A tax change in the New year which allows certain real estate investors to avoid paying tax on certain properties in France is set to change the dynamics of the European property market, it is claimed. 
From 1 January 2010, companies and trustees managing investment funds in the Channel Islands, Isle of Man and British Virgin Islands will be able to invest in French properties free of the French annual 3% tax on their open market value.

This will radically alter the flow of funds within Europe and represents a genuine threat to any recovery in the UK property market while boosting the French market, it is claimed.

In anticipation of the scrapping of the tax, funds that would otherwise make their way into the UK residential and commercial property market are already being earmarked for investment in France.

French property will not only provide added portfolio diversification for offshore investors but, with the investments being Euro-denominated, a currency hedge. France also offers a wider range of properties to investors than the UK, such as alpine ski resorts and vineyards, which are bound to appeal to offshore investors.

Pierre & Vacances Group, a listed French tourism property developer and manager, said it has seen a sharp rise in enquiries from the three offshore territories since the beginning of the year, as investors prepare to move once the tax is scrapped.

‘This seemingly small tax change is already big news in the investment community, with many private and corporate investors approaching us in advance of January 1,’ said Nick Leach, Head of Pierre & Vacances Property Investments, UK & Ireland.

‘Suddenly, a big reason for not investing in France will be removed and the effect could be dramatic as more and more investors catch on.’ he added.

David Anderson, a chartered tax adviser at London-based Sykes Anderson Solicitors, also believes that the change will boost the French property market.

‘The removal of this tax will have a very positive effect on the French property market, specifically investment property, but could have a very negative effect on parts of the UK property market,’ he said.

From the New Year, a pool of capital in the Crown Dependencies will, for the first time, be able to flow, uninhibited, into France, with quality French property in good locations likely to do particularly well,’ he explained.    He added that his firm has already exchanged contracts for several Channel Island investors on high value French properties who are aware exclusive French properties will soon be harder to acquire as more wealthy buyers enter the market.