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To prevent the retention of land, the government has decided toincrease taxation on capital gains from the sale of building land! This phrase, which is difficult to understand, not to say stupid, perfectly reflects the government's approach to the 2014 Finance Bill.

This legislative aberration will undoubtedly lead to a large number of taxpayers, disgusted by these tax reversals, pulling out of the sale of land. So it's a safe bet that yet another reform of capital gains tax will be introduced in 2015, or even in 2014! In fact, the Prime Minister, Jean-Marc Ayrault, has already declared that he wants to "review" the French tax system...

Returning to the 2014 Finance Bill, which was approved by the National Assembly on 19 December 2013, it provides for the abolition of the allowance for length of ownership for capital gains on the sale of building land. This changes the previous system, which resulted in exemption from capital gains tax after 30 years of ownership.

In addition, during the debates on the 2014 Finance Bill, Members of Parliament decided that no transitional measures would be introduced. The new capital gains tax will apply to sales of building land that are definitively completed on or after 1 March 2014. It makes no difference whether a compromis or promesse unilatérale was signed and registered before 31 December 2013. It is the final date of the sale that will determine the tax regime. Given that the sale of building land involves a delay of at least 5-6 months between the preliminary contract and the final sale, notably because of the conditions precedent for obtaining planning permission and the expiry of the period for appeals by third parties, it will be difficult to avoid the new system.

Capital gains tax can be very high for the taxpayer, at 34.5% (including social security contributions). What's more, in some cases it can be combined with the two flat-rate taxes on first sales of land that has become suitable for building under article 1529 of the General Tax Code and the law of 27 July 2010.

Finally, it should be noted that the exceptional 25% allowance on capital gains on property introduced until 31 August 2014 does not apply to sales of building land.

It may be wise to bear in mind that the owners of these properties often own their main residence. They therefore rarely need to sell quickly, and waiting for a new reform will certainly be the preferred option.

To avoid capital gains tax, there are two other options available to the taxpayer.

The first, which is illegal, is to use kickbacks, which we do not recommend (see our article on this subject: kickbacks). Given the over-taxation that some taxpayers will experience as a result of this reform, the temptation will be great and there is a risk that bribes will multiply.

The second option, which is legal, can be considered when you wish to pass on to your children. Taxation on capital gains on property only applies to transfers for valuable consideration. A gift therefore does not fall within the scope of property capital gains tax. If you own a plot of building land valued at €100,000, it might be a good idea for your parents to make a gift of it to your children, who will then sell the land and divide the cash between them. Valued at €100,000, the land will be passed on to the children at the same value. When the land is sold, even if it falls within the scope of capital gains tax, no capital gains will be payable as long as the children sell for the same price. In a way, the capital gains will have been "laundered".

Initially intended to encourage landowners to sell, in order to promote housing construction and generate revenue for the State, the 2014 Finance Bill will certainly have the opposite effect. The motives behind such a reform are therefore incomprehensible, and demonstrate either incompetence or dishonesty on the part of the bill's promoters, particularly towards vendors who are engaged in a sale of building land that cannot be repeated before 1 March 2014. In the end, the latter are likely to be the only ones to pay for this reform; the others will wait for better days or opt for a bribe or a free transfer of their land.

All we can do now is hope that the Constitutional Council overturns this legislative nonsense.

UPDATE OF 30 DECEMBER 2013

On 29 December 2013, the Constitutional Council censured Article 27 of the 2014 Finance Bill relating to capital gains on the sale of building land, on the grounds of equality before the law and public duties.