French Property Leasebacks - Frequently Asked Questions
These are general questions regarding Leaseback schemes. Please note that terms and conditions will vary between each individual development.
Do I have to be a French resident to purchase a leaseback property?
No. UK residents as EU residents can purchase leasebacks and you can purchase as many as you want
Is a Leaseback scheme similar to a time-share?
There is no similarity at all. When you purchase a time-share, all you are purchasing specific periods of time, which you can use within certain locations over a set number of years or in perpetuity. You have no capital growth interest in the property.
With a Leaseback development, you are the freehold owner of the property and you enter into a 9 year or 11 year lease agreement with a major management company to secure a guaranteed income. At the end of the lease agreement, the property is yours to do with as you wish within certain rules. You can sell at any time and enjoy the potential of capital gain on the property
Why is there a discount on the purchase price?
The French government has given tax breaks to developers in order to encourage them to build these 'Residence de Tourisme' developments. There is a great shortage of holiday accommodation in the summer and France earns much of its GNP from tourism. This discount is the refund of VAT, which is passed on to purchasers who invest in these developments. On new developments this amounts to a 16.4% discount off market price – effectively immediate significant equity in the property.
What other tax allowances are there?
Once again the French government, provide very generous tax allowances to investors which can be offset against the rental income, which is subject to income tax in France. Such is the extent of the allowances that, depending on the financing of the purchase your income could be tax free for at least the term of the leaseback contract. The allowances are:
Mortgage Interest: As with ‘buy to let’ property in the UK you may offset your mortgage interest against income (the mortgage having been taken out with a French lender on the Leaseback property).
‘Depreciation’: You are allowed to offset a fixed amount for ‘depreciation’ each year (This is 80% of the property purchase price over 20 years).
The ‘Rates’: You are even allowed to offset Tax Fonciere, the property rates against the income. Carry-Over: If your tax allowances exceed your income then the unused allowance can be rolled over into successive years for 5 years!
Capital Gains Tax: Leaseback property is treated in exactly the same way as other freehold property in terms of French capital gains tax. Tax is payable at 16%. However after 5 years you are allowed to reduce the amount of gain subject to tax, by 10% up to the 15th year when there will be no capital gain subject to tax.
Would I be subject to tax in the UK?
You must declare your income on your UK tax return. However your income will have been subject to tax in France and the generous allowances. Your French income will be dealt with by an accountant in France, who will provide the appropriate information for the UK tax authorities showing your income is tax paid or indeed negative.
With capital gains tax, the UK authorities will take an interest. Any gain after 10 years is subject to 40% relief and net of any tax paid in France.
Are all leasebacks new building developments?
No. The majority are new constructions or totally refurbished developments defined as new. However some resale leasebacks are available. These are subject to exactly the same tax treatment and leaseback contracts as a new build other than the VAT on a resale will be c.5-7% rather than 19.6%.
Who will look after my property during the Leaseback period?
The management company manage all of the properties on the development and, because of the high standards required, all properties and their grounds are maintained in perfect order during the 9 year or 11 year period.
The added benefit of these schemes is getting the property fully furnished and fitted with kitchen and bathroom appliances, and knowing that your property is not left empty and unattended for weeks or months at a time.
Who is responsible for paying all the bills during the Leaseback period?
All the bills are paid for by the management company. They are responsible for all rental management costs, utility bills, and the upkeep and general maintenance of the property during the term.
The payment of local 'Taxe foncière' (local rates) would be your responsibility as the owner, however this can be offset against your income. Even in the expensive South of France, a 2-bed apartment in the ‘tax fonciere’ may be no more than say €300 pa. No 'Taxe foncière' is due on new properties for the first 2 years.
What happens if sell the property before the end of the Leaseback term?
As the freeholder of the property, you can sell it at any time. However, you would have to take into consideration that you would be selling the property with the residue of the Lease term in place for the new buyer, and whatever period was remaining on the lease would have to be reflected in the sale price.
Is the rental income guaranteed?
The rental income is guaranteed throughout the period and is usually paid every 3 months in arrears. The rental companies who pay the rent are usually large holiday companies with substantial numbers of clients and assets. Often the income will be indexed linked usually against INSEE Index of Construction Costs. The rental is not guaranteed by the French Government.
Would I get a higher rental return if I bought a similar property and let it myself?
Perhaps, but there are three points to consider. Firstly, you need to generate the rentals yourself. Should you use a managing rental agent, you will find that they may charge up to 25% of your gross rental income. Secondly you would be responsible for all maintenance bills, pool cleaning, gardening, apartment cleaning, changeover costs and arrangements with the property between lets and dealing with emergencies associated with the property. Last but not least, you could not guarantee your annual rental income as with the leaseback contract.
What happens at the end of the Leaseback period?
Most investors renew the lease agreement with the holiday rental company. Some schemes allow a shorter renewal period for greater flexibility. Alternatively you may sell the property and benefit from the preceding years’ capital growth
When I book my preferred weeks, will I be able to live in my own property?
As long as you have booked on time, you will usually be able to live in your own property. If you are late in booking, it may have to be another similar property.
What happens if I cannot use all my allocated weeks?
Owners often arrange to sub-let the property, although you would have to do this privately. Some Leases restrict this.
What happens if I wish to use more than my allocated weeks?
Generally you would get a discounted rate on any extra weeks you required over and above those allocated to you.
Can I use the property during the off-seasons?
Generally yes, but a fee will be charged, usually a discount is given on the list price from the rentals company and this will be subject to the individual schemes.
What mortgages are available for leaseback property?
Purchase can be financed by a repayment mortgage over 10 to 20 years. Generally the maximum mortgage available on a leaseback is 80%. Long term fixed mortgages are available, usually up to 15 years. Mortgages must be paid off by age 70.
How much cash would I need to buy a leaseback?
From above therefore you would need to find a minimum of 20% cash plus costs of purchase (notaire’s fees, land registry etc); these will amount to around 4% for a new property and 8%-9% for a resale property
Do I pay interest on a mortgage on a leaseback as stage payments are made?
Many leaseback properties are bought off plan 12-24 months before they are complete, and often the bulk of the mortgage is required before final completion. In these cases there are French mortgage companies who offer a grace period called "franchise" during the construction of the property. This arrangement lets you defer the full mortgage repayments during the construction. You pay only the life insurance and a very small percentage of interest on the amount of money borrowed
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