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Property Investment for Expats in the United Kingdom

Submitted: July 2013

There are no restrictions on property investment for non-UK nationals, and property rights are guaranteed by registration at the Land Registry. Round-trip property transaction costs are relatively low in the UK, unless you are buying multi-million pound property. Property investment may be made through companies, although the UK has recently tried to discourage this in certain cases.

UK housing law is not harmonised, as there are four separate jurisdictions: England, Wales, Scotland, and Northern Ireland.

 

UK housing market generally

The UK housing market is very unequal, and the gap has widened over the recent years. Broadly speaking, the UK is divided into three major areas: Northern Ireland, London and the South East, and the rest of Great Britain. An alternative view would focus on a “North-South divide”, whereby the South West and East Anglia are amalgamated to London and the South East.

In Northern Ireland, property prices are very low (average price: £131,128 in Q1 2013), and the housing market has been under downside pressure since the 2008 crisis.

London and the South East are the most expensive regions of the UK (average price: £454,644 and £273,766 respectively in Q1 2013). Although prices have fallen in 2008-2009, the upward trend has resumed since then.

In the rest of Great Britain, the picture is rather mixed and market trend analysis should be made on a case-by-case basis. Average property prices range from £139,082 in the North to £220,532 in the South West (Q1 2013).

 

Leasehold vs. freehold

An expat should understand the concept of “leasehold” prior to going ahead with a property purchase. In some countries, the residential real estate market consists almost exclusively of freeholds. In the UK, there are freeholds and leaseholds on the residential property market.

If you have a freehold, you have full ownership over your property.

If you have a leasehold, you are the lessee of the freeholder (the “lessor” or the “landlord”). A leaseholder must pay:

  • Ground rent, and
  • Service charges for repairs, maintenance and cleaning

Additional charges may apply for certain items not covered by service charges. These include contributions towards buildings insurance and major works (sinking fund).

Although leaseholds are like tenancies, they spread over a very long period (typically 99 to 999 years), the ground rent is minimal, and service charges paid by leaseholders are not necessarily any different from the expenses they would have incurred as freeholders. Therefore, leaseholders may have the illusion that they are the ultimate owner of their property, even though it will eventually return to the freeholder unless you have a right to do otherwise. For more information on leaseholders’ rights, click here.

You should always check whether you are buying a leasehold or a freehold. You may easily end up being sold a leasehold for the price of a freehold, especially if the tenure is very long. Nonetheless, don’t forget that the value of a leasehold erodes over time. Typically, you enter red territory when your lease matures within less than 70 years.

 

Mortgaging

Get your documentation right before applying for a mortgage.

It might be tricky for expatriates to take out a UK mortgage, as lenders require documentation which isn’t necessarily available for non permanent resident individuals. The task gets even harder if you are a non-UK resident and you wish to buy UK property.

However, some lenders appreciate that there is high demand from individuals who have an overseas element in their application. Therefore, the first thing to do is to look for a lender who is willing to offer its services to you. Alternatively, your wealth manager might be able to help you in the mortgage application process. See Wealth Management for Expats in the UK.

UK lenders offer fixed and variable rate mortgages, remortgages, buy-to-let mortgages, offset mortgages, and many other specialist mortgages.
An offset mortgage (or a current account mortgages) is a product whereby your savings may “offset” your outstanding balance. Consequently, an offset mortgage is a high-yield, tax-efficient savings product. An offset mortgage doesn’t necessarily come with higher interest rates or fees, as compared with non-offset mortgages.

Example

Sue has taken out a 25-year 5% offset mortgage in 2010. She initially borrowed £200,000. Three years later, Sue has repaid £20,000, which is in line with her repayment schedule. However, she has sold her car for £10,000, and she decides to invest the proceeds in her offset mortgage.

Interest will be calculated on £170,000. In other words, her extra £10,000 attracts a tax-free yield of 5%, as she saves on £500 interest that she would otherwise have paid.

Interest-only mortgages are not banned in the UK. However, expatriates should not hope too much as banks are getting more and more reluctant to lend on an interest-only basis. This is because of the “interest-only time bomb”, which is worth more than £100bn and poses substantial risks to the UK financial system.

For an overview of the UK mortgage market, you can use a price comparison website like this one.

 

Gazumping, gazanging, and gazundering

Gazumping may be a real concern for prospective property buyers in England. A buyer is “gazumped” when he made a purchase offer to the seller and the seller accepted that offer, but later on the seller accepted a higher offer from another prospective buyer. This is made possible by the fact that sale agreements are not legally binding before you “exchange contracts”.

Typically, surveyor’s fees, mortgage fees and legal fees have not been paid when an offer is accepted, but these formalities must be completed before contracts can be exchanged. On average, it takes three months to exchange contracts once parties have agreed on an offer.

Gazanging takes place when the seller pulls out of any deal, generally waiting for better market conditions. Gazundering involves a buyer forcing his seller to accept a lower price.

These phenomena are less common outside England, if not banned.

For an overview of the buying process in England, click here.

 

Letting your property

If you decide to let your property, you must be aware of the applicable landlord and tenant law. Don’t forget that housing matters are “devolved”. In this case, rules may vary whether you are in England, Wales, Scotland or Northern Ireland. For an overview of landlord and tenant responsibilities in England, click here.

Do not breach or frustrate the purpose of your mortgage contract. Typically, you should not let your property without letting your bank know if you are on a first-time buyer mortgage.

Net rental income is taxed at the standard personal income tax rates. See Investment for Expats in the UK If you take a lodger in your main home, rental income is exempt unless your household gets more than £4.250 in rent.

 

Real Estate Investment Trusts (REITs)

Property investment can also be made through common investment vehicles. This may help you secure a yield while not having to manage your property investments for yourself.

A REIT is a tax-exempt property investment vehicle, which is required to distribute at least 90% of its profits. Distributions are subject to a 20% withholding tax, and they are taxable as rental income in the hands of the investors.

 

Council tax vs. Land value tax

The UK has a single-tier system with regard to property taxes. Only local council tax is payable by the occupier, although it must be paid by the owner when there is no other occupier.

The amount of tax is determined by the band of the property. Consequently, you might wish to check the applicable council tax band prior to purchasing UK property.

There is no land value tax in the UK, although there is continuing debate over the introduction of a “mansion tax” on certain multi-million pound properties. However, an Annual Tax on Enveloped Dwellings (ATED) has been introduced since 1 April 2013. ATED covers only:

  • Residential property
  • Located in the UK
  • Worth more than £2m, and
  • Owned by certain legal entities.

 

Stamp Duties and offshore tax avoidance

The UK has substantially tightened the tax burden on property purchases over the recent years. This is especially true of residential property worth more than £2m.
Stamp Duty Land Tax (SDLT) is payable on the transfer of UK property, and progressive rates apply. As a result, an SDLT liability of hundreds of thousands of pounds may arise on the transfer of multi-million pound property.

SDLT rates for residential property are as follows:

Purchase price/lease premium or transfer value (£)

Rate (%)

0 to 125,000

0

Above 125,000 to 250,000

1

Above 250,00 to 500,000

3

Above 500,000 to 1m

4

Above 1m to 2m

5

Over 2m

7

Over 2m if purchased by certain legal entities

15

 

Different rates apply to non-residential or mixed use property, and there are surcharges if you buy a leasehold with high rent.

HMRC is committed to protecting the UK tax base. Consequently, HMRC employs significant resources to defeat offshore avoidance schemes that are primarily designed to artificially shift the UK tax base.

 

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