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Many
people dream of owning a holiday home or investment property abroad,
but are concerned by a whole host of potential ownership
difficulties. There is however an established scheme in
France
which allows for both the purchase of a holiday home, and which also
provides a guaranteed income year on year.
The
leaseback scheme, or Residence de Tourisme, was established in
France
in 1976. It
is a Government backed scheme designed to increase available tourist
accommodation in
France
with a view to increasing income from tourism.
It is open to non-residents and is becoming
increasingly popular in the
UK
as either a pure investment with a guaranteed income, as a holiday
home option, or indeed both.
The
scheme works by purchasing a freehold property.
You become the legal owner.
The property is then leased back to the developer or a
management company.
Under the leaseback scheme the government also refunds to you
the VAT normally charged on a new build properties (currently
19.6%).
The
owner is then guaranteed a rental income throughout the period of
the lease.
The net return to the owner varies between developments but
is typically between 4% to 6%.
This compares very favourably with a typical 20 year fixed
rate mortgage of around 3.75%, and variable rate mortgages which are
lower.
It can be seen how the rental income can be used in respect
of the mortgage payments.
Loans of between 75% and 85% are available depending upon
circumstances.
The rental yield is also index linked annually to
construction costs, which means the rental income currently increases by
approximately 2.5%.
As
in the UK
there are tax allowances in respect of mortgage payments which can
be offset against income.
The lease typically lasts for between 9 and 11 years, after
which the management company has the option to either renew, or the
property can be sold, or rented out and held privately by the
owner.
The
purchaser/owner can also enjoy periods of usage free of charge
through the year, depending upon the terms of the lease.
These terms normally allows for between 4 and 6 weeks free
usage each year.
The management company is responsible for all the maintenance
of the property including the maintenance of furnishings which are
often included in the purchase price.
The developer is also responsible for insuring the building
and its contents.
It also pays for some of the property taxes and all the
utility costs.
Naturally
it is important to appreciate the potential pitfalls.
Consideration should be given to the options available on
completion of the lease. The risks of the developer or management
company going into liquidation can be reduced by dealing with large
well established companies with a proven track record.
Remember that whatever happens you retain ownership of the
property.
It is also important to understand the differences between
UK
and French mortgages and legal structures.
However
Leaseback offers the combination of purchasing a new select
property, linked to a guaranteed rental income providing greater
certainty in financial planning matters.
It provides for an exciting investment opportunity that can
also be enjoyed for periods throughout the year, or loaned to family
and friends.
In addition French property prices continue to appreciate by
over 10% per annum, and there is therefore scope for capital growth.
Potential
problems can be overcome by careful planning and appropriate advice.
Esprit Property Consultants LLP specializes in selecting the
right properties from established French developers, in addition to
advising on where to obtain legal and financial advice from experts
which also specialize in the French property market.
>>Click
here to find out more about Esprit
Summary
of why
leaseback is an exciting proposition:
-
VAT refunded at
19.6%
-
A guaranteed rental income which
is index linked.
-
Tax allowances e.g.
payment, repairs, maintenance, management expenses etc. which
can be offset against income.
-
Maintenance and management
paid for and arranged by developer/management company.
-
Fixed rate mortgages of
currently around 3.75% over 20 years.
-
Variable rates currently
much lower
-
Mortgages typically
available with 20% deposit
-
No
French Capital Gains Tax after 15 years of ownership
-
Potential capital growth,
currently averaging 11% per annum.
-
Agreed periods of free
usage.
-
The
property is sold fully fitted and furnished
-
No
requirement to be a French citizen
It is also important to understand the potential problems
with leaseback
-
Consider
options available on completion of lease
-
What
happens should the management company goes into liquidation
-
Any
penalties incurred by selling the property early
-
Terms
of renewal or cancellation of the lease. The management company can renew the lease if they so
wish.
-
Any
hidden charges levied by the management company
-
Appreciation
of difference between
UK
and
French law and mortgages
-
If
you sell before the end of the lease, a proportion of the VAT
might be payable
-
Any
early sale will be with the remainder of the lease in place
(although this might suit some)
>>For
more information on mortgages and financing
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