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Buying a property in the French Alps - What you need to know

06 May, 2020 by Investors In Property
Buying a home in the French Alps is an attractive prospect for many keen skiers who spend year after year visiting the area for their holidays.
 
But just how easy is it to buy a second home in the French Alps? And what hoops do you have to jump through to make this dream a reality?

Below we present the key facts you should know when considering buying a French ski property:
  • Availability of French properties to foreigners
  • Property types in France
  • Advantages of buying newbuild
  • Advantages of buying a leaseback property
  • Purchase process & costs
  • Construction guarantees
  • Taking a mortgage
  • French property taxes
  • Selling, inheritance tax & capital gains
You will find further information on our Buyers’ Info page.
 

Can foreigners buy a property in France?

Yes. In France, unlike Austria & Switzerland, there are no restrictions on foreign buyers. It is possible for foreign buyers to purchase a property either in their own name or in the name of a company, and most properties have Second Home status so there are no restrictions on your use of the property and no rental obligation.

Foreigners are free to purchase a property of any size (m2) and any type (chalet, apartment, hotel, etc) without restriction.

In stark contrast with neighbouring Switzerland & Austria, where properties are subject to restrictions & rules at national, regional and sometimes local level, property in France is straightforward and open to foreign buyers without complication.
 

Property types in France

There are three main property types in France; classic freehold, leaseback & “DIY leaseback”.

1. Classic freehold

Most properties are classic freehold. You own the property and you may keep it for your own exclusive use or you may rent it out; you choose.
 
In France it is possible to claim back the 20% TVA (French VAT) on a new property provided it is made available for rental on a commercial, fully-managed basis. This is what is known as “leaseback”. This is a tax incentive designed to encourage owners to rent their apartments, avoiding empty beds in the resort, and to encourage tourism and employment in the local area.
 
So effectively you can get a 20% discount off the price shown in our price list. To qualify for the 20% TVA reclaim you must make your property available to rent on a commercial basis (not just rent it yourself to friends and family). You must sign a commercial lease with an approved specialist company and they will also help you with the paper work to reclaim the tax. The rental company must provide some basic services to the renters such as cleaning, linen exchange, keys, breakfast, etc. The rental arrangements can be quite flexible but the property should available to rent for at least 8 or 9 weeks in winter and 3 weeks in the summer. You may not occupy the property for more than 182 days per year. We can provide some introductions and further details depending on the property and the resort.
 
As you created the lease, you may also cancel it and then you will no longer be obliged to rent the property in future. This is unique to the French system – if you buy a property in Austria or Switzerland which has a rental obligation that obligation is not cancellable and will continue forever. The 20% TVA reclaimed is amortised over 20 years so if you decide after 10 years to cancel the lease and revert to exclusive use of the property you would pay back half of the tax you have saved. You can sell the property at any time and the buyer could either carry on the rental arrangement or pay back part of the TVA and maintain for personal use. If you sell after 20 years there is no VAT to pay back.
 

2. Leaseback developments

Some newbuild developments are specifically designated as “leaseback” and you are obliged to rent your apartment when you are not using it. These tend to be larger developments, often with a range of extra services and facilities such as a concierge, swimming pool, wellness area, restaurant and lounge. The legal concept is that you buy a standard “freehold” property but on the day you complete the purchase you also sign a lease to a commercial operator which will manage the development and rent your property when you are not staying there. The lease will be for 9 or 11 years and the operator has options to extend and renew it.
 
Management companies all have slightly different rules about owner’s use of the property and some are more flexible than others. Owners block out periods in high season for their own use but last minute bookings and unlimited off season use are sometimes permitted. The developer handles the VAT rebate for you so you only pay the net purchase price; you don’t pay the VAT at all.
 
In addition to the TVA rebate, owners of leaseback apartments benefit from a fully managed and maintained property, which generates regular rental income. Some leaseback operators give a guaranteed index-linked rental income, others pay you a share of the actual rental income for the weeks your apartment was in the rental pool.
 
Owners can block out periods for their own use, and the terms are much more flexible now than they used to be.

3. DIY Leaseback

If you buy a new “classic freehold” apartment or chalet, you could still benefit from the 20% TVA reclaim if you make your property available to rent on a commercial basis. So you could effectively, secure a 20% reduction on any newbuild property presented on our website in France if you are willing to make your apartment available for rental on a long term, commercial basis.
 
To qualify for the tax incentive you must sign a commercial lease agreement with a management and that company must provide a selection of basic services to the renters (cleaning, linen exchange, keys, breakfast, etc). You will need to make the apartment available to rent for at least 8/9 weeks in winter & 3 weeks in the summer and you cannot occupy the property for more than 182 days per year.

We can provide some introductions and further details depending on the property and the resort.
 
The TVA reclaimed on a “DIY leaseback” property is amortised over 20 years so, if you decide after 10 years to cancel the lease and revert to exclusive use of the property, you would pay back half of the tax you have saved.  You can sell the property at any time and the buyer could either carry on the rental arrangement or pay back part of the TVA and maintain for personal use.
 

Advantages of buying newbuild/leaseback

The main advantage of buying a newbuild property is that you can save 20% TVA (French VAT) by entering into a commercial rental program (leaseback). Only new properties can be registered for a leaseback scheme so the 20% saving is unique to newbuild objects.

In addition, you do not pay the Taxe Foncière in the first 2 years and the purchase costs for a newbuild are around 2.5% compared to 6-8% for a resale. As a result, you can save up to 30% on the purchase of a newbuilt apartment or chalet.

Designated, pre-packaged leaseback developments tend to benefit from a wide range of additional services and facilities. These can include a concierge, on-site bars & lounges, spa & wellness suites, swimming pools and so on. These pre-prepared leaseback schemes will tend to be sold fully-furnished with a private storage area for owners to use while the property is rented. These types of leaseback developments tend to be a trouble-free investment and are essentially ready to go once the deed of sale is signed.

Owners in leaseback projects and owners of DIY leasebacks alike can benefit from the management of their property and services such as linen and catering during their own stay in the property.

The obvious final benefit of leaseback properties is that you will receive a healthy rental income net of all costs (other than the Taxe Foncière). Some projects offer guaranteed income while others will pay based on a formula of number of weeks rented and number of weeks of owner use. In both instances it is in the interests of the managing company to maximise the rental of your apartment and therefore to maximise your returns.
 

What is the purchase process for a French property?

As you would expect, the purchase process differs slightly depending on whether you are buying a resale chalet or apartment or whether you are buying off plan. Below is a summary of each case.

Resale purchase process & purchase costs

Once you have decided you wish to purchase a property you will communicate an offer to the agent you are working with. Between yourselves, the agent and the vendors, you will eventually reach an agreement on a sales price and the legal process can begin.

To ensure you can proceed smoothly and without delay, it worth having your finances in order and a mortgage offer ready by the time you make an offer. We can make recommendations for French mortgage brokers.

There are two key documents involved in completing a resale purchase in France, the first is the Compromis de Vente and the second is the Acte de Vente.

The Compromis de Vente is usually prepared by a public notary who, like in Switzerland, is impartial and acts on behalf of both the buyer and the vendor. This document maps out the who, what and when of the property purchase and is signed by both the buyer and the vendor. From this moment the vendor is legally obliged to sell the property to the buyer. However, the buyer still has 10 days from this date to reflect and to walk away without penalty should they wish. This period is referred to as the “cooling-off period”.

The Compromis de Vente will usually also set out a deposit – 10% is customary – that will be paid by the buyer at the end of the “cooling-off period”. This deposit is paid into the notary’s account where it will be held until the sale is concluded.

Should the buyer or vendor walk away from the sale after the Compromis de Vente is signed and the 10 day “cooling-off period” elapsed, there are penalties to paid.

Usually it takes around 3 months from the signing of the Compromis de Vente before the Acte de Vente can be signed. Drawn up by the notary, the Acte de Vente is the final sales deed and is generally signed at the notary’s office (although a Power of Attorney can be granted). All funds will need to be in the notary’s account for the signing to take place. If you have taken a mortgage the notary will need the details of your mortgage provider and they will arrange for the transfer of funds.

Once the final deed is signed, the keys will be handed over and the property is yours.

In terms of the overall costs to the buyer, usually this is in the range of 6% to 8% and is inclusive of notary’s fees, the French equivalent of stamp duty and a registration fee. Generally speaking the estate agency fees are covered by the vendor.

Registering the mortgage usually incurs an additional cost.

Off-plan purchase process & purchase costs

Buying off-plan follows the same broad process used for resale properties.

The key differences are that some developers will allow you to “place an option” on a property thereby taking it off the market for a short period while you arrange to go and visit, discuss finance with a broker, etc.

As per the resale purchase process, a pre-contract agreement is signed to lay out the details of the purchase. In this case it is usually referred to as a reservation agreement.
 
This reservation agreement is signed with a subsequent “cooling off period” of 10 days and an agreed deposit. The deposit is held in escrow by the notary who, again, acts on behalf of both buyer and vendor. For off-plan properties it is crucial that the reservation agreement contains details such as the surface area of the property in question, number of principal rooms, details on the property’s specifications & the target date of signature of the sale deed (and usually the envisaged latest building completion date).

If you are refused a mortgage, usually you will have the right to cancel your purchase and get your deposit back, even after the 10 day cooling period. You should confirm this with the notary.

The final contract for off-plan property purchases is the Vente en l’état futur d’achèvement (VEFA). Again this document should be a comprehensive with a full description and plans of the proposed dwelling, its precise location and a detailed technical description attached specifying the nature and quality of the construction. This document will also lay out how the stage payments will work for your newbuild property purchase. Below is an example how the stage payments may be broken down:
  • 5% Initial deposit
  • 30% of the total price when the foundations have been laid
  • 35% of the total price when the property is weatherproof
  • 25% of the total price when construction is complete
  • 5 %of the total price the day the property becomes available to the buyer (the day you receive the keys)
Once the VEFA is in place and everything is agreed, you will be able to sign the deed of sale at the notary’s office (or via power of attorney). Depending on your country of residence your power of attorney documents may need additional ratification (e.g. the Foreign Office for UK residents).

Once the signing is complete, and once the final stage payment is made, there will be a formal handover of the keys and from that moment the property is yours. You will then have a period of one month to take possession of your home and inform the developer of any issues relating to the property.

As a tax incentive to encourage construction, the purchase costs for a newbuild property are less than for a resale property. All in, the total purchase costs amount to around 2.5% of the property price. This applies to all new properties under 5 years old. If a property remains unsold after 5 years then these benefits no longer apply.

Registering the mortgage usually incurs an additional cost.
 

What guarantees are there for newbuild purchases?

Buying off-plan in France is exceptionally well-guarded, with both the buyers’ interests and money protected by a number of clauses along the way.

Central to the protection of buyers is the GFA (translates as Financial Guarantee of Achievement), which is a guarantee the developer must secure before any sales deeds to buyers can be signed. The GFA essentially guarantees to the purchasers that the apartments will be finished and delivered even if the developer were to go bankrupt.

THE GFA will usually only be given once the developer has around 50% of the project pre-sold. This acts as a protection for both buyers and developers to ensure that the development can go ahead and will be delivered as agreed.
 

Mortgages – Can I get one & how much can I borrow?

French banks will lend up to 85% of the purchase price for a classic freehold, 80% for a leaseback to EU citizens. Non-EU citizens are limited to 70% for sale and leaseback.
 
French banks are able to offer fixed and variable rates. Rates vary continually but currently they are at historic lows with France now offering some of the cheapest lending in Europe. The long term fixed rates are very attractive and with offered mortgage durations so long (typically 15 to 25 years), non-resident buyers can lock in excellent long-term value.
 
In France, we recommend working with a mortgage broker to secure the best deal for our clients and to help them work through the complex lending criteria.
 
We are always happy to recommend brokers, so feel free to contact us.
 

What taxes will I pay on a French holiday home?

Local taxes

There are two local annual taxes, the ‘taxe d’habitation’ – the Residence tax - and the ‘taxe foncière’ – the Property Ownership tax.

The Taxe d’Habitation is calculated on 1st January each year. Liability to the tax has nothing to do with the amount of time you occupy the property, but instead on the possibility that you could reside in the property (you have the right to reside and the property is furnished).

The Taxe Foncière is imposed on the owner, whether or not the property is actually occupied by them or rented out. Owners of newbuild property are exempt from this tax for the first 2 years.

Both these taxes are based on the cadastral value of the property. The rates of tax are set by the région, the département and the commune and vary from one district to another. Typically each tax comes to around 10 - 20 euros per m2 per year each.

If you are leasing your property to a professional management company the management company usually will pay the taxe d’habitation so you only pay only the taxe foncière.

Rental income tax

Whether you are a French resident or not, you are liable to pay income tax in France on rental earnings made in France.

As of 2019, income up to €27,519 is taxed at 20%. Rental income above this threshold is taxed at 30%. These rates apply on the net rental income.

So, even as a non-resident you will need to submit a French tax return as well as declaring the income to the tax authorities in your home country. However, France has double taxation agreements with many countries so you are unlikely to face taxation twice on the same income.

Given the importance of tourism to the French economy, there are tax incentives for property owners who will make their furnished property available for rentals on a short-term basis.

The two main mechanisms for reducing your rental income tax liability are:

1. Offsetting any tax & deductible costs relating to the property

Tax deductible costs include notary fees paid at signing of sales deed (deductible over first 3 years of ownership), co-ownership charges, land taxes, annual mortgage interest & accountant’s fees.

2. Amortising the ‘paper’ value of the property

20% of the purchase price of the property is considered to be land, which cannot be amortised. However, the remaining 80% of the property ‘paper’ value can be amortised by either 4% per annum over 25 years or 3.33% over 30 years. This amortisation can be offset against your rental income.

It is also possible to amortise furniture costs relating to the property. The amortisation to ‘paper’ value of the property does not impact the market value.
 

French wealth tax

This tax has a fearful reputation but, as the owner of a property in the French Alps, you are unlikely to be liable to pay.

Non-residents with a property in France are only liable to pay wealth tax on physical assets located in France. Purely financial investments are therefore excluded.

The tax is payable when the taxable household net real estate wealth exceeds €1.3 million, when it is then applied on net assets above €800,000.

So If you borrowed 80% to buy your property, the wealth tax will only be an issue if your property is valued at €4,000,000 or more – i.e. when the equity on the property equals or exceeds €800,000.
You can reduce your liability to the wealth tax by using a company structure such as an SCI (Societe Civile Immobiliere).

Wealth tax rates are progressive starting at 0.5% to a maximum of 1.5% of the equity.
 
 Fraction Taxable         Rate of Tax
 €0 - €800,000             0%
 €800,000 - €1,300,000    0.50%
 €1,300,000 - €2,570,000          0.70%
 €2,570,000 - €5,000,000     1%
 €5,000,000 - €10,000,000  1.25%
 €10,000,000+   1.50%
 


Selling, capital gains & inheritance tax

Selling

There are no restrictions on when and to whom you can sell your property in France.
This includes leaseback properties. You do not have to repay any VAT & there are no penalties. The buyer will purchase the freehold from you & will take over the lease to the management company.

If you created your own sale and leaseback then when you sell the property the buyer has a choice; either to carry on the rental arrangement or to pay back part of the VAT and keep the property for their own exclusive use. 
 

Capital gains tax & taxes when selling a property

When you come to sell your French property, unless that property is your primary residence, there are three of taxes that will come into play:
 
- capital gains tax (impôt sur le revenu)
- social tax (prelevements sociaux)
- solidarity tax (prélèvement de solidarité)
 
The tax rate will be determined by your country of residence (from a tax point of view) and the size of the capital gain.
 
The standard capital gains tax rate on the sale of real estate is 19%. That base rate is the same for residents of France, the EEA & non-EEA residents alike.
 
Following a landmark ruling in 2015, if you are a non-resident from another country in the EEA then you are exempt from paying social tax in France. You will, however, have to pay the new solidarity tax at a rate of 7.5%. Thus a total tax liability of 26.5%.
 
If you are a non-resident of France and non-resident of the EEA, then you will be charged then you will be liable for the 17.2% social tax in addition to the 19% CGT. Thus a total tax liability of 36.2%.
 
Residents of France are taxed at the same rate (19% CGT & 17.2% social tax) unless they are not affiliated to the French social security system. In which case, they will also benefit from exemption and will instead pay the solidarity tax of 7.5%.
 
On top of this, there is a supplementary rate of tax is also payable on large capitals gains – a super tax. The supplementary tax rate starts when the total gains exceed €50,000:
 
Total gain (€) Tax rate
50,000 to 100,000 2%
100,000 to 150,000 3%
150,000 to 200,000 4%
200,000 to 250,000 5%
More than 250,000 6%
 
Liability to the tax is reduced if ownership is shared as the threshold total gain is calculated per person. So a property owned by a husband and wife in 50:50 partnership, would not meet the threshold for the supplementary tax until the total gains reached €100,000 (i.e. €50,000 each).
 
The good news is that both the capital gains tax and social tax are subject to a tapered relief system, reducing your tax liability with years of property ownership.
 
For the first 5 years of ownership there is no relief to the CGT liability. Starting in year 6, there is a discount of 6% every year on your total CGT liability. Finally in year 22, there is a 4% decrease in your CGT liability. After 22 full years of property ownership, the property is exempt from capital gains tax.
 
Similarly the relief on social charges kicks in after year 5, with 1.65% per year relief from years 6 to 21, a 1.6% relief in year 22 and then a 9% per year relief from years 23 to 30.  After 30 full years of property ownership the property is exempt from social charges (where applicable).
 

Inheritance tax

For a tax resident of France, all worldwide assets are liable to French inheritance tax.

For non-residents of France, only real estate in France is subject to French inheritance tax.

There is no liability for inheritance tax between husband and wife, or those in a civil partnership.
A threshold system applies to inheritance tax for French property. There are tax-free allowances for children/parents, brothers/sisters, nieces/nephews & others.
 
The most significant inheritance tax allowance, as you would expect, is for parents to their children and is currently limited at €110,000 per parent / per child.
 
The fact that the allowance is calculated per parent / per child means larger families are able to pass on more expensive homes without incurring tax.
 
A two parent, three children family would therefore be able to pass on a property of up to €660,000 without incurring tax.
 
For inheritance exceeding the tax-free allowance, tax is calculated based on the amount inherited:
 
Taxable inheritance Tax rate
Up to €8,072 5%
From €8,072 to €12,109 10%
From €12,109 to €15,932 15%
From €15,932 to €552,324 20%
From €552,324 to €902,838 30%
From €902,838 to €1,805,677 40%
Above €1,805.677 45%
 
Inheritance tax can be reduced or even avoided if you set up an SCI (Société Civile Immobilière). This is a specialist type of French company that is established for the ownership and management of property.
 
With an SCI, it is possible for shareholders to progressively transfer or donate the shares to their heirs, lowering the inheritance tax liability.
 
For more information on buying through a company or managing your property through a company please contact us.
 
 
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