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New French property law may attract more investors

6th March 2007 | back to article listings BACK    print this article PRINT

Following a recent report from International Living that France enjoys the best quality of life in the world, there is another piece of news that may interest buy-to-let investors that are currently thinking Gallic. A new law enacted last year, and subject to several recent revisions, has served to make things somewhat easier for the investor who leases their freehold property to a management company.

Under the so-called 'leaseback' scheme, foreign investors are able to purchase a freehold property and let it to an approved management company for a fixed term of between nine and eleven years. As part of the arrangement, the company agrees to pay a fixed rental for the property, even when it is not being used. This means the investor can bank on a guaranteed income for the property and make appropriate forecasts. Of course, the terms of the deal are likely to mean that the rental income the management company pays the owner during peak season will probably be considerably less than the price that they could get on the open market, but this is offset against continued regular income during the off-season.

Previously, investors taking advantage of the leaseback scheme did not have to pay VAT - 19.6 per cent - on the purchase price of the property earnings, unless they sold the freehold inside the duration of the agreed leaseback term. At that point, a proportion of the VAT, known in France as TVA, would be payable to the government. The proportion was calculated by deducting the number of years the agreement had been in operation for from 20.

A nine year lease would mean that, once it had run its course, the owner would pay 11/20 of the VAT on the original purchase price. With inflation over those nine years, the proportion payable would likely not be a significant sum. If the owner of the property engaged in leasehold for 20 years, there would be no VAT payable on expiry of the lease.

Under the new legislation, selling the freehold does not attract any VAT repayments at all, even if the transaction takes place in the first few years of the leaseback agreement, which would previously have attracted a 100 per cent VAT payment to the government. This makes a relatively simple scheme even less confusing and may well serve to attract more investors to the French market. However, It is important to be aware that this arrangement applies only to new build properties. The investor who purchases a refurbished property or in a regeneration area will probably not be able to take advantage of the scheme.

As an added bonus, although the terms of leasehold agreements will vary between companies, most will allow for the owner to use the property as a holiday home for a certain number of weeks each year. During such time, the property will continue to be cleaned and serviced as it would normally be for a paying holidaymaker, meaning the investor can look forward to several weeks of ease each year plus a guaranteed rental income.

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