Irish owners selling French property must pay French capital gains taxbefore paying 20 per cent on the gain at home, writes Laura Slattery

Irish people buying property in France face higher tax costs than they would in other popular European locations for second homes.

Investors selling on French property and people with holiday homes who wish to sell up are charged twice on capital gains tax (CGT), because Ireland's double taxation treaty with France is so old, according to Mr Kieran Twomey, director of Kennelly & Twomey tax advisers.

"We do see the capital gains tax as something of a problem, because the treaty does not cover capital gains tax," Mr Twomey said.

Ireland's double taxation treaty with France came into effect in 1966, when there was no capital gains tax in Ireland.

The first round of negotiations for a new treaty are taking place at the moment, and Mr Twomey hopes a new agreement will be in place by 2005.

But a spokesman for the Revenue Commissioners said it could not put an official timescale on when the treaty would be completed.

At the moment, there is no "pound-for-pound" credit system for capital gains tax. Irish owners selling French property must pay French CGT, which has a maximum rate of 33.33 per cent of any gain. The net gain is then subject to Irish capital gains tax at 20 per cent. "That continues to be the situation up until we get a new treaty," said Mr Twomey.

For example, if the gain on the sale of a property is €1 million, French tax of up to €333,300 could be payable. The net gain would then be €666,700, making the Irish tax bill come to €133,340 (20 per cent of €666,700). The total tax payable is €466,640 or 46.64 per cent of the gain.

However, the 33.33 per cent rate of capital gains tax does not always apply to all of the gain. In France, CGT applies on a sliding scale, depending on how long the person holds the property.

For every year after the first two years, 5 per cent of the value of the gain is subtracted before any calculation of capital gains tax is made. So if someone owns property in France for 22 years, no capital gains tax will be payable.

If someone owns property for 10 years and then decides to sell on, there will be a 5 per cent reduction for eight of the 10 years. In this case, a total of 40 per cent would be subtracted from the gain.

So in the case of a €1 million gain, €600,000 would be taxed at 33.33 per cent, or a tax bill of €200,000 - an effective 20 per cent rate. The remaining €400,000 would be taxed at the Irish 20 per cent rate, leading to a total tax bill of €280,000.

The situation differs for inheritance tax, where the property owner receives a credit against Irish inheritance tax for tax paid in France. "It's normally the highest tax that you end up paying," explained Mr Twomey.

French inheritance tax applies at a rate of 40 per cent for family members and 60 per cent if the property is passed on to others, compared with a rate of 20 per cent here. So double taxation relief in this case does not mean that an Irish person inheriting property in France would pay the same as they would if they inherited property in Ireland.

Ireland has double taxation treaties in force with 41 countries, with negotiations for a further five countries completed and another three - Canada, Cyprus and France - in the process of renegotiation.

These agreements cover income tax, corporation tax and, in most cases, capital gains tax.

Double taxation agreements with other countries where Irish people tend either to buy investment properties or look for a holiday home, such as Spain and Portugal, are "all fairly modern treaties", according to Mr Twomey.

"France has the regime that tends to be the most expensive from the tax side," Mr Twomey added.

Other taxes that apply are income tax on any rental income and an annual wealth tax. This latter is typically about 0.75 per cent for a person with equity of €1-€2 million in a property and has a maximum rate of 1.8 per cent.

Each owner of a property has an allowance of €720,000 before wealth tax kicks in. This makes family ownership of property a good idea from a tax planning point of view, according to Mr Twomey.

At the seminar organised by L.K. Shields solicitors, Ms Susan Hardie, head of French property at Triplet & Associés, highlighted the complicated nature of French inheritance law, which focuses on protecting the rights of children and gives people much less discretion on how to divide their assets under their will.

Triplet & Associés is a French law practice with offices in Paris, Lille and Marseille. It specialises in providing English-speaking assistance to Irish residents wishing to purchase property in France.