Why French Leaseback offers higher return than UK Buy-to-Lets
From 2020, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate the tax due. So tax will be paid on turnover rather than profit, meaning tax could be due on non-existent income. For higher-rate taxpayers, mortgage costs above 75pc of rental income will make their BTL investments loss-making.
In France, you can deduct French mortgage interest on top of all the allowable expenses like legal/mortgage fees, accounting fees, service and management charges. Also, you can offset 1/30th (property depreciation) and 1/7th (furniture depreciation) of property and furniture prices respectively each year (property depreciation: 30 years) and furniture depreciation: 7 years. As a UK tax resident, from 2020, you will still be able to offset the full mortgage interest each year against the rental income received unlike in the UK.
It does make sense to take out a French mortgage when financing the purchase of a French property if you are planning on using as a furnished holiday let as you will reduce greatly the taxable rental income profit at UK HMRC. You will first need to declare your rental profit at French Revenue (local Revenue office where your property depends on) but thanks to the property depreciation laws in France on top of the aforementioned running costs and mortgage interest, you will not pay any tax for over 10 years, 30 years in some cases.
Example: Landlord pays 40pc tax
The UK Buy-to-let property that you own earns 20,000 a year (after deducted running costs) and the mortgage interest is 13,000. Tax is due on the profit. You pay tax on 7,000, meaning 2,800 for HMRC and 4,200 for you.
From 2020, tax to pay will be due on your full rental income of 20,000, less a tax credit equivalent to a basic-rate tax on the interest. You pay 40pc tax on 20,000 (£8,000), less the 20pc tax credit on mortgage interest (20pc of 13,000 = 2,600). HMRC gets 5,400 and you get 1,600. Your tax bill has gone up by 93pc.
In France and because of mortgage interest and depreciation you do not pay any tax on your property for 20-30 years.
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