French revolution: Channel your investment

Sarkozy's reforms are good news for Brits buying abroad. Chris Partridge reports

Barely a hundred days since taking over as President, Nicolas Sarkozy has already kicked France's traditionally sleepy property market into action. His tax reforms, like Margaret Thatcher's back in the 1980s, are intended to create a property-owning democracy – but foreign property-buyers could benefit as well.

The reforms focus on two main areas, according to Trevor Leggett, founder of Leggett Immobilier, a French estate agency specialising in selling to the British. "The biggest change is to inheritance tax, where the limit is now ¿150,000 per child per parent," he says. "As most homes in France are in the ¿200,000 to ¿500,000 range, 95 per cent of French people will be exempt from inheritance tax."

In the past, inheritance tax was so savage it usually resulted in the house having to be sold, but many Brits with houses in France failed to realise that the tax applied to them. Couples with children will now be able to buy with confidence that they will be able to pass on the property should disaster strike.

The second focus of reform will come as welcome news to any Brits earning money in France. Sarkozy has brought in tax relief for mortgage interest – whether you work as a self-employed plumber or a salaried office clerk, some of the interest you pay on your mortgage can be deducted from your annual income tax bill.

"Mortgages taken out since May have been eligible for tax relief on 20 per cent of the interest payments, up to a limit of ¿7,500 a year. This will affect several hundred thousand British residents in France, who tend to be self-employed," says Leggett.

One thing that has not changed is the bureaucracy involved in buying property, however, so it is essential to get good professional and legal advice at every stage, Leggett says.

The reforms should encourage the French to buy rather than rent – the average first-time buyer in the country is over 40 – and the demand is expected to push up prices.

And Sarkozy has made it clear he wants to provide tax breaks for the rich, which will further boost the market, as it has in London.

"Other reforms are in the pipeline, intended to try and stop the outflow of wealthy people from France to places like Morocco, where they pay no tax at all," Leggett predicts.

Financing property investment in France has also got easier and cheaper, according to Katy Hepworth, who looks after overseas mortgages for fund managers Assetz. "The big news is that we have seen deposits down from 30 per cent two years ago to 10 per cent," she says. "Mortgage rates can be as low as 4.35 per cent depending, on the term and the amount borrowed. French banks are getting very competitive."

The latest reforms will focus investors' attention on another recent French innovation, designed to promote the rural economy. Four years ago, the previous government made furnished holiday lettings exempt from capital gains tax after only four years of ownership. Many investors buy a chateau or farm with lots of outbuildings that can be converted into holiday cottages or retirement homes, often using them to finance living in the big house.

Sharon Hill of Your French Property advises buying on the coast. Strict planning laws make development on the coast very difficult, and this is causing prices to rise.

"South Brittany has a lack of properties and is very popular with Parisians as well as the British and Irish, so prices are rising quite rapidly," Hill says.

Hill is selling holiday apartments at Quiberon Bay in southern Brittany and in the small town of Mimizan Plage, near Bordeaux. The two- and three-bed units are sold subject to leaseback by the developer for furnished lets, thus gaining maximum tax benefits. They are reasonably priced in the ¿200,000 to ¿300,000 range.

Hill believes that Sarkozy's reforms will bring the French property market into line with other European markets, most of which have seen big booms in the last few years.

"France is a long way behind the rest of Europe," she says. "Sarkozy is really shaking up the property market and I believe it will make a lot of difference."