Dream second homes are now a nightmare

published 5 February 2013

Every time I go on holiday, I am, like everyone else, gripped by the need to look in estate agents' windows and dream of owning a house in the sun that I can fill with local bric-a-brac and return to every year. Fortunately, I tend to have neither the cash nor the depth of enthusiasm to tarry too long at any one window.

Why fortunately? Because I don't have a euro mortgage. I don't have to worry that Ryanair might cut flights to my favoured French airport. And I don't have to spend wakeful nights totting up all the extra taxes that cash-strapped governments are slapping on houses owned by non-residents. As The Sunday Times points out: "Britons who own holiday homes in France are facing a double whammy of higher mortgages and property charges."

The former is due to the recent slide in the pound it's just hit its lowest level against the euro for over a year. That means anyone who has borrowed in euros to buy a house is going to suffer in sterling terms. A €1,000-a-month mortgage was costing you £810 in December 2011. Today it's £855. There's no telling where the pound will go from here (it's a race to the bottom), but living with the uncertainty isn't much fun.

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Easier to tell is the direction of taxation: up. From this year, a new 15.5% "social tax" has been introduced in France. This comes on top of the 20% owners pay on rental income, and on top of capital gains taxes. There is also a sliding scale "additional tax" that depends on the value of your property.

The upshot? Someone who would have paid 19% capital gains will now have to pay up to 40.5%, says The Sunday Times (19% + 15.5% + 6%). Worse, while France has a double-taxation deal with the UK (taxes you pay in France are offset against those you pay at home), this doesn't apply to the social tax. As a result, the effective tax bill on a €100,000 gain would be €43,500 (or more depending on how much the house is worth in total).

It is hard to find an upside in this. The rise in taxation has pushed down second home prices in France so capital gains and hence capital gains tax takes have fallen. But as paying less tax means you got less gain, this won't do much to soften the blow.

One more thing to worry about. The taxman takes a dim view of foreign homeowners who rent their houses out as holiday homes and fail to declare the income on their tax returns HMRC's affluent unit announced a clamp-down last year. The lesson? If you have so far resisted the urge to buy your own place in the sun, you might want to keep resisting.

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.