Optimising Tax Benefits with a French Mortgage
Originally posted on & updated on 15th October, 2024
Acquiring a French property with a mortgage offers several tax benefits, including income tax and succession tax. This article outlines the main advantages of financing the purchase of your dream house in France. Whether you’re a first-time buyer, a seasoned investor, or simply looking to secure a piece of French paradise, understanding the tax advantages of a mortgage can help you make informed decisions and maximise your financial situation.
Optimising Tax Situation with a Mortgage
As you planning to buy a property in France, it’s essential to explore all the financial aspects, including the potential tax benefits. By leveraging a mortgage, you can not only spread the cost of your investment over time but also take advantage of various tax incentives that can significantly reduce your overall financial burden. From deductions on interest payments to strategic planning for inheritance, a well-structured mortgage can offer substantial savings and peace of mind. Read on to discover how a mortgage can provide valuable tax benefits and help you achieve your financial goals when buying or investing in France.
Income Tax
Those renting out a French property are subject to French income tax on their rental profits. Allowable expenses are deducted from the rental profits. Expenses are deductible from rents only if those expenses are incurred ‘wholly and exclusively’ for the letting business.
Allowable expenditures include mortgage interest payments. Hence, if you acquire a French buy-to-let, you can deduct mortgage interest against rental income, reducing the taxable profits.
UK residents renting French property are also subject to UK income tax on their French rental profits. Again, expenses incurred ‘wholly and exclusively’ for the business of the letting are allowable against the rental profits, however this generally does not include mortgage interest payments.
Instead, 20% of the loan interest paid during the relevant tax year is generally deductible against the UK income tax liability (i.e. not against the rental income).
To avoid double taxation, UK residents may offset the income tax and social charges paid in France against the UK income tax due on their French rental income.
Real Estate Wealth Tax (REWT)
REWT is a tax on immovable property. You will be liable to pay REWT if the net market value of your household’s taxable real estate assets exceeds €1.3m as of January 1st. Non-French tax residents are only taxable on French properties, while French residents are taxable on their worldwide properties.
In determining the taxable value of your real estate for REWT purposes, debts (whether secured by a mortgage or not) existing on 1 January of the relevant tax year are deductible, provided they relate to the purchasing, repairing, improvement, construction, reconstruction or extending of a real estate asset.
Therefore, if you acquire a French property and finance the acquisition with a French mortgage, the outstanding debt can be deducted from the value of your French property when calculating your REWT liability.
To avoid abuse of the rules, interest-only loans relating to acquiring an asset are not fully deductible but have to be amortised on a straight line over their terms. When the term is not specified, it is deemed 20 years. For clarity, this does not apply to, say, construction debts.
A Practical Example
You acquire a €10m interest-only loan on 31 December 2018, with the capital repayable in 10 years. The deductibility of the loan is decreased by 10% for each complete year. As a result, you could offset €9m in 2020 (i.e. 90%), €8m in 2021 (80%), €7m in 2022 (70%), etc.
Succession tax
French properties are always liable to French succession tax, irrespective of the deceased’s domicile position.
Debts and liabilities are deductible from the value of assets for French succession tax purposes if they represent amounts owed by the deceased at the date of death. This reduces the exposure to the French succession tax.
When the deceased was non-French domiciled, only debts secured against assets subject to French succession tax are allowable. In the case of a UK-domiciled individual, a mortgage secured against a French property is allowable.
For example, assume an individual dies, leaving a French house worth €500,000. A mortgage of €100,000 is secured against the house. The mortgage is set against the value of the house. The succession tax value of the house in the estate is reduced to €400,000.
French properties are also subject to UK inheritance tax (IHT) when the deceased was domiciled in the UK. Again, debts and liabilities are also deductible for IHT purposes. The French succession tax can be offset against the UK IHT due to the same asset to avoid double taxation.
Set Up Transfers with Currency Specialists
One effective way to save money when buying a property abroad is using currency transfer experts for your deposit and regular monthly payments. Our money transfer specialists can help secure competitive exchange rates and avoid the high fees often associated with traditional high-street banks. By locking in favourable rates, you can minimise the impact of currency fluctuations and ensure that your payments are more predictable and cost-effective. This can result in significant savings over the long term, making your property purchase more financially manageable.
Expert Tax Advice
Our legal expert, François Mouniélou, specialises in taxation, wealth tax, succession, etc.… for property owners and investors in France. François has extensive knowledge of the French tax system. Do not hesitate to contact him directly for more information or to book a consultation.
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