UAE, 12th October 2016: It has been a tumultuous period for the British currency ever since the nation’s public historically voted to leave the European Union in June 2016.
The situation has been further exacerbated in recent days by the announcement that the exit could be commenced from March 2017 when the now-famous Article 50 of the Lisbon Treaty is triggered, causing the pound to drop almost overnight to a 31-year low.
Although bad news for Brits, the weak pound can mean rewards for foreign investors and expats, particularly those looking to place their investments in British property.
“This is an opportunistic time for those being paid in US dollar-pegged currencies such as the dirham to invest in British entities as they will receive much more for their money than before. Additionally, UK assets have suddenly become a lot cheaper meaning greater purchasing power”, comments Neil Stewart, Senior Financial Planner at Guardian Wealth Management.
In the capital city of London, the effects have already been felt; property prices have dropped 10% since the peak in 2014 and average values paid in US dollars per square foot have dropped by 29%, according to data provider LonRes. This makes buying in prime central London with the US dollar the most affordable it has been since 2012.
Forecasts from the most pessimistic suggest that the pound could drop to as little as US$1.15 by the end of 2016, meaning that prices in prime central London could drop by 37% per square foot. Add to this a typical rental yield of 4%-6% and the total returns could be significant.
Additionally, with the Bank of England base rate also at an all-time low (just 0.25%), mortgages have become significantly cheaper for borrowers and typically range between 3.53% to 4.24%. Although slightly trickier for expats and foreign investors to secure, the range of buy-to-let mortgages are improving all the time and non-UK residents can expect to put down anything from 25%-40%.
“All the evidence indicates that now is a great time to buy property in the UK. However, despite the currency gains and fall in house prices, there are a number of tax barriers on UK residential properties that need to be considered, which can be considerably higher for the foreign investor”, continues Neil Stewart.
Stamp Duty Land Tax (SDLT)
SDLT can now be a significant cost in acquiring UK properties and will apply to all units above £125,000. Banded rates will apply but consumers can expect to pay up to 12% for properties costing over £1,500,000. An additional surcharge of 3% can be applied to purchases of second homes.
Non-resident Capital Gains Tax
Non-resident Capital Gains Tax was introduced in April 2015 to all non-UK residents selling UK residential property. The tax can be around 18% for basic rate taxpayers, 28% for high earning individuals and trustees, and 20% for companies. The aim was to close a tax advantage between foreign landlords and British landlords who already had to pay the tax on profits from the sale of a second home. The tax will also be applied to UK expats selling properties whilst based overseas.
Tax on Rental Income
UK income tax is charged on income from letting property situated in the UK regardless of the residence status of the landlord. Currently, expenses such as maintenance fees will be accounted for and deducted when calculating the rental income tax. However, this is due to be limited from April 2017 as finance cost restrictions are phased in.
From 2017-2018 foreign landlords can offset 75% of their costs against rental income, with the remaining 25% given as a basic rate tax deduction. These finance cost restrictions will decrease by 25% per year until 2020 when 100% of the costs will be given as a basic rate tax deduction.
Value Added Tax
Many of the costs incurred by investors in UK real estate such as surveys and legal fees will be liable to a UK VAT tax of 20%. Since the letting of residential accommodation is (in almost all cases) not a “taxable activity” for VAT purposes, the VAT suffered on those costs is not generally recoverable.
Inheritance Tax (IHT)
From April 2017 foreign investors (non-domiciles) will be liable to pay UK inheritance tax on their properties as well as the annual tax on enveloped dwellings (ATED) introduced in 2013. It will no longer be possible to shield UK residential property from inheritance tax by holding it through a non-UK company within an excluded property trust or a non-UK company.
Expats from the UK will still be liable to pay IHT on all UK properties regardless of whether they live abroad, unless they have been deemed of non-domicile status which is usually unlikely.
“As you can see the tax burdens on foreign investors and expats are significant and need to be weighed up against the benefits of a low pound. The UK property market is still buoyant and a reliable asset class, but the recommendation would be to stick to one property rather than several to minimise the costs and see a good return on investment”.
“Ultimately there are other pound investments such as mutual funds and single equities that can be lucrative during this period and it is important for investors to diversify their assets. We recommend speaking to a financial advisor with expertise in the UK market to ensure secure investments are added to your portfolio”, concludes Neil Stewart, Senior Financial Planner at Guardian Wealth Management.
For more information, visit www.guardianwealthmanagement.