Why it might pay to buy to let
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 2020 (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
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
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 2020.
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
which developers can apply for and you should ask if your developer
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
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.