THE WEALTH TAX 2018 – IFI
The IFI, major reform of the year 2018, replace the ISF “Solidarity Tax on Wealth” concerns all taxpayers (natural persons) whose taxable wealth (which we will define later) is greater than 1.3 million euros, we remind you that the thresholds of the IFI and the ISF are unchanged.
All taxpayers are not subject to the same tax liability, depending on whether their tax residence is established in France or abroad.
For taxpayers domiciled in France the tax liability is unlimited, they will be taxed on all their property and rights held in France and abroad.
For non-French tax residents, they are subject to a lower obligation since they are taxable only on property and property rights owned in France.
Of course all taxpayers, residents or non-residents are not concerned by the IFI only taxpayers whose taxable wealth is greater than 1.3 million are concerned by this measure.
The IFI is normally due on all property and real estate rights belonging to the debtor on 1 January of the tax year. (Excluded from the scope of the IFI is the value conferred on company shares and shares owning real estate used for the business activity of the entity holding them).
The IFI is an annual tax that will be every year and not once when the property is acquired.
The General Tax Code (hereinafter CGI) has not given a definition of what it means by property and real estate rights submitted to the IFI.
- However thanks to the doctrine we understand that it is;
- Undeveloped buildings: farmland, woods and forests, moors and building plots;
- Built buildings: whatever the assignment (residential use, or professional use);
- Buildings under construction;
- Real estate rights: usufruct, right of use, right to the lessee of a building lease.
- Lease and rental agreements are also taxable at the lessee less the amount of rent or royalties remaining due and the amount of the purchase option.
- The IFI also relates to real estate held through a collective investment scheme or via a redeemable insurance contract, as well as property and real estate rights transferred in trust or placed in a trust for their market value
The amount you will have to report in your IFI return will be the market value of the property, which is the normal price that a buyer would be willing to pay to acquire the property or rights.
We specify that there is no method imposed to determine the market value of real estate however the tax administration is based (most of the time) on the comparison method which is to study similar sales made in a close territory. (Software is planned for that: PATRIM; immobilier.notaire.fr).
To evaluate each property or real estate right it will be necessary to take into account the possible easements affecting these goods and rights but also the dismemberments possible (usufruct, bare property, joint ownership), but also burdened with various rights (well rented, well with an inscription mortgage, acquisition reserve for reasons of public utility).
Concerning the deductible debts which will increase the liabilities and thus come to reduce the taxable base of the IFI it is necessary to know that the I of the article 974 of the CGI (General Tax Code) enumerates the 5 main categories of expenses likely to create debts deductible of the IFI when these expenses remain to be settled or have been financed by a loan:
- debts relating to the acquisition of property and real estate rights (expenses for the acquisition of the property but also for the financing of the property such as transfer duties payable);
- debts relating to repair and maintenance expenses (these expenses concern the expenses used to maintain the property in state, and thus to maintain its destination according to its use, for example will be deducted the expenses of repairs following a water damage).
- debts relating to expenditure for improvement, construction, reconstruction or enlargement;
- the debts relating to the taxes due for the reason of these goods (is expressly excluded the charges due for the income generated by the properties namely the income tax and the tax of habitation) it is limited to the property tax, to the theoretical IFI;
- debts relating to the acquisition expenses of units or shares
The deduction of these expenses is also conditioned, to be deductible the debt must:
- To be effectively supported by the debtor on 1 st January of the tax year (by the taxpayer or spouse, or spouse, his or her minor child) this therefore presupposes that the debt must be borne by one of the members of the household tax;
- Be justified (in case of control the taxpayer must be able to justify this debt by any act, for example a loan agreement) to remind the debts that are uncertain are not deductible.
By way of example, bank loans for the acquisition of real estate are deductible, so if a debtor bears a real estate loan, he or she may deduct on 1 January:
- The capital remaining due on 1 January of the tax year;
- Interest due and not paid on 1 st January;
- Interest accrued on January 1st.
The loans to be deducible you must previously answer to a regime more restrictive than that known, certain debts they are not more deducible and of others are still deducible but you must answer to the rigorous regimes, ex: of the the debts contracted by the debtor itself next to his consort or near to a society checked by a member of the house; undersigned case of the loans next to near person, children, ascendancy, collateral) or undersigned near to entity checked by the family group)
Regarding loans in fine and this is the novelty of this year, the law comes to limit the amount of debt deductible January 1 of the tax year to the amount of the difference between the total amount of the loan and an amount equal to the same amount multiplied by the number of years since the payment of the loan is divided by the total number of years of the loan.
To understand this I refer to the following development:
Loans in fine are considered as depreciable today, “The debts mentioned corresponding to loans providing for the repayment of the capital at the end of the contract contracted for the purchase of a property or taxable real estate law are deductible each year for the amount the total amount of the loan minus an amount equal to the same amount multiplied by the number of years since the loan was paid and divided by the total number of years of the loan, “states article 31 of the finance law for 2018. ”
Development: normally if a loan in fine is taken over 10 years for example, it will make a deduction of 10% each year (Why 10%? Because 10 x 10 = 100 is the totality)
So for example the taxpayer had a property whose taxable net worth was 5 million, he made a loan of 5 million over 10 years, the first year his good is 5 million, the deductible liability was: 5 million – (10 % of 5 million) or 4.5 million, there remained only half a million to declare for the IFI.
For all contracts that did not provide for a repayment term, the law also came back on this point since now the indefinite loan contracts will be considered as ending after 20 years (from the date of grant borrowing).
In addition, the law provides for a limitation of the amount of deductible debts, in fact when the value of real estate assets or rights exceeds 5 million euros and the total amount of debts admitted exceeds 60% of this value, the amount of debts exceeding this amount. threshold is allowed in deduction only up to 50% of this excess. This limitation concerns all the debts mentioned in I, II and III of article 974 of the CGI. However, this ceiling does not cover debts that the taxpayer can not justify that they have not been spent for a primarily tax purpose.
Attention because here we use the term “mainly” and not “exclusively”, which is even more difficult to demonstrate for the taxpayer.
As a reminder, the IFI tax rate is as follows:
|Taxable net worth of the assets||Tax rate|
|If less than 800 000 €||0 %|
|If greater than € 800,000
but less than € 1.3 million
|If greater than 1.3 million €
but less than 2.57 million €
|If greater than € 2.57 million
but less than € 5 million
|If greater than 5 million €
but less than 10 million €
|If greater than 10 million €||1,5 %|
Last important information concerning non-French tax residents who would have paid a similar tax abroad.
If we have a strict reading of article 980 of the CGI is made, it is expected that IFI-like taxes, paid abroad, are chargeable to the IFI. However, this charge is limited to only those goods and rights held abroad for which a foreign tax has been paid and which is submitted to the IFI in France, this measure makes it possible to avoid double taxation.
Another clarification but the tax charged abroad will have to be calculated pro rata of the goods which will also be included in the base of the IFI in France, that is to say that it is quite possible that goods are taxed abroad but will not be included in the IFI base in France, so this part of the foreign tax paid will not be deducted from the IFI base in France (since the property not being imposed himself in France).
As a reminder, the foreign tax to be taken into consideration is that paid in respect of the IFI’s tax year in France.