France Plans Reform Of Property Tax Credit

by Ulrika Lomas, Tax-News.com, Brussels

06 August 2010

French Finance Minister Christine Lagarde has confirmed government plans to abolish the tax credit currently available for housing loan interest, and to replace the existing system with a ‘unique tool’ designed to support home ownership from 2011.

According to Lagarde, this ‘unique tool’ will take the form of an enhanced “universal” zero rate loan, which will be non means-tested and will be available exclusively for first-time buyers. Under the government’s plans, financial support will be increased for low-income earners in France, as well as for certain geographical areas and for the purchase of new housing. Details of the specific rates are due to be finalized in the autumn, Lagarde continued, with the aim of introducing the new measure at the beginning of 2011.

Defending the government’s latest proposals, Christine Lagarde explained that the new provision will replace the existing “minefield” of complicated aid currently available, which includes the tax credit on housing loan interest and the means-tested zero rate loan already in application. By simplifying the system, it will become more efficient, Lagarde emphasized. Individuals currently benefiting from the five-year tax credit will continue to do so, Lagarde explained.

Although the tax credit on home loan interest was one of the flagship measures of the tax package championed by the French President Nicolas Sarkozy in 2007, it has also proved to be a highly expensive tax break for the government, costing the state an estimated EUR1.6bn a year. Combined, the current zero rate loan and tax credit tax shelters represent a total cost for the government of around EUR2.8bn. The new measure is expected to cost the government in the region of EUR2.6bn a year.

In a bid to accelerate the rate of property transfer and to avoid the retention of land for development, the government is considering two possible options, Lagarde added. The options are to increase, rather than decrease, over time the amount of tax levied on capital gains derived from house sales, and to ensure a “systematic” rather than optional increase in land tax levied on building land, to encourage owners to build or to sell.

As regards a possible increase in the reduced 5.5% rate of value-added tax (VAT) accorded for housing renovation work, a decision will not be taken until September, Lagarde noted.

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