Second home focus: France
Buying a second home became notably tougher during the Covid-19 pandemic as countries closed their borders to curb the spread of the virus, but today demand is picking up once again. France has been a particular favourite for all the usual reasons – its climate, landscapes, food and wine – but also because it is easily accessible for most Europeans, especially residents of Luxembourg, while also remaining popular with UK, US and Middle Eastern buyers.
The number of transactions involving existing rather than newly-built property totalled just over 1.2 million over the 12 months to the end of November, according to notaries’ professional body Notaires de France, an increase of 17.5% from a year earlier.
Its market analysis identifies an average increase in prices outside Paris of 8.8% between the third quarter of 2020 and the same period of 2021, with house prices (up 9.4% over the first nine months of the year) outpacing those of apartments (7.5%). In greater Paris the overall increase was lower at 4% over the year to September 2021, but house prices gained 7%. An analysis of preliminary contracts suggested this trend was set to continue well into the first part of 2022.
Adélaïde Mercier, Senior wealth planner at Banque Internationale à Luxembourg, says: “The past two years have seen more Luxembourg residents buying property in France, because they can get there easily by car. But most big luxury homes are being acquired by customers from the Middle East and UK residents. Almost 50% of our mortgage loans are financing property in France.”
The Paris region is the most prestigious region in France and it is also very sought-after by ultra-high net worth individuals.
Provence and Côte d’Azur still key markets
For upmarket buyers, Provence and the Côte d’Azur hold the greatest appeal, followed by the Basque area adjacent to Spain around Biarritz and Arcachon to the west of Bordeaux. BIL Head of WM lending Catherine Bastien adds: “The Paris region is the most prestigious region in France and it is also very sought-after by ultra-high net worth individuals, particularly Neuilly-sur-Seine, Saint-Germain and Versailles.
“In the luxury market, it is mainly foreigners who are buying, or people from Paris who want to live closer to the sea, in places like Biarritz, St. Tropez and Cannes. In Monaco it is mainly foreigners who want to live there for tax reasons.”
Despite the impact of the pandemic, international buyers are still present in the luxury market. “American and Asian people are still buying luxury real estate in France, although they have not been able to come over for the past couple of years,” Ms Bastien says. Most of the demand, both from European or international buyers, is for second homes rather than main residences, and in many cases purchasers are looking to rent out their properties when they are not occupying them.
Tax, fees and conveyancing costs
French rules allow anyone to buy a home there (within reason) and the buying process is relatively straightforward. Once the buyer has found the house they like, they sign a pre-contract (compromis de vente) and pay 10% of the purchase price upfront. If they subsequently back out of the deal, they lose that deposit, except in very exceptional circumstances.
For new properties, the compromis will usually include a stipulation that planning permission must be granted. After the deal has been signed, the notary will investigate any legal, financial or other claims on the property. The final stage is the completion of the purchase (acte de vente).
The buyer will be liable for the notary’s conveyancing fees and property tax, amounting to between 7% and 8% of the purchase price for existing property; for new property the cost is around 2%, but the purchaser must also pay VAT at 20%. Estate agent’s commission can range from 2% to 5% and in some cases more.
Once they have completed the purchase, property owners will need to pay the various housing taxes – land tax (taxe foncière) and local taxes (taxe d’habitation). These vary depending on where the property is located, its size, and the cost of local amenities. It is important to mention here that local taxes (taxes d’habitation) have already been abolished for 80% of tax households and should be abolished for 100% by 2023.
Property and France’s wealth tax
France’s real estate wealth tax, introduced in 2018 to replace a broader-based tax on financial and other assets, applies to property worth €1.3m, net of borrowing, though there are allowances for a property used as a main home (French residents are assessed on their worldwide property assets, non-residents only on property in France). Property with a value above the threshold is subject to the tax according to a progressive schedule rising from 0.5% to 1.5% (applicable from more than €10m).
The taxation of rental profit depends on how a property is rented out, whether it is being offered for rent by a business or an individual, and whether it is let furnished or unfurnished.
The taxation of rental profit depends on how a property is rented out, whether it is being offered for rent by a business or an individual, and whether it is let furnished or unfurnished. When letting furnished property, the majority of people will use the so-called micro-BIC regime: a standard tax rate of 20% is applied to 50% of the income (higher for registered furnished tourist accommodation or guest rooms), plus social security charges at a rate of 17.2% (7.5% for European residents).
Capital gains rules on the sale of property are complicated. Says Ms Bastien: “Purchasers in France must decide whether to buy in their own name or through a company. The taxation levied on the sale of the property will depend on the type of company involved. Individual owners of property in France can sell it completely free of tax after 30 years of ownership.
“Setting up a société civile immobilière or SCI is very popular among our clients. In most cases, the SCI is treated in the same way as an individual – it is free of tax after 30 years. With a private limited company or SARL, which is subject to corporate income tax, this exemption is not available. Tax is always payable on the capital gain, however long the property has been owned.”
Flexibility on loan types
If you need to borrow to buy in France (which can be useful to help stay under the property wealth tax threshold), domestic banks may not be particularly flexible. Many are unwilling to lend to non-residents, even for luxury property. Ms Bastien says international institutions such as BIL, which understand the tax framework for non-residents and are used to dealing with a wide range of nationalities, can offer an advantage.
International banks may be able to provide more flexible lending arrangements. Bullet loans – where a bank lends in anticipation of the borrower receiving a large lump sum payment in the future that will enable them to pay off the loan in full – are not readily available from French banks, but can be sourced from specialist lenders used to dealing with purchasers at the high end of the market.
French property has proved popular with international buyers throughout all market conditions, and buyers enjoy the comfort of a strong and predictable legal system, which minimises risk for would-be homeowners. BIL says demand for real estate in France remains higher among its clients than for any other region in Europe.
The past two years have seen more Luxembourg residents buying property in France, because they can get there easily by car, but most big luxury homes are acquired by customers from the Middle East and UK residents.