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Contents of article "Why it might pay to buy to let"
Why it might pay to buy to let
Acquiring a leaseback property
Stephen Smith of Stephen Smith (France) Ltd does the maths and finds buying a leaseback property could be a cost-effective way to own a home in France
Acquiring leaseback property has aroused a great deal of interest recently amongst British aspiring to real estate ownership in France. Many people make preliminary investigations and are put off. On the face of it, to some, leaseback schemes look like time-share schemes, which is what they are not. Others are deterred when they realise that the returns on their investment may well be modest. And some find the legal paperwork or the mechanics of managing a leaseback apartment, including the prospect of dealing with the French tax office, altogether daunting.
In addition to finding out as much information as you can, what you must do is examine your financial goals very carefully. If your intention is to use somebody else’s money (ie the rental income) to acquire your home from home in France - a place you can holiday in and subsequently retire to - then think exceedingly carefully. Would you really want to retire to an apartment in a condo by the sea with only transient holidaymakers for neighbours? If your aim is investment then what you could do is use somebody else’s money to earn some extra income and give you a capital asset in the long run.
I am not suggesting you become a property speculator overnight, but, in times where interest rates are low and where pension schemes are suspected to be underfunded, it may well pay to put your money to work a little more creatively. With careful legal and financial advice, there is no reason why you can’t earn something towards the windsurfing school you always wanted to run in Brittany or, later on, that little stone cottage in a lavender field in Provence. Leaseback is very popular amongst the French themselves and especially as a way to boost pension income.
The mathematics of the thing are these.€100,000 = Gross House Price
- €80,000 = 80 per cent mortgage
= you have to find €20,000 deposit
+ €4,000 fees and charges
- €16,000 TVA rebate
= €7,600 expenditure
On a gross purchase price of €100,000 you will get your VAT back making the net purchase price €83,600. If you have raised an 80 per cent mortgage on €100,000, you will have €20,000 deposit to pay, plus, say, €4,000 in charges and fees minus the VAT rebate of €16,400. This leaves you having to find something of the order of €8,000. (Do remember, though, that if you have bought a refurbished property, your VAT discount may only be based on 5.5 per cent TVA as only new-builds attract discounts based on the full rate.)
You will receive a guaranteed return on your investment in the form of rental income. This will typically be between 2 per cent and 5 per cent and you should be wary of promises of unlikely returns.
The other thing that may happen is that should you hang on to your leaseback apartment until the mortgage is paid off, you may well have a capital asset worth much more than your initial €100,000.
It was about twenty years ago that the French government of the day implemented an initiative to boost tourism and create employment and leaseback schemes were born. Of several different schemes available, by far the most popular with ‘foreign’ - ie non French resident - investors is the RTC (résidence de tourisme classée) which is governed by an arrêté issued by the French Ministre du commerce, de l’artisanat et du tourisme dated 14 February 1986 (as subsequently amended).
RTC developments are usually in an attractive tourist area where the best rental returns and potentially significant capital appreciation potential can be found. Because of their popularity, many of these developments (and certainly the most successful ones) will be fully sold ‘on plan’ before building work has even started.
To qualify as an RTC all of the apartments in the development must be furnished (in a particular style over which the buyer unfortunately has no choice) and meet a minimum - generally high - standard.
A well-run RTC offers a tastefully equipped (dishes, kitchenware etc) apartment ready for letting. It usually also offers excellent maintained shared facilities such as car parking, laundry use, refreshment areas, restaurants, beach/ski access, swimming pools, golf courses, tennis courts and so on, which can usually be accessed free of charge during high-season periods. In some resorts hotel services (e.g. reception, room service, house linen, 24 hour security etc) are also available.
Since you will be receiving French rental income, and also because of the various French VAT forms and declarations that need to be completed, you should seek the assistance of a French accountant. The developer or management company will often provide you with a kit fiscal (package of pre-printed tax forms for you to complete and return to him) and/or propose a local accountant to deal with the paperwork for you, for which you must pay an annual fee.
Income from lettings in France must be declared to the French tax office by the 30 April each year. Rental income is taxed as commercial income that is as bénéfices industriels et commerciaux or ‘BIC’. As a landlord you will either be considered a louer en meublé non professionnel (non-professional landlord) or a louer en meublé professionnel (professional landlord), an LMNP or LMP.
To be classed as an LMNP, you must not be registered at the registre du commerce et des sociétés - RCS - nor must you earn more than €23,000 (£16,095) or half of your revenue in rental income.
As an LMNP, you will be assessed under the Micro-BIC regime if your revenue is less then €76,300 (£53,000). The Micro-BIC is a forfeit whereby your turnover is reduced by 72% or €305 (£213) whichever is the greater leaving you to pay tax on the remaining 28%. You can also make an election to pay under one of the réel regimes which will allow you to offset real expenses suffered against revenue. This is very often most advantageous if you have financed the leaseback with a mortgage as interest paid is an expense.
The Micro-BIC assessment period is a term of five years and to make the election for a réel regime, you must apply to the tax office by the 1 February of the year in which the election is to come into force. The election is irrevocable for two years.
If your revenue is greater than €76,300 (£53,400) and less than €763,000 (£534,000) you will be assessed under the réel simplifié regime and under réel normal if greater than €763,000 (£534,000). The réel regimes require formal accounting for income tax purposes.
As an LMP you will be assessed under one of the réel regimes. This means that the tax payer can offset any losses on his rental activity against his total income and any gain resulting from the sale of the property will be taxed as business capital gains.
The capital gains realised on the property let on a furnished basis by an individual who is registered as a professional landlord in France are normally exempt from capital gains tax if the turnover is less than €250,000 (£175,000) and provided that the activity has been in existence for at least five years.
The nature of a leaseback scheme and the legal mechanics of a purchase are outlined below.
If you buy an apartment in a development under a leaseback scheme then you will own the apartment, its freehold and a part of the freehold of the common parts of the building. You will also be buying a furniture pack with the apartment and committing yourself to the management charges of the building. The developer is sometimes referred to as the ‘head tenant’ and to provide you with your VAT discount, the head tenant must provide quasi-hotel services. So your management charges may be a little out of the ordinary in that you may have to pay towards the upkeep of communal gardens, the pool or even the ski lift out back. Your rights and obligations (e.g. covenants and restrictions) in respect of your private and shared ownership, and the way in which your service charges are calculated, are governed by two highly technical documents known as the acte authentique de vente (French conveyance deed) and the règlement de copropriété (lease of the common parts). Every buyer who signs a contrat de réservation for a leaseback is deemed to have read and understood the RDC and is therefore legally bound by it, even though the RDC may not yet have been prepared.
Because you own the freehold, then this is not a time-share. It is an investment and a capital asset in the way that a time-share is not.
What you are buying is called a ‘lot’ and it forms part of the larger private development and you buy it before or during the construction phase. The most popular RTC developments are to be found in Paris, Côte d’Azur, the Alps, the Charente, throughout France and, most recently, Antibes.
The commercial leaseback by you of the lot to the head tenant means a tie-in period of at least 9 years. Your developer bears the cost of marketing the apartment and paying you a guaranteed monthly return all year round. At the end of the agreed period, the developer has the right of renewal of the contract or compensation if you refuse. You may think this smacks of unfair advantage, but because the developer expects to continue in business with you, you can expect that the furniture will be renewed, the property well maintained and you can count on another stable period of guaranteed returns. And you get to use the property for holidays should you wish. Often eight weeks a year with more at a discounted rate.
If you are buying before or during construction then you buy generally in the form of a VEFA , vente en état future d’achèvement. This is property in its future state of structural completion.
French law protects buyers of VEFA property units in various ways. The main laws applicable are Law 67-3 of 3 January 1967 (now enshrined in Articles 1601-1 et seq of the French Code civil and Articles L261-1 to L261-22 and Articles R261-1 to R261-33 of the Construction and Habitation Code) and Decree 78-621 and Decree 78-622 of 31 May 1978.
Armed with a glossy brochure and protected by the law all you have to do is choose, you might think. Caveat Emptor!!! Let the buyer beware lest you end up with a half-finished badly constructed property uninhabitable and too costly to complete. Check on the financial health of the developer and on the guarantees and insurance cover provided.
There is also a quality mark, Qualitel (www.qualitel.org), which developers can apply for and you should ask if your developer has one.
Go and see the site if you can and see if you can chat to the locals and make sure you have a list of questions for the developer or his agents and the notaire. The majority of VEFA properties are sold by developers on plan prior to construction, although you may be able to inspect a show house (maison-témoin). A reputable developer may well have sold the entire stock before building work has even commenced. Indeed, be suspicious if a development is nearly completed and a number of properties remain unsold - the developer may be overcharging or something else may be wrong.
Initially, you will be asked to sign a contrat de réservation (‘the contract’) and pay a deposit of 2 to 5 per cent. Under Article 1601-3 of the Code civil, the main characteristic of a VEFA is that ownership of the land passes to the buyer on execution of the acte de vente, but ownership of the property you are buying only passes as construction advances. So, the rest of the purchase price is paid in instalments on completion of the various stages of the construction.
If you are interested in capital appreciation rather than income and you intend to sell the property to realise the gain, then, at the outset, you must get the developer to execute a waiver of his right to compensation should renewal of the lease not be forthcoming. This must be carefully worded and you must take expert legal advice.
Should you sell before 20 years you will have to pay your discounted VAT back and you may have to pay capital Gains Tax if you sell before 16 years are up.