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Following a statement made on 29 August 2014 by Mr Manuel VALLS, the Prime Minister, the system of capital gains on property arising from the sale of building land has been amended to provide tax relief. In addition to aligning with the allowance scale for built property (I), an exceptional allowance of 30% (II) has been introduced by the tax authorities.

I. Alignment with the allowance scale for built-up property

Since 1 September 2014, disposals of building land have benefited from the same allowance system as that for built-up property. This more favourable allowance system results in exemption from income tax after 22 years and 30 years for social security contributions.

More specifically, for income tax on capital gains (19%), the allowance is calculated as follows:

- 6% for each year of ownership after the 5th and up to the 21st ;

- 4% for the 22nd completed year of ownership.

The allowance is therefore 100% after 22 years of ownership.

As for social security contributions (15.5% tax), the allowance is determined as follows:

- 1.65% for each year of ownership after the 5th and up to the 21st ;

- 1.60% for the 22nd year of ownership;

- 9% for each year after the 22nd.

The tax base for social security contributions is therefore reduced by 100% after 30 years of ownership.

In addition to this general deduction, the government has introduced an exceptional deduction of 30% for the exclusive benefit of sellers of building land.

II. Exceptional 30% allowance

This announcement is rather paradoxical when you consider that the government tried twice, in the 2013 and 2014 Finance Bills, to abolish any system of tax relief for sales of building land! At the time, it justified doing away with the system on the grounds that it wanted to avoid the retention of land caused by an allowance system that encouraged people to hold their property for thirty years. This over-taxation of building land sales would have had the opposite effect, with owners waiting for better tax treatment, especially as the capital gains regime has been changed every 6 months for the last 3-4 years!

Aware of its mistake, the government has reversed course by introducing this exceptional 30% allowance, which is used to calculate the net capital gain after applying the general allowance rules explained above.

For its part, the tax authorities have clarified the comments made by Mr Manuel Valls. Transfers of building land covered by a preliminary agreement (promesse de vente or compromis de vente) with a definite date between 1 September 2014 and 31 December 2015 are eligible for this allowance. The final sale must be completed no later than 31 December of the second year following the year in which the preliminary contract became legally binding (the date on which the contract was registered with the tax authorities, for example). This relatively long period is due to the often lengthy time it takes to process a building permit that has been cleared of all appeals.

To qualify for the 30% allowance, the tax authorities specify that the purchaser must not be a spouse, a partner in a civil solidarity pact, a notorious cohabitee, or an ascendant or descendant of the vendor or one of these persons.

A legal entity of which the seller, his spouse, his partner in a civil solidarity pact, his notorious cohabitee or an ascendant or descendant of one of these persons is a shareholder or becomes a shareholder at the time of the sale, is also ineligible for the allowance.

It should be pointed out here that there is no law or legal text governing this exceptional 30% allowance, which is the result of a simple declaration by the Prime Minister! The tax authorities have taken up this declaration and clarified certain points in the BOFIP (Bulletin Officiel des Finances Publiques). If, for example, a law contradicts the position of the tax authorities, the taxpayer will not be penalised. In fact, the rules published in the BOFIP remain enforceable against the tax authorities.