French SCI properties and UK residents

French SCI properties and UK residents

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It is common for UK residents buying a home in France to buy them using a Societe Civile Immobiliere (SCI) to acquire the property).

In France for tax these SCIs are tax transparent, that is, the individuals involved are taxable as though the SCI did not exist.

In the UK however I understand that an SCI is opaque for tax purposes, that is, the actions of the SCI are its own for tax, 

This creates lots of apparent problems.

1. A) On whom is the income taxable in the UK if the property is ever let? I have read that it should be returned as income of the individual owners and that seems a common sense solution as the rents will in practice be paid to the individuals and not to the SCI and the expenses will be paid by them also; also an SCI in French law is, I understand, legally banned from carrying on a business. B) Does a form 17 have to be filed to allocate the income to the individuals in their equitable proportions? C) If interest is incurred on a loan taken out to buy the property but this is not secured on the SCI property, is that interest deductible in principle from the rent?

2. A) How are capital gains to be calculated? The costs will have been borne by the individuals but the property is in the SCI. Is it possible to have a capital loss? I find this very confusing to think about. B) Also can such an SCI property be the subject of a Main Private Residence claim (if switched in the proper manner)?

This situation must have arisen many times in the past, but I can find little written about it and have found so far nothing on the UK capital gains side.

Can anyone enlighten me on how it all works?

Replies (5)

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By Montrose
22nd Jan 2015 13:22

SCI

HMRC do treat SCI as opaque-see INTM180030

The underlying income would be directly assessable on  the owners under ITA s720

Normal tax principles would apply so iunterest should be allowable if purpose of loan was to acquire the proiperty-security is irrelevant.

TCGA s13 would apply if property is sold at a profit.A claim under s13(5)(cb)(ii) might apply [see my query yesterday].

Overriding question- can UK taxpayer argue that for UK tax purposes SCI is merely a nominee? If so, main reisdence relief could apply if not merely a holiday home .On  the question of holiday homes, see Trather and Another v HMRC, where there is a discussion on this subject. If SCI is not a nominee, then main residence relief cannot apply.

French tax advice may be advisable given that rental income arises there.

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Portia profile image
By Portia Nina Levin
22nd Jan 2015 13:29

ITA section 720, TCGA section 13?

Are you not assuming that this French company (probably managed and controlled by UK residents) is non-UK resident?

I am not sure it will be.

I think the commercial reality is that the SCI is mere nominee for the individuals.

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Replying to Ian McTernan CTA:
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By Arbitrary
22nd Jan 2015 15:25

French SCis and UK residents

Thank you Portia for the comments and for pointing me at the two sections.

The problem is that HMRC view the SCI as opaque. I am reasonably content for the rental income and expenses to be on the UK personal tax return. But the capital gains position is what gives me the grief, especially if there is a capital loss (as I do not see how the individual can get relief for it). Also I do not see how an election for private main residence can be made with an SCI involved. 

Do you see any way for any capital losses to be relieved personally or for an effective election to be made?

 

 

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Portia profile image
By Portia Nina Levin
22nd Jan 2015 15:31

I did not point you at the two sections

The two sections are not relevant.

The point is that whilst the SCI has legal ownership of the asset, the individuals are the beneficial owners. It is the beneficial owners that are liable to the income and gains.

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By foxtrot
23rd Jan 2015 15:49

 

 

Off the cuff, SCIs are transparent for French tax, but NOT if you let the property furnished, when the company will be taxed under the French corporation tax regime

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