French Vacation Leaseback

I found the ethics discussion on the leaseback schemes to be interesting. I had read an article recently on a related topic. In the UK it is common for people to have self-invested personal pensions (similar to the proposal put forth by George Bush a couple of years ago during the social security “crises”). These Sipps as they are called allow individuals to make personal investments that provide tax rebates in return for limited ability to access the money until an age limit is met. Very similar to a 401k.

It is not permissible to make investments in personal property with the Sipp. Only commercial property is allowed. However a loophole has been found around this restriction. In France and Spain there is a government supported method for a legal leaseback. This method encourages people to purchase property that is intended to be used as a hotel or rental unit in order to increase tourism. Besides the rental income the buy makes, he also does not have to pay the French VAT tax, with is currently 20%.

So a buyer in the UK purchases the French vacation villa with his SIPP, receives the UK SIPP contribution tax benefit, receives the UK rental income SIPP tax exemption, receives the UK capital gains SIPP tax exemption (if the property is sold), receives the French VAT relief, and in 20 years has a nice vacation home. Considering that he only has to make a down payment to make the purchase and can finance the rest, this provides a really nice way to make a good investment.

Ethically speaking I am not sure the leaseback is really a problem here since the French law is specifically intended to increase investments in vacation properties. The buyer is using it for its intended purpose. From the SIPP standpoint, the article I read implied that the SIPP is not intended to allow investments in personal property, but in effect this is what is being allowed though the loophole. The property is commercial for a while but is really personal property which can be enjoyed as such after it is paid off.