SCPI and property tax (IFI)
The transformation of the Wealth Tax (ISF) into the Property Tax (IFI) came into force on 1 January 2018, this aims to concentrate asset taxation on property rather than capital.
What this really means is that your financial investments, liquidity and personal property are no longer taxable. Only property and property rights of which you are the owner will remain so, this will include your SCPI shares.
The principle of Property Tax (IFI)
You are subject to the IFI if the net value of your property holdings, as evaluated on the 1 January of each year, is more than 1.3 million euro. To find out if you reach this threshold you must allow for all property and property rights that residents of your tax address (except adult offspring) own directly, and any property owned indirectly through company or investment trust shares. However, any property or property rights used for your principal professional activity are exempted from the IFI since they are considered to be professional properties.
The IFI value brackets are progressive, the rates increment by 0.5 to 1.5%. Be careful, even if the IFI threshold is set at 1.3 million, the tax is calculated from a total holding value of 800,000 euro. However, in order to limit the threshold effect inherent to entering the IFI bracket, a reduction is allowed for tax payers whose total holding value falls between 1.3 and 1.4 million. However, there is also a maximum limit, such that the total of your IFI, income tax and national insurance contributions does not exceed 75% of your taxable income.
How to evaluate your SCPI shares
You SCPI shares will only be subject to the IFI for their representative value within the taxable property or property rights owned by the trust company with whom you have subscribed to the shares.
To establish the amount to be declared, the coefficient of the ratio between the value of the property owned by the company (except for any property used for business purposes, considered professional property and not subject to the IFI) and the total value of all the assets owned by the company should be applied to the market value of your shares on 1 January. The result of this should then be multiplied by the withdrawal value of the shares on 1 January (for variable capital SCPI) or by their execution price on 1 January (for fixed capital SCPI).
If you purchased your SCPI shares on credit, the outstanding capital on 1 January of that tax year, will reduce their value by that amount for the IFI calculation. In the same way, you can integrate any debts contracted by the company to acquire taxable properties or to finance expenditure related to these properties. Rules have been set up to avoid any abuse. For example they forbid the integration of debts contracted within your family circle or debts contracted by a company of which you have a controlling interest.
To avoid these complicated calculations, the company to whom you have subscribed your SCPI shares will provide you with the taxable value of your shares for your IFI declaration each year. Simply multiply this value by the number of shares you hold to get the amount to be declared.
Division of ownership, an effective anti-IFI weapon
The ownership of SCPI shares can be divided up between a usufructuary and a bare-owner for a specific period of time (5 to 15 years). This division of ownership is especially interesting, in IFI terms, for the bare owner. In fact, the divided properties are only taxable in the name of the usufructuary for their full ownership value. However the bare ownership value of the shares is not included in the IFI taxable holdings of the bare owner.
CThis approach is therefore especially interesting for investors who wish to invest in walls without adding to the tax budget. An additional source of interest is that the bare owner receives no rental income during the whole of the ownership division period which also lightens the load on their income tax.
Finally, at the end of the division period, the investor recovers full ownership of their shares without incurring any further charges, taxes or formalities. Bare ownership purchase is an advantageous solution for investors who already pay a lot of taxes and do not need income in the short term. One should however pay attention to the non-liquidity of the shares during the division period.
In 2019, the IFI added 2.1 billion euro to the State treasuries, 600 million more than the minister of Finances initially forecast. 139,149 households were subject to it, 4.85% more than in 2018. It should be noted that the ISF (Wealth Tax) was in force until 2017 and added between 4 and 5 billion euro per year and concerned between 4 and 5 million tax payers.
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.