EU Property Portfolio Library

The French Leaseback

 
Q: What is a Leaseback Scheme?  
Q: What is the Tax Benefits?  
Q: What is the legal process?  
Q: Can I get a Mortgage?  
Q: Can I include my Leasback in a SIPP?  
Q: WHAT HAPPENS ONCE THE LEASEBACK AGREEMENT EXPIRES?  
   
Buy-to-let in France  
Q: What is a buy-to-let?  
Q: Is the rental income guaranteed?  
Q: What are the costs incurred?  
Q: Can I get a Mortgage?  
   
The French Bare Ownership  
Q: What is the Bare Ownership Scheme?  
Q: What are the Tax Benefits?  
Q: What is the legal process?  
Q: Can I get a Mortgage?  
 
The French Reversions  
Q: What is a French Reversion Property?  
Q: How does the reversion investment work?  
Q: What is the Legal Process?  
Q: How long does it take?  
   
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Q: What is a Leaseback Scheme?
A: It is a stress-free purchase for investors living abroad.
  
  • You acquire a newly-built freehold property, fully furnished and equipped which is ready to be let.
  • Property investments are located in potential growth tourist areas along the Mediterranean coast, the Atlantic coast and the Alps.
  • You sign a rental agreement with a property management company for a minimum period of nine years.
  • In return, you receive a guaranteed rental income between 3% and 5.5% of your initial investment for 9 or 11 years (increased each year with inflation as measured by the ‘indice du coût de construction’).
  • Personal usage of the property.
  • The French government gives you a VAT concession, which means saving 20% on the initial property price. In most cases you receive the VAT back from the government within 4 to 6 months of the purchase of the property.
  • Some developers may advance the VAT refund and receive the funds directly from the government.
  • Non-French residents can obtain an 80% mortgage (on the price of the apartment including VAT), therefore it can be a ‘no money-down’ scheme (however, in most cases, investors would have to advance the VAT for 4 to 6 months)
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Q: What is the Tax Benefits?
A: TAX AND FINANCIAL ADVANTAGES OF LEASEBACKS:
 
  • Exemption of the 20% VAT charge applied to new properties
  • Two years exemption of Taxe Foncière (land tax on property).
  • Guaranteed income received from 3% to 5.5% of your initial investment for 9 years minimum.
  • Up to 80% of the purchase price of the property can be financed at an attractive rate (making it a ‘no-money down’ scheme).
  • Lower deposit than for a resale property (5% instead of 10%).
  • Notary fees vary between 2% and 4% for the purchase of a new property whereas it is usually between 6% and 8% for a resale property.
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Q: What is the legal process?
A: Introduction:
It is a long and administrative process with lots of parties involved, so please be patient. EU Property Portfolio (EUPP) is here to help you along the way. Serge Vidal, one of the Directors, is fully dedicated to follow his clients from when you make the deposit to legal completion
  Step 1: Getting Ready  
 
  • Establish goals (location, size, budget…).
  • Hold initial mortgage discussions to determine how much you can borrow.
  • We recommend the French mortgage broker which can source hundreds of banks in France on your behalf.
  • Obviously, if you have other existing mortgage contacts, you are free to use them.
 
  Step 2 – Reserve your Property:  
 
  • Select the property you want to purchase.
    Put an option on this property, for a period lasting a minimum of 48 hours/ 2 days and does not exceed 72 hours/3 days (during this period, no one else can purchase this property).
  • Between the limited period of a minimum of 48 hours/2 days and not exceeding 72 hours/3 days, you must send your 5% deposit of the purchase price (including VAT, but excluding the furniture price) usually via bank transfer to the French notary’s escrow account.
  • You will need to provide us with a proof of your transfer by fax to 0870 762 5083 as well as the filled in copy of the “Information for French Deeds” document
  • If you fail to send your money during this period, you will loose your option.
 
  Step 3 – Reservation Contract:  
 
  • EU Property Portfolio (EUPP) fills the reservation contracts and commercial lease on your behalf
  • EUPP then sends you the reservation contract for review and signing
  • You then return all documents directly to the developer usually within the next two weeks without making any changes or date of the contract
  • If you have any questions on all documents, please let us know
 
  Step 3 Bis – Mortgage & French Bank Account:  
 
  • You select the mortgage company or mortgage broker
  • The mortgage broker sends you an application file, which you will need to return. This is a very administrative process, which includes providing payslips, bank account details, health questionnaire…
  • You will also need to open a bank account in France, which our or your mortgage broker should help you with. You will receive your rental income and pay your mortgage on this French account
  • If the buyer wishes to arrange a loan though a French bank this can be up to 80% of the purchase price subject to status
  • The French banks ensure the loan by mortgaging the property that is being purchased
  • French law allows you to withdraw from the purchase contract should you fail to obtain the mortgage, and to recover any deposit lodged
  • The information required by the bank, apart from your detailed civil status, aims at defining your actual income and thus your ability at repaying the mortgage.
  • This loan is granted only if it does not increase your debts unreasonably, and to that matter the annual repayments should not exceed 30 % or your annual income
  • The purchasers have to provide the bank with the following documents:
  • Identification papers (passports)
  • A letter of recommendation from their bank
  • 3 last bank statements
  • A letter of recommendation from their employer
  • 3 last salary slips
  • If they are self employed, full activity report from their accountant
  • The bank‘s mortgage application form, dully filled in and signed
  • The compulsory insurance application form also filled out and signed
 
  Step 4 – Preliminary Contract  
 
  • The developer counter-signs the reservation contract and returns a copy to you by registered post
  • This reservation contract confirms the purchasers’ civil status, the purchase price, the property number, the size, the full description of materials, fixtures and fittings, the individual floor plan and the site plan also whether the purchase is subject to the buyer obtaining a mortgage or not
  • The buyers have to sign the commercial lease agreement (Bail commercial) which includes the length of the lease, the guaranteed rental incomes as well as the terms and conditions of the contract; that needs to be signed and sent back to the management company
  • From the receipt of this contract, you have a 7-day cooling-off period
  • During that period, you have to right to cancel your purchase by sending a registered letter and receive your deposit back without any explanations
  • After this 7-day cooling-off period, the contract is legally binding
 
  Step 5 – Mortgage Offer  
 
  • Once the mortgage company receives your application, you must obtain an “attestation de dépôt de prêt”, which is a bank letter confirming it has received your application
  • Please send us this acknowledgment letter, by e-mail or fax so we can forward it to the developer
  • Once your application file is complete, the mortgage company will hold its credit committee and decide on your mortgage
  • Once the mortgage company has granted you a mortgage, please send us your mortgage offer, so we can forward it to the developer and the notaire’s vendor
 
  Step 6 – Mortgage Acceptation:  
 
  • The mortgage company will send you its mortgage offer by post
  • You must wait at least 11-days before you can accept it and you will have a maximum of 30 days to answer, all explanation will be provided in the bank’s cover letter
  • Once you have signed the mortgage offer and sent it back to the bank as well as to the notaire who will need a copy to prepare the Acte de Vente  which is the final contract and we would like to be informed whether you will sign the final contract at the notaire’s office in France or if you need a power of attorney (see explanations below)
 
  Step 7 – Notification:  
 
  • Once a certain % of the apartments have been sold, the developer will ask the notaire to notify its clients
  • You will therefore receive all final documents and a power of attorney (if applicable) from the notaire
  • At this point the notaire will ask for the notary fees and relevant taxes together with a further percentage of the purchase price depending on the stage of construction the building has reached
 
  Step 8 – Power of Attorney:  
 
  • If you cannot sign the final contract at the notaire’s office, you will need to sign the power of attorney in front of a notary public in the UK at a cost of about £100 to £150
  • The notary public will send your power of attorney to the Foreign Office who will then stamp it.
  • The whole procedure takes about one to two weeks The notary public will then send your power of attorney stamped by the Foreign Office to the vendor’s notaire
 
  Step 9 – Legal Completion  
 
  • Once the notaire receives your power of attorney, he or she will instruct your mortgage company to release the funds to the notaire’s escrow account
  • Once the funds are received by the notaire and provided all documents are in good order, the final contract is signed and have you legally completed the purchase of your property
  • When owning an apartment in France under the leaseback scheme, the purchasers must have a tax representative in France acting in their behalf with the French tax office
  • So the purchasers have to fill out different forms called “Kit Fiscal”. This package has to be sent back to the Notary in charge of the operation
  • Congratulations! You are now the owner of a great investment in France!
  • The notaire will then pay the registration taxes and register your title deeds
  • Please note that you will only receive your official title deeds 3 to 6 months after legal completion
 
  Step 10 – Post Completion  
 
  • Before the apartment is delivered, the interest is charged when the mortgage money is released.
  • After delivery of the apartment, interest on the full mortgage is paid and the full capital price is repaid as well.
  • You will need to send your bank account details in France (RIB, “Relevé d’Identité Bancaire”) to the management company, so they can send your rental income
  • Rental income is usually paid the month following the end of each quarter (so, April for the 1st quarter, July for the 2nd Quarter…)
  • If you are buying a leaseback, you will get back the VAT (19.6%) after six months
 
  Step 11 – Stage Payments  
 
  • The different stage payments are the following:
  • 5% Deposit with reservation contract
  • 25% With signature of final contract when work commences
  • 5% Foundations complete
  • 15% First floor
  • 20% Water Tight i.e. up to roof level
  • 10% Air tight i.e. windows fitted
  • 10% Partition Walls finished
  • 5% Work finished
  • 5% Handover of keys
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Q: Can I get a Mortgage?
A: FRENCH MORTGAGES:
 
  • Non-French residents can obtain a French mortgage, up to 100% of the purchase price inclusive of VAT
  • Many banks in France are now very familiar with non-resident buyers and we can recommend you to the most competitive ones. In general, mortgages in France and Continental Europe are less flexible than in the UK: more documents to be provided, fixed rate market, no self-certification, limited interest-only products
  • No self-certification. Therefore, it is difficult for self-employed and business owners, need to produce 3 years account, letter from chartered accountant,…
  • Interest-only mortgages: There are 2 types. The first one usually requires to set-up funds every month (which cannot be accessed) equal to the repayment amount, which defies its real purpose. The second type is the same as in the UK, but it is more difficult to get. Not everybody can qualify. Interest rates vary from 5.90 % for 15 years fixed rate and 4.35% for 15 years variable rate, so a guaranteed return above 4.35% would largely cover the interest payment.
  • Repayment mortgages: Fixed Interest rates start at 4.9% for 15 and 20 years and from 5.30% for 25 years variable rate. Variable interest rates will start at 4.35% for a period of 15, 20 and 25 years.
  • Approval in principal: Banks in France look at the overall borrowing capacity and they do not look at the investment only. French banks will look at a person’s coverage ratio. The total of interest payments & repayments must represent less than a 1/3 of your income after tax (including regular salary + a portion of your year-end bonuses + rental income). This is obviously a general rule as each decision is taken by the bank’s credit committee on a case-by-case basis. This takes into account your current mortgage payments in the UK & abroad, car loans, credit cards repayments and all other borrowings both in the UK and abroad.  If you already have several property investments but they do not appear on your main bank accounts (where you get your salary), we would suggest not to mention it to the bank, as this will decrease your borrowing capacity
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Q: Can I include my Leaseback in a SIPP?
A: Leaseback in a SIPP:
From a pension perspective a Leaseback is considered as a commercial property. It can therefore be included in a SIPP as long as no holiday credit is offered in the commercial lease. The main advantages of the SIPP are listed below:
 
  • Premiums paid into the SIPP attract income tax relief at the individuals highest marginal tax rate(Up to 40%)
  • No income tax is payable on rents received nor is capital gains tax payable on a disposal of a property.
  • SIPP's provide the flexibility of income drawdown, phased retirement and a deferred annuity purchase.
  • Income can be withdrawn from the fund whilst still working(from age 50)
  • The costs of running a SIPP are transparent.
  • Individuals can contribute into a SIPP the higher of 100% of salary or £3,600.
  • Companies can also contribute into the SIPP and favourable tax advantages for 100% owner managed companies.
  • It is possible to borrow up to the value of 50% of the net asset value of the scheme.
  • It is the only pension fund which allows the fund to purchase a commercial property, such as a leaseback scheme.
  • Death benefits may be written under trust to avoid Inheritance tax exposure.
Q: WHAT HAPPENS ONCE THE LEASEBACK AGREEMENT EXPIRES?

A: 3 possibilities are available to you depending on your personal plans. You may be looking to retire in your property, or use it 6 months a year or just sell it. You will be offered the following options: This is an example for a €450k excluding VAT apartment:

 
     
Q: What is a buy-to-let?
A: The Buy to let scheme :
In this system, the purchaser buys a property that will be let as a main residence to private tenants.
The Pros:
 
  • No need to buy the furniture,
  • Guaranteed income of up to 9 years,
  • Flexible commercial lease with breaking point after year 3 and 6,
  • €14 per sqm income in average
  • Possibility to break the lease agreement and move into the property
  • Taxe d’habitation (council tax) and service charge paid by the tenant
  • No Taxe d’habitation (council tax) for the 1st two years
  • Property entirely managed by the appointed management company
  • Reduced notary fees of 3% instead of 7%
 
The Cons:
 
  • No personal usage allowed for the full length of the lease
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Q: IIs the rental income guaranteed?
A: Yes, the rental income is guaranteed :
The guaranteed rental income runs from the delivery of the new build property until the tenant enters the premises. The guarantee covers:
 
  • The rental income, the service charges, as well as any charge due by the tenant,
  • Any damage caused to the property by the tenant after the lease has expired
  • Legal protection for the owner in case any legal action is taken against him,  
Vacancies cover: There is a security of receiving a rental income, even when the property is vacant.

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Q: What are the costs incurred?
A: The costs incurred are the following:
 
  • 10% of rental income paid to the management company
  • Land tax (€7 per sqm per annum)
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Q: Can I get a Mortgage?
A: FRENCH MORTGAGES:
 
  • Non-French residents can obtain a French mortgage, up to 100% of the purchase price inclusive of VAT
  • Many banks in France are now very familiar with non-resident buyers and we can recommend you to the most competitive ones. In general, mortgages in France and Continental Europe are less flexible than in the UK: more documents to be provided, fixed rate market, no self-certification, limited interest-only products
  • No self-certification. Therefore, it is difficult for self-employed and business owners, need to produce 3 years account, letter from chartered accountant,…
  • Interest-only mortgages: There are 2 types. The first one usually requires to set-up funds every month (which cannot be accessed) equal to the repayment amount, which defies its real purpose. The second type is the same as in the UK, but it is more difficult to get. Not everybody can qualify. Interest rates vary from 5.90 % for 15 years fixed rate and 4.35% for 15 years variable rate, so a guaranteed return above 4.35% would largely cover the interest payment.
  • Repayment mortgages: Fixed Interest rates start at 4.9% for 15 and 20 years and from 5.30% for 25 years variable rate. Variable interest rates will start at 4.35% for a period of 15, 20 and 25 years.
  • Approval in principal: Banks in France look at the overall borrowing capacity and they do not look at the investment only. French banks will look at a person’s coverage ratio. The total of interest payments & repayments must represent less than a 1/3 of your income after tax (including regular salary + a portion of your year-end bonuses + rental income). This is obviously a general rule as each decision is taken by the bank’s credit committee on a case-by-case basis. This takes into account your current mortgage payments in the UK & abroad, car loans, credit cards repayments and all other borrowings both in the UK and abroad.  If you already have several property investments but they do not appear on your main bank accounts (where you get your salary), we would suggest not to mention it to the bank, as this will decrease your borrowing capacity.
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Q: What is Bare Ownership Scheme?
A: It is a stress-free purchase for investors living abroad.
  
  • You acquire a newly-built freehold property, fully equipped.
  • You sign a rental agreement with a property management company for a minimum period of 15 years.
  • Personal usage of the property is possible and depends on developments.
  • Non-French residents can obtain an 80% mortgage (on the price of the apartment including VAT).
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Q: What are the Tax Benefits?
A: TAX AND FINANCIAL ADVANTAGES OF BARE OWNERSHIP:
 
  • Two years exemption of Taxe Foncière (land tax on property).
  • Only tax to pay is Land tax
  • The tenant will pay all other taxes and charges (taxe d'habitation, utility tax, co-owners charges and insurance...)
  • Up to 45% of the purchase price of the property will be reduced 
  • Freehold ownership after the 15 years period with no additional charges
  • Lower deposit than for a resale property (5% instead of 10%)
  • Notary fees vary between 3% and 4.5% for the purchase of a new property whereas it is usually between 7% and 9.5% for a resale property.
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Q: What is the Legal Process?
A: Legal explanation:

Rights and Obligations of the Bare owner
* They become owner on the day of the exchange of the title deeds
* They pay for any major works done as well as for the land tax
* They can sell the property whenever, without the approval of the tenant
* Buyer cannot use the premises before the end of the lease (if management company offers stays)

Rights and Obligations of the tenant
* They have the use of the property, but cannot rent it
* They will pay for the service charges, council tax and maintenance

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Q: What is a French Reversion Property?
A: French Reversion Property:

The French social and economic environment is strongly favoring the reversionary property market. Pensioners can no longer live on their pensions and require an additional source of income. There are over 10,000 reversionary transactions made in France each year. The types of properties range from studio flats to apartments, villas and commercial properties.

They are located in attractive areas such as Paris and its close suburbs, the French Riviera and the Atlantic  

Excellent investment opportunity      
* Medium to long-term horizon    
* Possibility to buy property at a huge discount    
* Most properties located in prime areas    
* Portfolio diversification    
* No capital gain tax when property reverts to the buyer    
* Reduced notary fees  

Target Investors      
* Institutional investors    
* Affluent individuals planning for their retirement    
* Foreign investors who want a holiday home in France in the medium to long-term horizon

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Q: How does the reversion investment work?
A: There are two types of reversion properties: tenanted or vacant, and different payment structures and discounts.

Tenanted property
More than 95% of all reversion properties are tenanted, i.e. the vendor lives in the premises until he or she leaves the property to go to a care home or passes away. 30% of the tenanted properties are vacant before the vendor passes away and buyers can then live in the property or rent it out.

Vacant property
The vendor does not live in the premises and the buyer can live in the property or rent it out, which maximizes return as the rents cover the monthly payments to the vendor.

Payment Structures
There are three different ways of buying a reversion property:
1. By paying a lump sum plus a monthly annuity
2. By paying a lump sum, but no annuity
3. By paying a monthly annuity only, and no lump sum

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Q: What is the Legal Process?
A: Legal explanation:

Rights and Obligations of the Buyer
* Buyer becomes owner on the day of the exchange of the title deeds
* Buyer pays for any major works done as well as for the land tax
* Buyer can sell the property whenever, without the approval of the Vendor
* Buyer can use the premises if the vendor decides to leave the property
* Buyer can take insurance policies to limit excess of life expectancy of the Vendor

Rights and Obligations of the Vendor
* Vendor has the use of the property, but cannot rent it
* Vendor will pay for the service charges, council tax and maintenance
* The contract can be called off in the following circumstances:
  o The Vendor dies within the following 20 days after the exchange
  o The selling price is too low (i.e. to avoid inheritance tax)
  o The buyer knew that the vendor had an incurable disease when he bought the property

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Q: How long does it take?
A: It generally takes about 6 months to complete.

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