property sales drop sharply as new 20% tax looms

Sales of new build properties in France fell steeply in the first three months of 2011.

Volumes dropped 24 per cent in the first quarter of the year compared to same period in 2010, according to new data from the federation of French property developers (FPI).

The worst areas affected were Lyon, the third largest city, the region of Brittany and Provence in South West France. Sales fell 16% in Paris.

The only region to buck the trend was the Cote d'Azur. Sales of new homes on the Mediterranean coast were up 12 per cent compared with the first three months of 2010.

Nick Leach, managing director of Pierre & Vacances puts the change down to a winding down of tax incentives aimed at local buy-to-let investors.

“Our sales are slightly down on last year. Mortgage rates are beginning to creep up which is having some effect but the main reason is probably the tapering off of government tax relief offered in the Loi Scellier legislation in 2009”.

Loi Scellier allows French investors to offset rental income on properties worth over £300,000 against income tax. The amount of tax relief decreases over time.

New tax on property rental income proposed

The news of the drop in sales volumes coincides with the news that a draft law is being debated by the French parliament to levy a 20% tax on the rental income of non-resident second home owners.

The draft, which was approved by President Nicolas Sarkozy's cabinet on Wednesday and is expected to pass parliament in time to become law in 2012, says second home owners who don't rent out their properties should help pay for French public services.

It is part of a package of measures to cut France’s yawning budget deficit after an increase in the threshold for a supertax on the rich.

EU legal challenge

Although the law has been written so as not to apply only to foreigners (it also applies to French citizens who have moved abroad), it is likely to face legal challenges on the grounds it is discriminatory.

The French parliament is due to vote on the tax reform bill in July.

Source: Global edge