How new build leaseback investments can save you money

This feature gives some basic information about leaseback schemes, how they work, and how they can save you money.

For more detailed information about leaseback schemes and new build property, see our Property Developments section at https://creme-de-languedoc.com/property-developments/index.php

Leaseback – what is it, in a nutshell?

Leaseback schemes were introduced by the French government to encourage investment in tourist accommodation. They apply to new build property, or in some cases to older buildings that have been extensively renovated or refurbished (in which case the VAT refund is lower).

They are found in many parts of France, in and around ski resorts, in areas where there are golf courses and other leisure facilites attractive to tourists, and on the coast – which explains why there are so many of them in the Languedoc region.

Leaseback is based on the idea that you buy a fully-furnished French property, in a designated, officially recognised leaseback development, which is then leased back to a management company for at least nine years.

The management company rents out the property on a short term basis, and the rent charged by the company is subject to VAT (or TVA, in French); the French government agrees to waive the VAT charged when you buy your new build, leaseback property, in return for the VAT charged on the holiday rentals.

Why is leaseback interesting financially?

VAT refund

Leaseback properties are particularly interesting for buyers because they offer the incentive of a 19.6 per cent VAT refund. How quickly you get your hands on the VAT refund depends on the management company. Some will make the application for the refund on your behalf, which can take as long as a year or more. Others charge you less and bear the hit themselves, and then claim the refund.

Lower notaire’s fees

Another of leaseback’s financial attractions is the fact that the notaire's fees on leaseback purchases (indeed, on any new build buy) are only around two or three per cent, as there is no “transfer tax” (think of it as stamp duty), as opposed to the normal seven or eight per cent, within which transfer tax counts for around five per cent.

Rental income – but how much?

Leaseback property can give rental income which is guaranteed and index-linked to constructions costs throughout the period of the lease; it is usually paid quarterly in arrears. Each year, as building costs rise, your rental income rises, too. If they fall, the worst case scenario is that you receive the original guaranteed return.

Rental income – but how soon?

Leaseback purchases usually involve buying off-plan, which means waiting for (perhaps) 18 months until your French property is delivered. As soon as it is completed and you are the proud owner, the management company starts letting it out and the generation of your rental income should begin. Your contract will specify when you will get your first payment, but bear in mind that if your Languedoc property is delivered in the depths of winter, you might not see any rental euros until the following summer. Don’t count your chickens until they are hatched…

Capital growth

Generally, investors buy leaseback property for both rental income and capital growth. The amount of capital growth you can expect will depend on the resale value of your home; the quality of the build, the standard of maintenance and, of course, its location are all key. One of the reasons leaseback homes can give good capital growth is because they are discounted by 19.6 per cent in the first place!

Are there any catches or clauses?

Yes, of course! Read on…

Obligatory four weeks’ letting per annum

To qualify for the leaseback VAT refund, your Languedoc leaseback holiday home has to be rented out for at least four weeks a year.

Personal use

As the buyer, you can choose a leaseback formula that gives you a set number of weeks’ use of your French home. If you buy into a leaseback scheme with guaranteed rental returns, the management company has the rights to rent out property for most of the year. The more use you have of your property, the lower the percentage of your rental returns.

You need to think about how often, and how long, you will realistically want (or be able) to visit your Languedoc leaseback property. Only you will know if (say) four weeks’ personal occupancy per annum is enough, too little, or (heaven forbid) too much.

Selling on

Until recently, the payment of VAT on a leaseback purchase (19.6 per cent) was waived, but if the property was sold on before twenty years had elapsed, the seller was obliged to repay the French state a proportion of the VAT, calculated at one per cent per annum. This has all changed (hurrah!), and now you, as the owner, do not need to pay back any VAT at all if you sell your leaseback property, provided the residence must be classified with an official tourism star rating, and that the leaseback arrangements remain in place.

Other costs

The management company is usually responsible for paying all the utility bills, but you may well find that you have to pay a percentage of the shared facilities and maintenance costs, depending on how much personal usage you have – read the small print in your contract!

Could you do it yourself?

You could make more money by owning a Languedoc property outright and handling the lettings yourself (although you’d have the hassle of dealing with the paperwork, not to mention tricky tourists, and your rental income wouldn’t be guaranteed, either).

Capital gains tax

You will have to pay CGT if you sell your Languedoc leaseback home, unless you keep it for at least 22 years! For non-residents, French capital gains tax is payable at 33 per cent, but it reduces after five years, until it is zero after 22 years.