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Leaseback - Some Questions and Answers
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Leaseback - Some Questions and Answers
25th May 2007
Introducing leaseback
Leaseback is a French government initiative to promote investment in tourism-related developments. For qualified properties, the French government refunds to purchasers the 19.6% VAT usually due on new developments.
In return for this bonus, amounting to nearly one-fifth of the purchase price, the purchaser leases his/her property for a minimum of nine years for use as a tourist residence.
There is a quid pro quo. Investors are guaranteed a rental income, and their investments help provide an efficient letting structure for tourist developments.
Note that a leaseback property, unlike a timeshare development, is freehold property: you are the owner and freeholder.
How long has leaseback been around?
Leaseback investment has been in operation for over 20 years. If and when the French government decides that the scheme's objectives have been achieved, it is possible that it will end this incentive.
How does it work?
After purchasing a property, you lease it to a company that is responsible for letting/maintaining the property for an agreed period. The leaseback company guarantees you a rental income - usually fixed and indexed to the cost of living - for that period. You have an income irrespective of the occupancy rate in the complex, which is the company's problem. Some companies pay quarterly, others annually.
How hands-on is letting a leaseback property?
Leaseback properties are sold fully-furnished. Your leaseback company pays management fees and such expenses as maintenance, repairs and utility bills. For the duration of the lease, the leaseback company is responsible for decoration, upkeep of furnishing and fittings. At the end of the lease, the leaseback company is obliged to leave your property well-maintained, subject to the normal wear and tear over such a period.
What if anything happens to the leaseback company?
Under French law all leaseback companies must have professional indemnity insurance.
What is the return on investment?
On average, it is usually between 3% and 5% from rental income, plus capital gains from any appreciation in the value of the property. Some properties will increase in value more than others; get advice on this.
Can I sell the property at any time?
Yes, but you may have to repay a portion of the VAT. The amount payable depends on how long you have owned the property, and any repayment you make is passed on to your purchaser. The VAT rate is 19.6% over 20 years. If you sell after 10 years, you repay 50% of the VAT.
What are the tax implications?
Potentially, there are four types of tax liability:
French income tax on rental income. For non-residents, this is at a base rate of 25%.
Capital Gains Tax, at a rate of 16% for EU residents. There is progressive relief on this after a property has been owned for longer than five years. After 16 years, you pay nothing.
Property tax. An owner pays tax foncière, while an occupier pays taxe d'habitation.
Wealth tax is payable on certain assets held in France worth more than €720,000.
Buying through an agent, such as Marlborough International Property, will get you valuable advice, and a tax-effective package: under certain arrangements, for example, investors are not liable for French income tax.
Any other legal issues?
Under French law, children and other beneficiaries are protected in wills. You do not have absolute discretion about whom you may wish to leave the property to. However there are legal ways to deal with this issue; contact us for details.
Aside from the purchase price, what legal and other expenses will I have to pay?
Allow for notaire's fees of around 3% for new-built and 6.5% for resale (this includes the French equivalent of stamp duty). Also there are registration fees of 0.5-1% of the purchase price when a mortgage is taken out against the property. VAT reclaim through a specialist French firm costs €900. Mortgage agents can charge 1% of the loan amount.
How long does the purchase process take in France?
About two to three months from signing of contract to completion of sale.
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