Mitigating tax on rental income

There is always a solution to mitigate the tax you pay on rental income. The holiday letting tax regime systems allows owners to benefit from an amortisation system in order to decrease or totally eliminate the taxable revenue declared. Other expenses such as mortgage interest, furniture, fittings and accountants’ fees can also be deducted. In this way the net rental income can  be dramatically reduced and in some cases you can even get the VAT back on the property price and so obtain a 19.6% discount on the purchase price straight away by purchasing a French leaseback property.

There are two very efficient tax regimes that will make you benefit from an amortisation system that practically eliminates the tax liability on your rental income. Those regimes are called LMNP for “Loueur Meuble Non Profesionnel” and LMP for “Louer Meuble Professionnel”. Basically you have to rent your property furnished to claim for one of these tax systems. These regimes allow you to amortise the price of your property, furniture and fittings and to deduct the interest on your mortgage only if it has been contracted through a French bank.

Technically, the Tax Authorities will consider that 15% to 20% of the property price represents the price of the land which is not amortizable. So, the 80% which is left  can then be amortised at either 5% per annum over 20 years or 4% per annum over 25 years. Furniture and fittings can also be amortised at 10% per annum over 10 years. Thus, the amortization is deferrable which means that you are not required to use it as long as you have sufficient interest on your French mortgage or other charges to deduct. Some fees can be deducted from the rental income such as the accountants’ fees up to €270 per year and even one return journey from your home to your holiday property. Rental income can definitely be considerably decreased or even cancelled out completely by the off-setting costs associated with owning the property, rendering your income net of tax over a long period. However, a negative balance cannot be stocked to off-set income in the coming years so a good accountant is required.

Last but not least, there is also a possibility to get the VAT back on the property price. This can be complicated to manage as the property has to be considered as a holiday accommodation rented furnished. The condition is to operate as a “tourism operator” by offering a minimum of 3 services out of the 4 services required to be considered as a Hotel: Reception, meaning handover of the keys to tenants, cleaning service of the property, laundry or breakfast. Offering 3 of the 4 above services would give you the opportunity to get the VAT back on the purchase price and so realise a 19.6% savings in capital gain.