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Buy to let Property in France

Tuesday 01 July 2008

Buy to let properties in France offer significant tax benefits to investors, but you need to choose your property and area with care.

Over the past 20 years, in order to meet the demand for housing, the French Government have put in place a number of tax incentives for those willing to invest in new or renovated unfurnished private housing for rent.

In consequence, a whole development industry has grown up, geared to the construction of new homes that benefit from these incentives. Over the period 1995 to 2005 nearly 500,000 homes were constructed in this way.

Whilst the precise terms of the incentives may have changed, the same basic structure has applied.

Broadly speaking, in return for letting the property for a minimum of nine years, you are able to depreciate a percentage of the acquisition price, as well as set-off all reasonable running costs, against your liability to income tax on your total earnings.

Accordingly, investors who benefit from the schemes are those with a strong source of employment, pension or business earnings.

Whilst there is a cap on both the level of the rent that can be charged, as well as the income of prospective tenants, these have been generously set, and have not been a handicap to obtaining suitable tenants at a reasonable rent.

The schemes are known by the name of the Government Minister who introduced them – Perrisol, Besson, Robien or Borloo. They have been very attractive to many tens of thousands of middle class French professionals, both as method of tax avoidance, and as an investment for offspring.

Nevertheless, a recent Government report argued that the schemes have been the victim of their own success, with a glut of properties constructed in some areas, leading to some investors unable to find tenants for the property. Often these unsuccessful schemes were located in small towns or rural areas.

In other cases, the properties were too small for the local market, and were more often than not offered at rents that exceeded the local market rate for similar properties.

The situation is often aggravated by local mayors willing to granting planning consent for the developments because they were keen to see some investment in their local commune, and the prospect of additional rates that would generated.

New Proposals

As a result of the localised over-production, the report proposed that there should be a toughening of the zoning policy where permitted development could take place.

In addition, new schemes should be subject to a more detailed market study, in order to ensure that properties met local requirements. The developments should not be led by the demand from local investors looking to put their money into such a scheme, or the comparatively low value of development land in the area.

Although the developers have reacted angrily to the report, it has been looked on favourably by small investor groups, who consider that new restrictions on development zones will improve investment prospects.

Indeed, it may well be that the tax concessions will be improved, as the Government seeks to focus schemes on lower income households, with the consequent need to improve incentives for prospective landlords willing to let to higher risk tenants.

The clear lesson then from this study for potential investors is not to invest in a scheme simply because of the tax advantages that it brings.

You need to study the local market and the commercial prospects for the development. Whilst the developer will provide simulations on the returns likely to be made, this information is not contractual.

You would be well advised to discuss the scheme with local agents and a local notaire, who have no connections with the scheme.

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