SCPI: how to pay less income tax?
The revenue generated by SCPI (real estate investment trust) shares is taxable as rental income. It is subject to income tax and national insurance contributions. However, there are solutions for reducing the amount of tax paid by investors.
Calculated taxation scheme or micro-property owner scheme
Generally speaking, SCPI share revenues are subjected to the calculated taxation scheme for property taxes, in the same way as a rental income from unfurnished property. Investors must enter the amount in a property tax declaration form (n° 2044 or 2044 S), which should then be attached to their general income tax form.
However, if the shares were purchased on credit, the annual loan interest and fee payments can be deducted from any received rental incomes. This means that the taxable base amount can be reduced. The resulting balance is added to any other revenue received by the investor per tax address such that it is submitted to the adjusted income tax brackets.
If, in addition to the shares, the investor owns a property that they rent out directly and their tax address receives no more than €15,000 per year in rent, they can rightfully apply the micro-property owner taxation scheme. In this case they will not have to complete a property tax declaration form. They should enter their rental income along with their other revenues in their income tax declaration form. The taxation authorities will then apply a fixed-rate deduction of 30% to the declared amount and submit the remaining 70% to the applicable tax bracket rate. In return for this, any loan interests paid out during the year, in the event of a credit purchase, will not be tax deductible. However the investor will be able to give up their micro-property owner status and apply the calculated scheme if it is more beneficial to them to allow for the loan interest fees.
How is payment at source applied?
Since January 2019, SCPI share revenues are subject to a payment at source system. The taxation authorities debit a monthly, or quarterly, tax advance amount from the investor’s bank account. The amount is calculated by applying the payment at source rate for the most recent rent income declarations for that taxation address; this is updated annually in September. The following year these advance payments are deducted from the final tax amount calculated using the standard or micro-property owner taxation schemes. Depending on the situation, the taxation authority will refund any overpayments or request payments of any balance due at the end of the year.
SCPI shares are subject to national insurance contributions
The revenue generated by SCPI shares is subject to national insurance contributions, at a global rate of 17.2% since January 2018, on the same basis as that for the income tax. These contributions are also paid at source. The taxation authority debits a second monthly or quarterly advance amount from the investor’s bank account which is balanced out the following year in the same way as for the income tax.
A fraction (6.8%) of the CSG (Generalised Social Contribution) paid can be deducted from the investor’s income tax. This deduction results in a tax saving proportional to the tax rate of the investor’s taxation address. The more the SCPI investor is taxed heavily the more CSG deduction will lead to a greater tax saving.
Ways to reduce your income taxes
The investor can purchase the bare-ownership rather than the full ownership of the SCPI shares. In this case, they will save money on purchase since they will benefit from a 20 to 40% deduction on the price of the shares. Most importantly, they will have no tax to pay during the property division period (usually 5 to 15 years) since they will not be receiving any rental income (only the usufruct) they will therefore having nothing to declare to the tax office.
Another solution would be to purchase the SCPI shares via a life insurance policy, to benefit from the advantageous tax conditions applicable for such investments. In this case the income tax (and national insurance contributions) will only be payable on withdrawal and this will be even lower since the life insurance will be old at the withdrawal date.
As with any property investment, there is a risk of capital loss that may be caused by fluctuations in property markets and/or currency exchange rates. Revenues are not guaranteed, they may rise or fall depending on how the trust performs. An SCPI is a long-term investment with a recommended investment period of 10 years. Liquidity is limited, the management company cannot guarantee the resale of shares. As with any investment, past performances are not an indication of future performance.