coin-gaucheFrench Leaseback FAQs coin-droit

Q: What exactly is a “leaseback” property?

A: The “leaseback” arrangement is a tax-efficient property investment scheme, unique to France, designed to provide supplementary retirement income and, in some cases, a holiday home for a few weeks every year. A property sold under what is known as “the leaseback scheme” is commercial property and the lease contract guaranteeing the rental income is governed by French commercial law. Lease contracts usually run for 9 or 11 years and are renewable by tacit agreement. ”Leaseback” refers to a tax status that applies to the owner of the property (in France, this is known as LMNP, Loueur en Meublé Non Professionel) and affords the owner a certain number of tax benefits, beginning with the full refund of the 19.6% VAT on new build property. Only certain types of property can be purchased under this status: listed tourism residences, business residences for corporate travellers, retirement homes (with or without medical care) and student halls, and these have to provide a certain number of services such as linen replacement, cleaning and managed reception in order to qualify.

Q: Are you official estate agents registered to sell properties in France?

A: We are a fully registered French company with our head office in London and we hold a French realtors’ licence. Recommending investment products is a controlled profession in France and we are qualified to provide our customers with transparent and responsible advice. We also carry full professional liability insurance, which is a legal requirement in France. We specialise in leaseback properties and have an in-depth knowledge of how the scheme works - thanks to this, we know each one of our properties well and can offer well-informed advice about all aspects of owning a leaseback property in France.

Q: What services do you provide and what are your fees?

A: We are here to ensure that you understand the full implications of a leaseback investment, help you to identify the right property investment to meet your personal requirements and supply you with up-to-date information concerning available properties. These properties are nearly always purchased off-plan and we are able to send you every detail, including floor plans, by e-mail. When you have found a suitable property, we can assist you with your mortgage, if necessary, and guide you through the purchase process until completion. After completion we offer a fully-comprehensive after sales and follow-up service to all our customers.

Q: How is the “yield” calculated and how often is the rental income paid?

A: The yield is always a percentage of the value of the property excluding VAT, however the value of the property will sometimes include the cost of the furnishings and sometimes not. This depends on the method the management company uses for making its calculations and should be checked before purchasing. Rent is usually paid quarterly in arrears, but sometimes annually.

Q: Is the rental income indexed to inflation and if so, how?

A: Yes, the rental income is indexed annually as required by French law. However, you should note that in most cases this increase is only reflected every three years, so your rental income will go up every three years by the sum of three years’ rise in index. The index figure now used is the IRL (Indice de Reference des Loyers), which is published quarterly by the INSEE, France’s national stastistics bureau and which is usually between 2.5% and 3%. It should also be noted that some management companies will cap the increase to 1.5% or 2% and this should be checked prior to purchasing. As a rule, business residences offering less facilities will offer a higher level of indexation than tourism residences.

Q: Which regular costs and expenses are covered by the management company?

A: The management company insures the property, pays the taxe d’habitation (council tax) and covers all maintenance expenses and repairs.

Q: Does the owner have to contribute towards the management fees at all and are there any other bills to be paid?
A: The taxe fonciere (landowner’s tax) is due by the owner of the property and applies to any property in France, whether leaseback or otherwise. This generally amounts to about one month’s rental income, but the exact amount will depend on the location of the property and this can be checked prior to purchasing. You will also have to pay a small contribution towards the co-ownership charges as this is required by law of all property owners. The exact amount of co-ownership charges can also be checked prior to purchasing and will be higher on a property offering many facilities. Remember - all these costs will be offset against your rental income for tax purposes.

Q: What is the payment schedule for this type of property which is usually purchased off-plan?

A: When purchasing a leaseback property off-plan the schedule is typically the following:
• 5% on reservation
• 25% on signature of title deed and commencement of building work
• 5% on completion of foundations
• 15% on completion of ground floor
• 15% on completion of ground floor ceiling
• 5% when building is made water-tight
• 15% when building is made air-tight
• 10% on completion of partition walls
• 5% on delivery
 Most properties will be purchased using a mortgage, of course, so once you have paid the reservation deposit out of your own funds, how much more you will pay from your own funds will depend on what your personal contribution is towards the purchase. Your personal contribution will always come first and once you have paid this, any additional sums required (“calls for funds”), will be drawn down from your mortgage.

Q: What are the legal fees for the purchase of a leaseback property?

A: The legal fees, also known as “notaire’s fees”, can be broken down into two parts: Notaire fees: these can be estimated at 2.5% and are calculated on the value of the property including VAT but excluding furnishings. They generally come to about 2.1- 2.4%, however this percentage may vary slightly because part of the sum is legal fees while another part is fixed stamp duty. Mortgage registration fee: this is roughly 2% of the amount borrowed.

Q: What mortgage can I expect to obtain from a French bank?

A: As a non-French resident, in most cases, banks will now offer you up to 80% mortgage of the value of the property including VAT, which amounts to about 100% of the value of the property excluding VAT. It may be possible also for the mortgage to cover transaction costs (notary fees and mortgage registration fees).

Q: Am I obliged to open a French bank account?

A: Yes, if you take out a French mortgage in France or are expecting a VAT refund (which cannot be refunded into an overseas account). We can assist you with this.

Q: When do I get the VAT back?

A: The general rule is about three - six months after completion and delivery, the French tax authorities reimburse the VAT every three months, so it will depend on when your title deed was actually signed with regard to the fixed quarterly reimbursement dates. It is worth noting that most developers now absorb the cost of the VAT so you will not have to pay it and will therefore not have to finance it.

Q: How much tax must I pay on the income from my leaseback property?
A: The rental income from a French leaseback property is “tax free”, which makes the scheme very popular in France, and means that the income can be used in its entirety towards repaying the mortgage. One question often asked is how does this apply to non-resident overseas investors, and are the tax advantages the same? Leaseback investments are extremely tax efficient and the scheme offers multiple tax incentives. The tax allowances are the same for both residents and non-residents, which is why the scheme is very attractive to foreign investors. This is not the case with many other schemes, which are designed to save the French tax-payer money, and therefore do not carry all the same advantages for non-residents. The first of the tax incentives is the initial refund of the 19.6% VAT on the property. We will help you appoint an accounting firm to obtain the initial VAT refund and will also file your yearly VAT and income tax returns. You are of course free to appoint an alternative French accountant if you wish. After delivery, the accountant will proceed to obtain the VAT refund. If you have not paid the VAT upfront when purchasing your leaseback property, which is sometimes the case, the accountant will undertake the VAT refund procedure for the developer on your behalf. In the following years, the accountant will file your VAT return (5.5% on rental income, note that the yield you have been quoted is always net after the 5.5% VAT) along with your French income tax return. When preparing your income tax return, the accountant will opt for what is known as the “regime réel”. This will allow you to deduct all expenses from your income before calculating income tax, so in effect you are paying income tax on your profit only and not the entire income.
All your property-related expenses will be offset against your rental income:
• interest paid on the mortgage,
• accountant’s fees, property tax (taxe fonciere),
• transaction costs and stamp duty (known as notary fees),
• any co-ownership fees,
• an annual percentage for property depreciation (usually 100% over 20 years or 5% per annum,
• an annual percentage for furnishings depreciation (usually 100% over 10 years or 10% per annum).
Since the expenses incurred will exceed your rental income in any one tax year, the loss can be carried forward and used as a deduction against your rental income in future years. These losses can be continuously carried forward, until such time as they have been used up as a deduction against income. It will usually take a period of about 30 years before all expenses are utilised in this manner and you start paying income tax, which is longer than the length of the average mortgage. Non-French residents will receive a yearly statement from the French tax authorities (Trésor Public) showing the losses incurred and showing the amount of income tax owed as “0”. If there was to be any Irish / UK / US / income tax payable in future years, a credit will be allowed for any income tax already paid in France under the Double Taxation Agreements that France holds with most foreign countries. In addition to income tax, which as seen above you will not be paying on the income from your “leaseback property”, there are two other property taxes in France.
• the "taxe d'habitation" (property tax for the municipality or council) this is paid by the tenant, in this case the management company
• the "taxe foncière» this is paid by the property owner whether the property is “leaseback” or not and will be included as a deductible expense against your income as mentioned above. You are exempt from the “taxe foncière” for the first two years on a new build (law on new-build in France).

Q: Will I need to employ a French accountant?

A: Yes, you will need to appoint a French accounting firm to deal with your VAT refund and you annual French income tax returns (please see question above concerning income tax on the income generated by leaseback properties). Accountancy fees can be offset against your rental income and amount to about 400 EUR per annum for an English-speaking company.

Q: What about Capital Gains Tax?

A: You will be exempt from capital gains tax after owning the property for 30 years and the applicable rate for non-residents is 16% on your net profit, after deduction of all costs, including purchase costs. If you sell after 5 years, from the 6th year of ownership tax will be reduced by a % per annum so that no CGT will be due after 30 years of ownership.

Q: What’s the new 20-year rule regarding VAT and reselling your property?

A: A new by-law promulgated in 2007 means that it will no longer be necessary to repay a portion of the VAT if you sell before 20 years, as was the case previously, however, the new purchaser must take on the lease contract. if you sell the property without the lease contract, you will still be liable to repay a portion of the VAT corresponding to the number of years you have owned the property (minus 1% for every year you have owned the property).

Q: What happens when the first 9 or 11 years lease is up?

A: Most investors will have taken out a 20 year mortgage to finance their purchase and will therefore be happy to renew their lease for a further 9 years after the initial 9 or 11 year lease-term. Management companies will have developed their business plan over a period of 20 years and will expect you to renew the lease after the initial term. If you wish to withdraw from the lease contract at the end of the first term, you will be able to do so – however, you would then have to manage your property yourself and pay all the expenses covered the management company under your lease contract. You would also have to repay a portion of the VAT that has been reimbursed to you, since the refund was given under the condition that you let your property for short-term occupancy for a period of 20 years. A first lease term generally runs for 9 -11 years and will usually be systematically renewed for a further 9 (and not 11 years) after that, bringing the total duration of the “expected” lease period to 20 years. After that, it will be up to you whether you want to sign a new lease or not. In the case of properties involving personal use (holiday leasebacks as opposed to business residences, which are pure investment) after the lease-term several options may be open to property owners:
1/ Pull out of the lease altogether and either move in yourself or let the property yourself (of course this means that the management company will no longer cover repairs and expenses). This is sometimes possible, depending on the management company, and you should verify this before purchasing. In some cases, you may also give the management company a “mandate” to let the property on your behalf at chosen dates and pay you a rental income which is not guaranteed but corresponds to how much the apartment has actually been let.
2/ Sign up for a new lease
3/ Obtain longer personal stay allowances, this is usually possible.
4/ Sell the property, with or without the lease.

 Q: What happens if the furnishings need replacing?

A: Your apartment will be left to you in a normal sate of wear and tear at the end of the lease-term. As the owner of the furnishings you are normally responsible for replacing furniture when it has been damaged due to normal wear and tear, although any damage or breakage would of course be covered by the tenants’ damage deposit and will be charged for. Some management companies will replace the furnishings even in the case of normal wear and tear and this will be written into the lease contract. Furnishings are amortised over a period of 10 years at the rate of 10% per annum and will have therefore paid for themselves in tax savings after 10 years.

Q: What happens if the management company goes bankrupt?

A: Most management companies, and certainly all of those listed on our web site, are very large companies that manage a portfolio of several hundred properties and as a result, any risk is divided among all their properties: those that do well will cover any loss made by those that do less well, due to a bad ski season, for instance. If the management company is in financial difficulty and the property is well-located, another management company can easily be found to take over the operation and continue the lease contract under the original conditions, so this should not have any effect on the property owners. There have been a few unfortunate occurrences in the last years where the new management company has been forced to reduce the rental income, which was too high for the business to be profitable. The conclusion to be drawn from this is to be wary of small management companies offering unrealistic yields; they may seem attractive at first but could result in the company’s inability to pay.

Q: How easy is it to sell a leaseback property?

A: As long as the property is well-located, operated by a well-known management company and the asking price is realistic, it will be easy to sell a leaseback property. The large management companies nearly all have in-house sales offices with a large network of marketing agents and investors will be delighted to purchase a property that is already up and running and providing immediate rental income. In certain locations, it will also be possible to use a local estate agent for the sale and an e-mail to all the other co-owners of the property (list supplied by the management company on request) can work wonders as people will quite often have a friend or family member who would like to purchase in the same property as themselves.

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