French law changes are set to boost leaseback unit values

[ Friday, 16th March 2007 ]

A RECENT change to French law is expected to boost the value of leaseback properties when the owners sell them. Under the new law, investors are no longer required to repay any VAT even if they re-sell the property within the first five years of ownership.

All along buyers were allowed to buy leaseback holiday home properties without paying the VAT at 19.6% but if the property was sold prior to completion of the 11-year term, the vendor was obliged to pay a proportion of the VAT back to the state. Following the latest changes the clawback will be removed and the only condition is that the residence must be classified with an official tourism star rating.

The leaseback scheme was introduced as a French Government incentive designed to increase the provision of modern tourist accommodation as investors can buy a freehold apartment and then lease it back to an approved management company to let for an 11-year term.

Richard Deans, sales consultant in MGM's London office, says an investor who buys a two-bedroom apartment priced at €350,000 only pays €292,600 if it is bought under the leaseback scheme. Nevertheless the value of the property remains at €350,000 or more, as prices increase every year.

MGM offers two leaseback options with the VAT exemption. One option is the lease with rental income whereby the buyer receives a guaranteed annual rental income and can stay in the property for three weeks each year.

Under the second option of the lease with price reduction, the purchase price is reduced by 30% which includes 19.6% VAT exemption and a one-off lump sum equivalent to rental income paid in advance. The owner has six weeks use of the property each year but receives no rental income. This option may be more suited to those whose capital gains taxes are lower than their income tax.

Under both options, owners can sell at any time and, at the end of the 11-year term, can choose to enter into a new lease agreement on mutually agreed terms or opt out of the scheme and retain full use of the property. However in some French Alpine resorts, where local authorities are worried about the shortage of rental properties, laws have been introduced making renewal of leaseback arrangements for a further seven years compulsory at the end of the initial 11-year term.

MGM estimates that property prices in the French Alps are still growing by between 5 and 15% a year depending on location.

Donal Buckley,  Irish Independent