French homes

The worst nightmare of 200,000 Brits who own second homes in France looks set to be realised after newly-elected French President François Hollande announced he will increase taxes on foreign-owned second homes.

Tax on rental income is set to leap from 20% to 35.5%, while capital gains tax on property sales would rocket from 19% to 34.5%.

And the inheritance tax-free allowance between parents and children of about €160,000 (£134,000) - available to any child of the deceased – is expected to be slashed to €100,000.

The rise in tax on rental income will be backdated to Jan 1 this year while the capital gains tax hike will kick in from the end of July, giving shell-shocked owners virtually no time to sidestep the tax by selling their home.

The moves are part of a wider series of increases set be voted through in parliament within the next week, designed to accrue €7.2 billion (£5.8 billion) to plug a massive budget deficit.

Graeme Perry, a partner at law firm Sykes Anderson, which advises British citizens on French residences, said: ‘If the law is introduced, the effective rate of French capital gains tax will almost double for EU residents on their French property capital gains.’

Alex Henderson, tax partner at PwC, echoed similar sentiments: ‘Tax on foreign owned second homes focuses on the wealthy and avoids hitting your own electorate. However, the plans could breach EU laws if they discriminate against other EU nationals. There's likely to be a scramble as those Britons already looking to sell their French holiday homes try to do so before the imminent capital gains tax hike.’

Hollande has publicly decreed that the financial world was his ‘true adversary’. Such a stance has fuelled concerns that France’s wealthy will flee the country to less hostile tax states such as the UK.

The French PM also looks likely to introduce a marginal tax rate of 75% on incomes over €1m (£806,000) a year.

It led to PM David Cameron saying: ‘I think it's wrong to have a completely uncompetitive top rate of tax. If the French go ahead with a 75 per cent top rate of tax we will roll out the red carpet and welcome more French businesses to Britain.’

Another key Gallic tax proposal is to increase corporation tax according to the size of the company and redistributed profits. While no definitive figure has been settled on, it is expected to be around 35%.

Hollande also plans to abolish the tax exemption for overtime hours and scrap existing plans to increase VAT by 1.6% in October 2012.