Micro-BIC or Simplified Real ? Don’t get caught out by Saul Brownstein, tax solicitor at Sykes Anderson LLP solicitors.

Please note that taxation and national insurance is a complex subject and you should not take or refrain from taking any step without full independent advice on the particular facts of your case. The content of this article is of a general nature and no liability is accepted in connection with it.

Micro-BIC is the default taxation regime under which income received for letting out furnished French property is taxed. In other words, if you do not indicate any other preference, and your income is less than €76,000 per French tax (i.e. calendar) year, you will be taxed under this regime.

Under Micro-BIC, you are taxed on a fixed percentage of your turnover, being 28%. If you are UK tax resident the tax rate which is then applied is a uniform 25%; if you are French resident, the applicable rates are the usual marginal income tax rates. Micro-BIC takes no account of actual deductions.

As the Micro-BIC deduction is fixed, it benefits greatly those whose actual deductions do not approach the potentially generous 72% of turnover.

However, what if your actual deductions are greater than this ? Supposing the whole of your first year rent is exhausted by your costs? French tax law allows you to opt for a regime where actual deductions are taken into account. What’s more, if you are French tax resident, you can set off any loss you make against other income, for example your salary. This regime is known as the simplified real regime.

Remember to distinguish between income and capital expenses. An income expense is broadly one which is repeated on a regular basis, for example the monthly cleaning of a swimming pool. A capital expense is broadly one which relates to a one-off or irregular event, e.g. building a swimming pool. Only income expenses are deductible under simplified real. (Capital expenses are deductible for the purposes of French capital gains tax, which this article does not address.)

So where’s the catch ? Well, there are two catches; the first is that the election to be taxed under simplified real must be made by 1st February of the relevant tax year; the second is that this election is irrevocable for two tax years. Therefore, to know whether it is worth taking advantage of this regime, you must have an idea by 1st February of the relevant year what your income losses for that year and the next are likely to be, and particularly whether, on average over the two years or longer they are likely to exceed 72% of turnover. If they are, it may well be worth making the election.

Finally, be aware that if you are UK tax resident, your French income is subject to UK tax at your usual marginal rates (although tax already paid in France is deducted from your UK bill). Your income for UK purposes will be taxed in the usual way, with the usual deductions, irrespective of how it is treated in France. So always keep invoices and receipts.

(Micro-)foncier or (Micro-)BIC? Many people buy property intending to let it out. Some fail to realise a key distinction in letting French property lies in whether it is furnished or unfurnished.

The principal distinction is that the letting of furnished property is regarded as a business whereas the letting of unfurnished property is regarded as a “civil” activity, i.e. not a business activity. The treatment, both from a tax and a general point of view, is different.

The first consequence is that an SCI cannot let furnished property without losing its civil status and thus its tax transparency. This is because it is a société civile and so must have non-commercial objectives. There may be a way around this for UK residents, but if you intend to let furnished property, an SCI probably is not for you. Your notaire may not advise you of this.

Below, the thresholds remain the same whether one property is, or several properties are being let.

Unfurnished property brings in revenu foncier, property income. If such income is under €15,000 per annum, the landlord’s default regime is Micro-foncier under which he pays tax on 60% of turnover. Above €15,000 the landlord can opt for what is known as the real regime, where tax is paid on actual profit. It does not take an expert to work out that if actual profit is less than 40% of turnover, it may be worth opting for the real regime.

What deductions are available under real ? Repairs and maintenance, improvements, management expenses, interest on debts pertaining to the property, notably a mortgage, a general deduction of 14% (covering, inter alia, insurance and amortisation) and local taxes. If you are lucky enough to own a building of particular interest, your expenses may be deductible from general income, which is not usually permitted. You may not realise that your property is listed as having this particular interest !

Furnished property brings in bénéfices industrielles et commerciaux, where there are, here again, two possible taxation systems available to you: Micro-BIC is the default regime for those who turn over less than €76,300 per annum, and the real regime for those who exceed this (up to €763,000, although there are ways you can stay within Micro-BIC up to around €100,000).

Under Micro-BIC, you simply pay tax on 28% of turnover. The 72% deduction is uniform and can never be less than €305. Under real, you deduct actual expenses, but you also have to prepare accounts under French law. Permitted deductions include: general business expenses, mortgage interest, insurance, repairs and maintenance and amortisation.

A business of this sort can be registered in France as such if it meets certain criteria. This enables losses to be set off against any other French income (they can usually only be set off against income in the same class) and that a favourable capital gains tax position is obtained. However, other taxes, not least taxe professionnelle, then become payable.

Incidentally, if the property let is one’s principal home (only possible if you are French tax resident) it is exempt from tax. Otherwise, income for the letting of a room within one’s home (whether or not one’s principal home) is exempt up to €760.

If you start a business of this sort, it must be declared within two weeks to the relevant bodies, not least the French taxman.

UK consequences. If you are a UK tax resident, but letting French property, you have to pay French income tax, even if your clients are also UK resident and pay you in the UK. In most cases, the UK will also tax you on that income, with a credit for French tax paid. Some people mistakenly use Micro-BIC or Micro-foncier to work out their UK tax liability as well as their French liability. This is a mistake. The UK always requires you to calculate your tax liability based on actual profit. Although you do not have to submit these calculations if your gross turnover is under £15,000 per annum, you have to prepare them as they may be requested.

Careful consideration as to the best way of setting up your lettings in France is essential to maximising your net revenue.

Sykes Anderson LLP advises on all aspects of French and UK tax including the letting of French property, whether furnished or unfurnished.

Please contact Saul Brownstein on 020 7398 4700 or visit the website www.sykesanderson.com.