How French buy-to-let schemes can save you a fortune in tax

British investors are finally cottoning on to the holiday developments in France that offer exemption from VAT, providing savings of nearly 20 per cent.

These holiday complexes, known as résidences de tourisme, are built by a developer who then sells the units to investors. They, in turn, lease them back to an operator who does all the hard work - including furnishing, letting, cleaning and general maintenance.

To encourage the building of tourist accommodation, particularly in the South, the French government exempts leaseback résidences de tourisme from VAT on the purchase price, currently 19.6 per cent. Irish investors have known about leaseback for years, says Laure Baldacchino of Chesterton International, but it is now catching on in the UK. "The best capital appreciation is in the Alps and the South - growth has been about 10 per cent a year," she says.

Chesterton International is currently selling apartments at a typical résidence de tourisme near Cannes. Le Petit Lac is centred around a lake (of course) and has apartments of all sizes, with a starting price of £200,000.

With résidences de tourisme, the initial lease must be nine years, with an option to renew for another 11 years, bringing the total to 20 years. If the lease is terminated early, a proportion of the VAT must be repaid. It might sound generous of the government to give up all that income, but it gains on the swings what it loses on the roundabouts, says Mike Coyle, sales director of Premier Resorts. "The property must go into the lease scheme, and the government collects 5.5 per cent VAT on the rent," he explains. So investors must be careful about the type of leaseback they sign up for, depending on whether they want to use the place themselves. "Leaseback comes in various forms, from pure investment to plans under which owners can use the property for a few weeks a year, up to a maximum of six months. Returns vary from 6 to 2 per cent," says Coyle. Leaseback is a very secure way of investing, claims Coyle: "Because the developer and operator have to get approval from the authorities, the investment is basically underwritten by the government."

Premier Resorts is selling apartments in a type of development that is becoming popular with holidaymakers, a new quartier on the edge of an established village. This type of development is built in traditional style to blend in with the village but not overwhelm it. For example, Les Jardins de St-Benoît is a group of villas and houses being built on the edge of the village of St-Laurent, near Carcassonne. The leaseback scheme comes in four formats, from a "pure investment" option giving a net return of 4.22 per cent, to a "home from home" option with a lower return but giving the owner up to six months' use of the property.

The French alpine developer MGM has a number of résidences de tourisme, the latest being on the Italian border at La Rosière - you can ski to Italy for lunch! Built in Swiss-chalet style, prices start at €227,000. MGM has taken leaseback to a new stage with its next scheme, at Courchevel 1850, a four-star résidence de tourisme to be called Le Padisha, where buyers can either rely on rent, or own shares in the development.

Investors in leaseback schemes are advised to borrow most of the money in France, on the security of the property, says Martin Sadler of Assetz France. "It negates exposure to wealth tax, and a French mortgage will be deductible against the rent for income tax. It also reduces the danger of being hit by currency fluctuations," he says. "Rates are lower, at 3.95 per cent, but they are hardening."

Chesterton International: 020-7201 2070; www.chesterton.co.uk; Premier Resorts: 020-8940 9406; www.premierresorts.co.uk;

MGM: 020-74940706; www.mgmfrenchproperties.com; Assetz: 0845 400 7000; www.assetz.co.uk

The basics

* Save VAT at 19.6 per cent on a résidence de tourisme

* Unit is rented out by operator, who also pays for furnishing, cleaning, maintenance and taxes

* Owner can use the property to a maximum of six months

* Lease must extend to 20 years for all VAT to be recovered

* Get a French mortgage for best returns