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Sunday, 14th April 2024
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Investing in ‘la vie francaise’ is not as easy as it seems Back  
Buying property in France is becoming increasingly popular with Irish investors, writes John Crawley, but potential investors need to be aware that it is not as easy an undertaking as it would seem. Not only is the purchase process different but the tax, legal and financing consequences need to be thought out.
Buying a property in France can be very different from what you would be accustomed to when buying in Ireland. Not only is the purchase process different but the tax, legal and financing consequences need to be thought out. Here are some of the main things you need to know:
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The legal steps
Buying a property in France is a regulated process. There will be a Notaire who is a government official responsible for the conveyancing and represents the buyer and the seller. Notaire fees are fixed – around 4 per cent for new properties and 10 per cent for second-hand. If you appoint a Notaire who is different to the sellers they split the fee (you do not pay twice). It may also be advisable to appoint a solicitor to advise on the legal documentation.

When you select a property you will sign a preliminary contract (Compromis de Vente) which binds the buyer and seller subject to obtaining a mortgage. Normally you will be required to pay a 10 per cent deposit to the Notaire at this stage. There follows a 7 day cooling off period.

Within 2 – 3 months a final contract will be signed (Acte de Vente). In the case of both agreements you may appoint a person to sign on your behalf (power of attorney).

Financing your purchase
It is normal for the buyer to take out a mortgage in France to finance the investment. This will ensure that the buyer is best positioned to obtain a tax deduction for the interest borrowed against any rental income.
French banks typically lend 70 per cent of the purchase price (although 80 per cent can be arranged in certain circumstances).

You can expect to pay a mortgage registration charge of 1 per cent and another 1 per cent arrangement fee.
In the case of a new property development a staged loan drawdown can be arranged usually with minimal repayments until the loan is fully drawn down.

Mortgage protection insurance will be required and is normally arranged through the bank. You will need to make a decision on whether to borrow on a fixed or variable rate basis.

Taxation
Registration duties (equivalent to stamp duty) will apply on your purchase. These are included in the notaire’s charges (c.4 per cent for new buildings and c.10 per cent for secondhand properties).

France has a wealth tax which applies if your property portfolio exceeds €720,000. It is charged at a progressive rate which starts at 0.55 per cent rising to 1.8 per cent where the property is worth €15m.
There are two annual property taxes: taxe fonciere – the owner of the property is liable for this national tax; and taxe d’habitation is paid by the occupier to the local taxing authority.

Rental income is taxable but can be substantially sheltered by the interest cost of borrowings.

If you are tax resident in Ireland then you will normally be taxable on your net French rental income receiving credit for income taxes already paid in France.

Rental income
Short-term/seasonal furnished rentals – best suited if your property is in a tourist area or you wish to use the property yourself from time to time.

Long-term unfurnished rentals – normally these are for three year periods at a time. It is possible to take out an insurance policy in France to secure these types of rental contracts (prices depend on many factors but as a rule of thumb the premium reduces the rental yield by 0.5 per cent pa).

Leaseback schemes – these are tourist accommodation properties in designated areas. Generally small in size they are popular with investors. The buyer is entitled to reclaim the VAT (19.6 per cent) on purchase, normally organised by the developer. A management company leases the property from you, typically for 9 years and gives you a guaranteed rental return, currently between 4 per cent and 6 per cent depending on the area (and some usage of the property subject to accepting a lower rental yield).

Disposal
Capital Gains Tax (CGT) applies on disposal of French property at a rate of 16 per cent. This rate reduces progressively to 0 per cent from year 6 to 16. In other words after 16 years of ownership the CGT liability is nil. Unlike income taxes the Irish-French tax treaty does not provide for relief of overseas CGT paid in France.
This means that an Irish tax resident pays CGT in both countries.

The Irish rate is currently 20 per cent so the maximum combined liability is 36 per cent reducing to 20 per cent after 16 years.

Current opportunities in France
Getting onto the investment property ladder in France using the leaseback scheme has become very popular with Irish Investors.

So what is leaseback?
It is a tax-incentive scheme to encourage the development of tourist accommodation. The principle points are as follows:

• Purchase outright a new property – fully furnished
• Purchaser entitled to reclaim VAT (19.6 per cent)
• Property is leased to a management company for 9 years
• Management company gives an index linked guaranteed rental return to purchaser – yield typically 4.5 per cent to 6.0 per cent
• Purchaser has option to part use the property - normally at a discount to rental price
• 70 per cent to 80 per cent Finance can be arranged

Why buy a leaseback?
Fundamentally this is an investment opportunity. The index-linked rent will normally cover your mortgage payments (based on a 70 per cent variable rate 20 year loan) and taxes. Purchase fees (stamp duty, land registry, mortgage, legal & tax) are typically 6 per cent of the purchase price.

What alternatives are there to leaseback?
Leaseback is the best known type of French investment but there are other ways of owning French property. There are a growing number of investors buying both new and pre-owned properties which type can rent.

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