The purchasing process for resale properties
Once a property is found and the price has been agreed the vendor, (via the estate agent) the vendor and purchaser, will be required to sign a sales contract, the Compromis de vente (sometimes called Promesse de vente). The information in the compromis de vente includes;
Details of the identities of the vendor and you (the purchaser), full description of the property, the surface area of the property and land, the purchase price and the break down of fees, the date when completion must take place (providing the notary has received all the necessary answers from the different bodies) and finally any let-out clauses (conditions/ clauses suspensives) and the penalties that will be imposed if completion does not take place.
This document is binding on both the vendor and the purchaser. It includes a 7-day cooling-off period (7 days in which to change your mind) this is the best time to instruct for a structural survey inspection. You can include let-out clauses (conditions/ clauses suspensives).
If a mortgage is to be sought, the Compromis de Vente must contain a clause confirming that the mortgage finance is being sought. If the mortgage application is declined, the purchaser will not lose the deposit. Similarly, if the sale is dependent on getting certain property development certificated this should be included.
On the day of signing the Compromis de Vente you will be required to pay your deposit, usually 10% of the purchase price for older properties (less for new properties under construction or buildings under five years old). It is advisable to pay your deposit cheque to the compte sequester (the notaire or agent who is representing you) and not to the vendor. The deposit is held by the notaire/agent until completion.
After the 7-day cooling off period ends your deposit is only refundable if any of the let-out clauses are fulfilled. Similarly if the vendor withdraws from the sale, the Compromis will state what penalty the vendor has to pay to you.
On the day of completion, the balance of the purchase price of the property and all fees will be made to the notaire. Both vendor and purchaser will sign the Acte de Vente. Once this has occurred the property in now officially owned by the new buyer (you)
The purchase on new developments
When you see a development and a particular new property that you like it is important to act quickly. Some developments sell quickly, particularly leasebacks so to get the property of your choice you need to follow the French system. Some developers will give you a verbal option for a few days against a property, others won't, particularly if the development is near the end of its sales, however a verbal option isn't worth the paper it is not written on!
To secure the property you should sign a reservation contract as soon as possible to ensure the property is taken off the market. All of the French buyers do this and it takes a little time for foreigners to understand the strong consumer law that protects purchasers of property in France. A reservation contract that you sign is sent to the builder for signing and will come back to you by registered post in a few weeks. Upon receipt you have a 7 day cooling off period during which you can change your mind about the purchase.
In addition, every reservation contract has a ‘mortgage clause' so that if you cannot obtain the mortgage that you have stated you will apply for on the form then the contract is null and void and your deposit is returned.
Finally from two to several months after signing the reservation contract the Acte de Vente is signed and the property is yours - even though the development is probably only up to foundations stage or so. This is standard practice in France.
The deposit (typically 5%) is normally paid at the same time as signing the reservation contract; however you never pay the builder direct, always the legal Notaire who puts the money in a safe Escrow account.
When the Acte de Vente is signed the second payment is normally due - typically a further 25% paid to the Notaire. If a mortgage has been arranged with a lower deposit than 30% then the bank will pay part of this second payment.
Further stage payments are made to the Notaire over the build cycle of the property and these are normally met by the bank. Interest is due on the increasing bank borrowings over this period but this is easily offset usually by the property value increase in this period.
What is leaseback?
This unique plan enables anyone to buy their dream holiday home or overseas investment property and cover a lot or all of the mortgage costs with a guaranteed rental income (typically 3 to 7%).
The rental income is guaranteed by a large management company that rents the property on your behalf for typically 9 years. You also don't have to pay VAT on the property which saves you the 19.6% that would normally apply - a nice discount!
As owner, you usually have use of the property for up to 6 weeks of the year (if you wish). There are also the added benefits of purchasing the property fully furnished and fitted with kitchen and bathroom appliances, knowing that your property is not left empty and unattended for weeks or months at a time, and that the maintenance and upkeep is paid for by the management company!
Too good to be true? Well there are only a limited amount of properties available at any time under this scheme - that's the catch!
The majority of people who own holiday homes in France, actually only live in them for a few weeks of the year. In addition, French inheritance laws mean that many properties are owned by many family members who cannot agree what to do with the property - this also leaves many properties empty. This is why the French government has introduced 'Residence de Tourisme', or 'Leaseback' schemes to increase the quantity of holiday accommodation available in tourist hot-spots and increase foreign investor revenues in France!
Basically you get a holiday home you own outright, usually with use of it for several weeks of the year with a fixed rental income guaranteed for the rest of the year and a discount to market value of the property represented by a 19.6% VAT refund on the whole property from the French government (all new property has VAT in the total price, this refund represents a 16.4% discount to market value).
What legal advice do I need?
There are 3 choices you can make about seeking legal advice when purchasing.
Take no paid-for advice and use the same Notaire as the builder or the one appointed by the seller of a resale property to transact the sale. Total legal costs (inc. stamp duty etc) will be around 3-5% for new properties and 8-10% for an old property.
Appoint your own Notaire to act just for yourself. They will share the fees under French Law with the sellers Notaire so there is no extra cost to yourself. We can recommend an English speaking Notaire. Total legal costs will be around 3-5% for new properties and 8-10% for an old property.
Appoint a UK specialist overseas property lawyer for full advice. We can recommend legal specialists based in the UK and Ireland - costs will be around 1.5% of the property price for a leaseback purchase and 1% for a normal new or old property. Total legal costs (including the French Notaire costs) will be around 4-6% for new properties and 9-11% for an old property.
Capital Gains Tax
This article gives the latest update and information on taxation in France on capital gains.
Q. How have the Rules changed?
A. Before 1st January 2004 the gain was computed by the French resident taxpayer and included in their annual Tax Return Form 2042. There was no deduction by the notary on completion and to a certain extent the French Revenue relied on the honesty of the taxpayer. There was a special regime for non-French resident taxpayers. The notary dealing with the sale deducted 25% of the net gain made by non-resident individuals and 33 1/3 % made by non-resident companies and paid it direct to the French Revenue. There were regular arguments about whether invoices from non French VAT registered builders could be deducted in working out the gain. The system has been simplified and both French and non-French resident taxpayers are now broadly treated in the same way as non-residents i.e. deduction by the notary on the sale.
Q. What are the new rates?
A. Good news here. The rate of CGT for both French and non-French residents, who are residents of a EU, country is 16% of the net gain. If you are French resident you pay an extra 10% in French National Insurance making the effective rate 26%. In other words non-residents tax rate has been reduced by 9%, which on the face of it should encourage more foreign purchasers in France and will probably drive up prices. Once the 16% has been paid the non-French resident individual taxpayer can have no further French tax liability.
Q. From a tax perspective is French property attractive as an investment?
A. Yes very much so. The popular perception of France as a high tax country is out of touch with reality. In many cases France is a lower taxing country than the UK and from a tax point of view an attractive place in which to invest in property. The problem for UK investors is that UK CGT rates are now much higher than French CGT rates.
Q. What are the rates if you are not a resident of a EU country?
A. The rate goes up from 16% to 33.3%. This is subject to any applicable Double Tax Treaty, which may improve the position. If you are not a EU resident and plan to buy a French property you need to think about a suitable EU, and probably French vehicle to buy it in!
French Regional Taxes
French Regional Taxes consist of Local Property and Occupancy Taxes, which are based upon the rental value of the property and normally paid annually.
Taxe foncière (local property tax) is to be paid if you are the registered property owner on 1st January of the year of purchase. For newly built properties there is a 2 year exemption.
Taxe d'habitation (occupancy tax) is set for the whole year depending upon your situation on the 1st day of the year. It is paid by the person in occupation (therefore if an investment property it is paid by the tenant). For leaseback properties the taxe d'habitation is paid by the management company.
Inheritance Tax is due on any French property owned by resident and non-resident and is subject to French Law, which means that a surviving spouse does not necessarily inherit the total amount of his/her partner's patrimony.
We recommend you seek the advice of a legal specialist who may recommend the formation of a special French property-holding company called an SCI (Société civile immobilière), which results in different financial and legal outcomes for the surviving spouse.
Income Tax - In France rental income (made from French based assets) is taxable after deducting normal expenses. These include running costs, maintenance, refurbishment, insurances, management and service charges, loan interest and local property taxes.
Any further questions………..
As can be seen above the process of buying in France is very structured and regulated with very much the buyer’s security in mind. However because the process is structured it can be felt to be slightly intimidating with a combination of a new language and laws. Please feel free to email me with any questions or concerns regarding the buying process and through our knowledge and experience we trust we will be able to steer you in the right direction. Please feel free to contact us at: info@paulmanionproperties.com
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