British owners of vacation houses in the Dordogne Region have a tendency to believe French tax does not matter to them. It can come as a shock when they’re informed on a sale that French cgt will have to be paid. It may come as a further surprise when they understand the circumstances pertaining to deductible capital expenditure. But the real sting in the tail is paying someone else to verify the figures they produce.

The basic principle

Capital gains duty is levied on the variance between the purchase and sale prices, less permitted capital expenses. The purchase cost is increased by the agency fee and notarial costs in order to give the true cost of purchase. The sale price is decreased by charges incurred in connection with the sale – principally the survey costs associated with the obligatory “vendor’s pack”. The difference between these two numbers will deliver the gross capital gain.

Deductible costs

A seller will be able to subtract from the gross capital increase certain capital expenses – subject to conditions. Firstly, the costs must relate to “construction, reconstruction, enlargement or enhancement”. Construction, reconstruction and enlargement are easily understood: they will include the extension or reconstructing of the property or building. “Construction” will extend to the installation of a swimming-pool.

The deceptive term is “improvement” – the french phrase applied is actually “am?lioration”. You would have believed this wide-ranging enough to cover replacing kitchens and bathrooms. However, “improvement” means putting in equipment or even raising the degree of comfort and ease without changing the actual structure of the residence. Installing an elevator, central heating or perhaps air-conditioning are recognised as improvements, as are the installing of a new bathroom. The refurbishment of an existing kitchen area in that Dordogne home of yours may well however not be eligible.

Secondly, the work involved must have been carried out by a French-registered tradesman. You cannot deduct materials you’ve bought yourself even if they are to be used by the tradesman. Thirdly, you must be able to produce supporting proof of the actual expenditure in the form of invoices from the tradesmen concerned, and bank statements showing the payment.

If you are unable to satisfy these conditions, you can use instead a lump-sum allowance for expenses of 15% of the original purchase price, net of agency percentage and notarial charges. Subtracting allowable capital investment from the total capital gain brings you to a net amount.

Period of ownership

There exists then a further allowance based on the time period of ownership. For every full 12 months of ownership after five years the gain is diminished by 10 per cent. This means that if you own the property for 15 years or more no cgt will be payable within France.

Lump sum allowance

Once you have calculated the net capital increase you are allowed to deduct from it a fixed sum of 1,000 euros per individual owner. i.e. when the sellers are a married couple they will be able to withhold 2,000 euros.

Sting in the tail

Some of our English clients, selling their Dordogne homes, find the conditions for deductible expenses not only baffling but difficult to comply with particularly where they’ve brought in foreign labour or carried out work on their own. Or they may not have retained the details needed by method of proof. But the real sting in the tail comes with the necessity to hire a French-resident tax agent in the case of all sales above a threshold of ?150,000 even if you are making a capital loss.

The tax representative takes on personal liability to the French tax authorities for the correctness of the return. And it goes without saying that he will charge a fee. In a recent clear-cut case that we have had, a vendor selling at a considerable capital loss has had to pay for the tax representative close to ?1,000. If non-residents resent the system in the first place, the cost of a tax consultant adds insult to injury.

It has been said many times that the Dordogne region of France is without equal. Take a look at a variety of Dordogne Property and dream about that place you’ve always dreamed of? The website of MCM Dordogne Property: www.riberacproperty.com has an extensive selection of properties available just waiting for the chance to push you into fulfilling the dream.