Tax change to impact on European property market

From 1 January 2010 next year, companies and trustees managing investment funds in the Channel Islands, Isle of Man and British Virgin Islands will be able to invest in French property free of the French annual 3% tax on their open market value

22 July 2009

The dynamic of the European property market is set to change considerably in the New Year, with the UK potentially the biggest loser, according to Pierre & Vacances (P&V) Group.

From 1 January 2010 next year, companies and trustees managing investment funds in the Channel Islands, Isle of Man and British Virgin Islands will be able to invest in French property free of the French annual 3% tax on their open market value. This will radically alter the flow of funds within Europe.

In anticipation of the scrapping of the tax, P&V believe that funds that would otherwise make their way into the UK property market are already being earmarked for investment in France’s property market.

French property will not only provide added portfolio diversification for offshore investors but, with the investments being euro-denominated, a currency hedge. There are also a wide range of properties in France, such as alpine ski resorts and vineyards, which are bound to appeal to offshore investors.

The Pierre & Vacances Group, a listed French tourism property developer and manager, says that it has seen a sharp rise in enquiries from the three offshore territories since the beginning of the year, as investors brace themselves to move once the tax is scrapped.

“This seemingly small tax change is already big news in the investment community, with many private and corporate investors approaching us in advance of 1 January”, says Nick Leach, head of Pierre & Vacances Property Investments, UK & Ireland. "Suddenly, a big reason for not investing in France will be removed and the effect could be dramatic as more and more investors catch on."

David Anderson, a chartered tax adviser at London-based Sykes Anderson Solicitors, adds: "The removal of this tax on 1 January will have a very positive effect on the French property market, specifically investment property, but could have a very negative effect on parts of the UK property market.

“From the New Year, a pool of capital in the Crown Dependencies will, for the first time, be able to flow, uninhibited, into France, with quality French property in good locations likely to do particularly well. So far, this looming tax change has passed largely under the radar, but even before its implementation it is already beginning to change investor mindsets. We have already exchanged contracts for several channel island investors on high value French properties, who are aware exclusive French properties will soon be harder to acquire as more wealthy buyers enter the market."