French house prices warning for British owners already hit with 15% tax hike,,,

Britons with homes in France who already face a substantial tax hike on any profits they make if they sell are also at risk of a property slump as transactions dry up.

A perfect storm is said to be blighting the market across the Channel. According to a report in the newspaper Le Parisien, property sales are being driven down by a sellers refusing to cut asking prices, higher taxes from the new French Socialist government, tighter credit conditions and would-be buyers stalling to see if house prices will fall.

The report claimed 'the market is in freefall' with estate agents and solicitors reporting sales of previously owned homes down between 17 per cent and 40 per cent since the start of the year.

In the gite: New French leader Francois Hollande has imposed tax hikes on the wealthy and overseas owners of French property.

British owners of French property have already been hit this summer with the imposition of a 15.5 per cent extra social charge on profit on their homes, which cannot be offset against their UK capital gains tax bill.

Signs point to France suffering the same property market stagnation as Britain, where prices have failed to fall substantially, thanks to low interest rates propping up owners’ finances, but sales have dived.

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SIMON LAMBERT: France will still remain tempting to British buyers

French property is still likely to look attractive to British buyers even with the market catching a cold and higher taxes if they sell.

Most of those still buying in France will aim to own their property for many years and are unlikely to be trying to striking it rich on it.

Instead they are looking for the good life that France is still seen to promise, relaxed days and evenings, good food and wine and, of course, better weather - something likely to be heightened by our dire summer.

British buyers already buoyed by the pound's revival may see current weakness as an opportunity to target a bargain. The view among such buyers is that although prices could drop in the short term, in the long-term they will rise again.

Own a property for the long-term and buyers will also see their French capital gains tax bill fall thanks to taper relief and after enough time they will simply end up owing HMRC the 28 per cent due here anyway.

Mortgage rates for those looking to buy are also good. John Busby, a French mortgage expert at French Private Finance, has highlighted the long-term nature of French mortgages, with current deals available including a 20-year fixed rate mortgage at 3.85 per cent for those with 20 per cent deposits.

He said: 'The ability to fix your mortgage interest rate at under 4% for 20 years is a holy grail for many buyers. Effectively, you are paying under 2% mortgage your mortgage once you take out inflation.

'If you are looking for long term value and low risk France has a lot to offer. The current combination of soft property prices with such excellent mortgage products mean there are bargains to be had in spite of the recent tax changes.'

However, French consultancy PrimeView painted a more pessimistic view earlier this summer, telling the Telegraph that house prices in France were at the top of a bubble and could fall by 40 per cent over the next five to ten years.

Another study by The Economist, based on comparing rents and average wages against house prices - and then plotting this against historic norms, suggested the French property market was one of the most over-valued in Europe. The market was said to be 47 per cent too high.

Estate agents quoted in Le Parisien said high prices had squeezed buyers out and unless sellers were willing to lower their expectations their properties would be left on the shelf.

Patrick Jolly, of group Particulier a Particulier, said prices 'have reached such a level that buyers simply can’t keep up'.

As with the British property market, however, homeowners are reluctant to sell below what they believe their property is worth – leading to a stand-off between sellers and buyers.

Frederic Monssu, of the Guy Hoquet agency, said: 'Convinced that their housing is the most beautiful and because a neighbour has sold theirs for a good price, the sellers will not lower theirs. The result is that the transaction does not happen.'

Laurent Vimon, of estate agents Century 21, ruled out a ‘complete collapse in prices’ but said falls of 5 to 10 per cent could be on the horizon.

The report said that while prices in Paris had remained stable this year, they had fallen 3 per cent in Toulouse, Lille, Lyon and Nice and 7 per cent in Marseille.

French property prices have leapt over the past decade. PrimeView said prices across France were up 160 per cent since 1998, although household incomes were up just 35 per cent.

It added that changing demographics would drag on the market, as the ageing population meant an extra 1.2m net sellers every five years – identified as those over 58 – but a stable number of 33m net buyers.

The consultancy’s Pierre Sabatier said: 'Starting this year, the demographic structure will have a profound deflationary impact on property, reversing the last 40 years. We could see a vicious circle of falling prices.'

Britons hit by 15.5% social charge they can't offset against UK tax

A further dampener to the market in areas popular with British owners has come as overseas owners of French homes now also face higher capital gains taxes when they sell due to the addition of a 15.5 per cent social charge.

Down: Property sales in France have fallen substantially this year, the report in a French newspaper warns.

Previously, overseas owners from within the EU had been in a better position than French resident second homeowners, who had to pay this tax which goes towards services in France on top of 19 per cent French capital gains tax.

France’s new socialist leader Francois Hollande announced he would bring in the social charge for overseas owners in July, and this was recently agreed by the country’s Constitutional Council, despite claims it could be against EU law.

While those selling properties in France can offset capital gains tax there against the higher British rate of 28 per cent, HMRC says that they will not be able to offset this social charge against it – delivering an extra 15.5 per cent bill on top of what they must already pay.

Many will not end up paying the full higher charge, as the complicated French system of taper relief reduces the amount that capital gains tax and the social charge is levied on. This starts after six years of owning a property but was changed at the start of the year so that homes only become fully exempt after 30 years rather than the previous 15 years.

Owners pay the full amount for the first five years and then get a deductible allowance stepping up two per cent each year to Year 17, then four per cent a year to Year 24, then eight per cent a year until Year 30, when they get a 100 per cent deduction.

But even if you do get let off all your capital gains tax by the French taxman, you should still be paying the rest in the UK.

Britain’s flat rate capital gains tax is levied at 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers, however long you have owned an asset.

But the system adds your profit onto your annual income to decide whether you fall within the basic or higher rate tax brackets and then allows you to deduct your annual capital gains tax allowance of £10,600.

In practice this means anyone making a decent sum from a property in France is likely to pay the 28 per cent rate.