Leaseback Explained

 

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.

 

Is Leaseback the same as a Timeshare?

 

Leaseback has no similarity with timeshare. With leaseback the purchaser owns the entire freehold of the property and then enters into a lease agreement with the management company. This is secured against a guaranteed income.

 

Is the Leaseback Scheme open to non-French residents?

 

There are no restrictions on EU Citizens or companies purchasing one or more properties in France.

What is a typical return, and is it net of all charges?

The guaranteed income is up to 7% per annum, although typical leases are from between 4% and 6%. This is a fixed income as specified in your contract and is guaranteed whether the property is rented or not.

The income is also index linked to construction costs and is paid after deduction of all day to day expenses, which are met by the management company.

 

Who is responsible for the day to day running of the property?

 

The management company is responsible for fully maintaining the property. Clearly it is in their interest to maintain a high standard to ensure maximum occupancy levels.

All utility, maintenance and insurance costs are met by the management company. The purchaser is only responsible for the local "taxe fonciere". This is dependent on the size of the property but a typical two bedroom property would cost approximately £200 per annum. This can be offset against the income.

 

How much do you charge?

 

We make no charge for our services. Our fee is by way of commission from the developer.

 

Why is the VAT refunded?

 

This is essentially a tax-break from the French Government to encourage developers to build tourist properties and investors to buy. This is to ensure that there is sufficient accommodation available to service the tourist industry, which is a major source of France 's Gross National Product.

 

What is the VAT rate, and when do I get it back?

 

The current rate is 19.6% for new build and 5.5% for restored buildings. It is normally repaid within 6 months of purchase. However, some leaseback companies charge the net amount and claim the VAT back direct, so you do not upfront it. If you paid the VAT upfront, some leaseback companies reclaim it on your behalf. This rule is valid if you hold the property for 20 years. If you sell before you must repay the Pro-rata amount per year left that is passed then to the new owner.

The French Commercial Code imposes a duration of 20 years for commercial lease contracts to recoup the VAT in full. If for example at the end of the 11 years you decide not to renew, then you will have to pay back 9/20th of the VAT reimbursed initially – (this corresponds to the remaining 9 years).

In the event that you decide to sell on then again you will have to reimburse the VAT for the remaining years. However the new owner will then recoup the repaid VAT. The VAT is therefore reflected in the price of the property.

In case of death and if your heirs decide to carry on with the leaseback option, then there is no reimbursement of the VAT due to the government.

 

Are there any tax allowances?

 

Mortgage interest and expenses can be offset against income, together with a fixed amount for depreciation. Allowances can also be rolled over to successive years.

 

What about French income tax and Capital Gain Tax?

 

With regards to income tax, normally there is none. The acquisition can normally be structured in a way that does not make you liable for any. For Capital Gains Tax, as a non resident, you pay 16% of the net profit when you sell. However you can deduct your acquisition costs such as notary fees, selling fees etc and the cost of major improvements made to the property. After the first two years, there is a reduction of 5% of CGT liability per year you hold the property. After 15 years there is no capital gains tax to pay.

 

Am I permitted to use the property during the lease period?

 

Typically the terms allow for between 4 to 6 weeks of personal use each year. This is free of charge. However, it is also possible to have no personal use in exchange for an increased income. Depending upon the terms of the lease it may also be possible to sub-let any unused weeks.

 

What are the arrangements for mortgages?

 

It is typically possible to borrow up to 80% of the property's value on either an interest only or more usually a repayment basis. In certain circumstances it is also possible to borrow up to 100%. A typically repayment period is 20 years and in addition to variable rate borrowing, it is also possible to fix the interest rate for the whole of the loan period.

As a very rough guide, a yield of 5% with a 30% deposit would be capable of repaying the loan in 20 years.

Clearly the guaranteed index linked income, together with fixed repayments, provides a high degree of financial certainty.

Euro mortgage rates are currently around 3.5% variable or 3.75% fixed at present. This clearly compares nicely with the 4-6% income.

 

How much can I borrow?

 

The general rule of affordability is that the bank will take your gross family monthly income and subtract your current mortgage and loan payments. The remaining amount will be divided by 3 and the resulting sum is is the amount they assume you will have available to service the loan per month. Unfortunately they do not take into account the fact you have a guaranteed income. We are able to provide you with details of several brokers experienced with leaseback and who can act on your behalf.

 

What other purchasing costs are there?

Solicitor's (Notaire's) fees, land registry cost is and the like typically account for 3% to 4% of the purchase price.

 

Why not purchase a property and let it myself?

 

The advantage of this is that it may well be possible to generate greater income. However, newly built properties purchased outside the leaseback scheme are subject to VAT at 19.6%. You would be responsible for maintenance, property taxes and finding tenants. You would probably also need to employ a management rental agent at a typical costs of between 20% and 25% of gross income.

 

What happens at the end of the lease period?

 

At the end of the lease period, there are several options available. Some leases allow for the management company to review the lease for another fixed lease period. Alternatively, the property can be sold or rented out privately.

 

Would I get a better price if I go direct to the developer?

 

No, as the price we quote is the same as the price given by the developers. However the support we provide may not be available if you went direct to the developer.

 

What about if the leaseback company goes bankrupt?

 

This is very unlikely as the majority of leaseback companies are well established and are approved by the French government. However, it is not underwritten by the Government. In the event of bankruptcy, you always retain ownership of the property as it is freehold. You will have the option of self manage, or you can put it through another agent.

 

Caveat

 

These questions and answers are given on good faith and are for general guidance only. Circumstances will vary between individual properties and leaseback contracts. It is strongly recommended that independent advice is sought. We are neither tax nor financial advisers and would recommend that you seek appropriate professional advice for any matters directly related to financial or legal issues.

 

Copyright – Esprit Property Consultants LLP 2011