros
Because of the way the tax is worked out per person the married couple will pay less taxes than a single person earning 100,000 euros per year – his earnings per person push him up into the 40 % tax bracket above whilst the married couple will each pay taxes of 30 %.

Example 3 : A property investor
 Mr Brown, a UK resident, owns a property in France for which he receives an annual rental income of 8,000 €. The interest-only mortgage on the French property costs 3,000 € a year. He can deduct this mortgage repayment from his French income (8,000 € – 3,000 €) which comes to 5,000 € per year. As this figure is below the 5,852 € tax threshold, Mr Brown is not required to pay income tax on his investment.