In French law there is a complete exemption from capital gains tax (including social charges) on the sale of the principal residence.
An abundance of case law exists on what constitutes the ‘principal residence’, but the administrative doctrine states that it is the habitual and effective residence of the owner, where they live for most of the year.
In recent years, courts have ruled that there is no minimum period of occupation necessary for the property to be considered your principal residence, although unless there are extenuating circumstances a period of 6 months is normally required.
It is also possible to vacate your home and later sell it for it to still be considered you principal residence, provided the subsequent sale takes place within a reasonable period (which may be, say, a year) and active marketing has taken place. See our article Capital Gains Tax and the Principal Residence.
In a case recently heard in the French Court of Appeal, a couple purchased a property in 2001, from where they ran a chambre d’hôte.
A 'chambre d’hôte' is by definition, accommodation that comprises furnished rooms in the owner's home to accommodate visitors.
The couple sold the property in 2012 for €762,000 and claimed principal residence relief.
Although the sale was processed by the notaire on that basis, with no capital gains tax payable, the tax office later decided to review the assessment, as a result of which the couple were only granted relief on 23% of the surface area of the property.
The tax office made the decision on the basis that the remainder of the property was for professional use.
The couple contested the decision in court, claiming that the chambre d’hôte business had ceased before the sale of the property.
However, their tax return showed they had business activity in the year and neither had they declared termination of the business with the relevant authorities.
In the absence of registration of the property in the assets of the balance sheet of the business, the court considered that the property must be considered as personal assets. As a result, they could not obtain relief on the basis that the property was a business asset.
Consequently, the judges ruled in favour of the tax authority, confirming at 23% the surface area of the property permitted for principal residence relief.
Comment
The implications of this judgement would appear to be that only by terminating the business at least six months prior to sale of the property, whilst remaining in it, would it then become possible to obtain full principle residence relief. Alternatively, if the tax regime of 'regime reel' is used, it would be possible to obtain business relief on capital gains tax on that part of the property used for the business.
If you seek tax advice, you can contact our tax partner at French Tax Advice.
Ed Note: We will be taking a closer look at capital gains tax relief on the sale of business assets, including furnished lettings, in a future article.
Related Reading:
