Are you an expat considering investing in UK property?
For a very long time, it's been the investment of choice for many expats, whether they're from the UK or not.
Why wouldn't you want to?
The UK property market has been very stable; in fact, more than that, it's produced great returns.
Guess what? It doesn't stop there. Strong rental demand means that you're going to get a steady income as well.
That all sounds great, though, is it all upside?
Let's take a look in a bit more depth and discover why investing in UK property might not be as attractive as it once was.
Before we do that, we wanted to say that any debt should be covered by life insurance.
You might have a policy that you took out back home and you're still paying premiums. So, we want to let you know that this policy would let you down now that you're an expat if there was a claim on it.
You need to be sure that your life insurance is going to do what it's supposed to.
So, here's an opportunity to get a copy of our...
"Expat Life Insurance Confirmation Pack."
It's completely FREE and has resources to help you confirm your life cover still works. Plus, it gives you a step-by-step guide of how to do that and gives you questions that you should be asking.
So CLICK the image below and get yours NOW!
The Pros Of UK Property Investment For Expats
Stable Market - We've already briefly touched on this in our introduction. Historically, it's produced real price growth. This makes it very attractive if you're an investor looking for long-term growth. There have been some market corrections along the way, with the last one happening in 2008 as a result of the global financial crisis. That being said, key cities such as London, Leeds, and Edinburgh have shown strong growth over time.
Rental Demand - The UK population is growing, and there is a shortage of suitable housing, which equals rental demand. So, if you're an investor, you can enjoy reliable income streams. This is especially true for major urban areas and university towns.
Diversification - Investing in UK property can provide diversification to your investment strategy. It can act as a hedge against inflation and for UK expats against currency risk. Property is its own tangible asset class with its own market cycle. This is often unrelated to other traditional investments, providing performance independent from them.
Favourable Legal Environment - The UK has a well-established legal framework that protects property rights and ensures landlord-tenant relationships are governed by clear regulations. If you're an expat investor, this gives you confidence and security when entering the market.
Potential For Capital Growth - We all know that past performance isn't a guarantee of future growth. However, it's worth noting that the appetite for UK property remains strong. This is an indicator that going forward, UK property prices are likely to keep rising.
The Cons Of UK Property Investment For Expats
High Initial Investment - All that growth has meant that UK property prices aren't cheap. If you want to get in on the action, then you're going to have to stump up some serious cash. This may mean borrowing money to buy the property.
Management Challenges - Managing property investment from abroad can prove difficult. Finding a reliable property management service is essential, though this will come at a cost and reduce your investment yields. Then you've got the issue of maintenance, fixing wear and tear, and significant damage. Any difficulty with tenants will also take time and may prove more challenging if you're remote.
Brexit - The UK economy is going through changes and new stresses since it left the EU. The economic outlook is far less positive than it was, and those Brexit bonuses seem few and far between. These deteriorating fundamentals will impact the UK property market over time. Increased debt and lower GDP growth will eventually result in a reduced credit rating for the UK, which would in turn lead to higher interest rates and possibly a weaker pound.
Taxation - The past decade has seen some big changes for you if you're an expat property investor. There have been changes in taxation across the board, and none of them have been positive for you. The tax net has widened and increased for non-resident property investors. We'll touch on these changes later in more detail.
Costs - When it comes to your investments, costs are bad because they reduce your yield. Everything that we've mentioned above results in higher costs, resulting in a much lower net yield if you're investing in UK property as an expat.
UK Taxation Changes For Non-Resident Property Investors
Tax efficiency should play a significant role in determining where you invest your money. For a long time, expats or non-UK residents enjoyed some great tax breaks on UK property.
Over the past decade, however, these benefits have largely disappeared.
So, let's take a look at what those changes are and what they mean for you as an investor.
Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax (SDLT) on residential property has undergone several changes over the past decade. The most recent changes introduced surcharges for non-resident investors, set at a rate of 2% on anything above £40,000, in addition to normal SDLT.
Additionally, there's now an extra 3% SDLT charge if the property is a second home or buy-to-let.
This means that for an investment property up to £250,000 in value, you'll be paying 5% in SDLT.
For properties above this price, SDLT would increase to 10% on the portion above £250,000. The upper limit for this band is £925,000, beyond which higher rates of 15% and 17% apply.
These changes have significantly increased your upfront cost of buying a UK property as an expat.
Mortgage Interest Relief
If you're considering becoming or currently are an expat landlord, you might be using debt. Mortgages are a common way to invest in property and allow you to leverage your capital.
One significant change that could impact you is the phased reduction of mortgage interest relief. Previously, you could deduct interest from rental income before calculating profit. The tax that you would have to pay would be calculated on this profit figure.
However, over recent years, this relief has been gradually restricted. This has resulted in increased tax burdens for many expat landlords, especially if you have a highly leveraged property portfolio or higher rental incomes.
Capital Gains Tax (CGT)
Before 2015, non-residents could sell UK property without being charged Capital Gains Tax (CGT) on gains. However, after April 2015, this changed for expats selling residential investment property.
For UK citizens who are non-resident, primary residence rules still apply. So, if you're selling your family home, you won't pay CGT on gains.
If you're an expat landlord with property in the UK, this change will have had an impact on you. Moreover, if you're thinking about buying UK investment property, this is a setback. It represents a significant reduction in the tax efficiency of UK residential property as an investment.
This is because any gain made when selling a property that's more than £3,000 gets hit with CGT. Currently, for residential property, this equates to 24% of the gain, payable to HMRC.
Inheritance Tax (IHT)
The structure of UK inheritance tax (IHT) has remained relatively consistent over the past decade. However, in April 2017, changes were made that impacted all non-resident property owners.
Property owned directly by non-residents has always been subject to IHT. However, before 2017, many non-residents utilised a strategy called "enveloping" to avoid IHT.
Enveloping involved owning the property through an offshore company. The shares of that offshore company were then placed into trust. This structure gave the investor control of the assets and kept them out of their estate, thus avoiding any IHT charge on the property portfolio.
Such structures were rendered ineffective by legislation introduced in 2017. This meant that IHT couldn't be avoided, further reducing tax efficiency.
The Costs
We've explored the tax implications of owning UK property, which present significant costs. Here's a breakdown:
At least 5% SDLT on entry
At least 20% on rental profits
24% of any gain above £3,000 on the sale of the asset
Initial purchase costs, starting at least at £5,000 without SDLT
Once you've acquired the property, you'll likely seek someone to manage it for you. This includes finding tenants, conducting checks, rent collection, and handling repairs.
On average, this management can cost around 10% of the rental fee, though it may be higher. Negotiating a discount is possible, especially with multiple properties managed by the same company, potentially reducing the cost to 7% or even 6%.
If the property remains vacant, you'll be responsible for council tax payments.
Additionally, you'll need to cover maintenance costs.
If you're using a company to hold the property assets, there are associated costs, including potential audit requirements and the need for an accountant to assist with taxes.
All these factors significantly impact your returns. In fact, recommending an investment with such expenses would likely be met with skepticism.
The Fundamentals
I'll be blunt and put my cards on the table here...
I honestly don't get it!
Right now, two things blow my mind when it comes to investing. These are Bitcoin and the UK property market.
But we're not talking about crypto today, so let me explain what I mean about the property market.
I understand that property markets are demand-driven and economic health impacts this. I also get the argument about there being a shortage of affordable/suitable property in the UK. And I'm aware of the opportunities in the rental market for the UK, especially in University towns.
What I really don't get is this...
The relationship between average income and average house price is a key indicator. It shows whether a property market is under, over, or at the right value. These values have historically moved together and shared a close connection. Though over the past 20 years, this has changed and the two have diverged. This is because the average house price is increasing faster than average income.
This isn't a good situation and is a cause for concern for long-term stability in that property market.
Housing has to be affordable for the majority of any country's population. When it isn't, this indicates income inequalities which are negative over the long-term.
This also indicates market imbalances from speculation, excessive investor demand, or supply constraints. All of which create housing bubbles that end in sharp downturns for property markets.
Today, people need to borrow more to buy a property. Gone are the days of 3 times salary mortgages. Today, we're looking at multiples of five or six times salary.
After the 2008 financial crisis, lending practices were tightened up. This meant 90% mortgages were the most you could borrow against a property.
In 2024, because of the lack of affordability, 100% mortgages have been reintroduced.
And all this makes the UK more and more interest rate-sensitive; it's like financial type 2 diabetes. Because we have to borrow more as interest rates go up, it sucks more money out of our incomes. This means there's more money going to finance debt and less money getting spent in the economy.
See where this is going?
I see people on Facebook, TikTok, and Instagram telling you how they can help you get rich from property. They tell you how property can't fall by 40 or 50%.
Why can't it?
Let's take Japan as an example. In the 80s, they had an asset price bubble which saw massive increases in land and property prices. In 1992, this bubble finally burst; land and property prices started to fall. This continued year after year until 2012. By this time, residential property prices were a tenth of what they were at their peak.
UK property prices have been rising for a long time. While 2022-23 saw some very modest corrections, they weren't big enough to correct any of the above.
From the forecasts that I've read, 2024 is supposed to see UK property prices grow.
It can't go on forever...
Before we summarise what we've talked about today, we want to remind you of this...
Life insurance is essential, especially if you have a mortgage. Making sure that your life cover works now that you're an expat is important.
Don't take it for granted that an existing policy will, because 80% of domestic policies don't. They stop providing cover 6 months after you've been living in another country.
So, here's an opportunity to get a copy of our...
"Expat Life Insurance Confirmation Pack".
It's completely FREE and has resources to help you confirm your life cover still works. Plus, it gives you a step-by-step guide of how to do that and gives you questions that you should be asking.
So CLICK the image below and get yours NOW!
Summary
What's the answer to that question we asked at the start...
Is UK property a good investment if you're an expat?
It certainly has been in the past, and I'm not saying it won't be in the future. But right now, I have my reservations.
If you take an honest look at the costs, then it's a very expensive investment.
The tax changes have a massive influence on our opinion, especially with regards to CGT. This reduces yield by almost a quarter, and that's a big chunk of change to be giving up.
There are better investments available to expats. Ones that give capital growth, income, and are way more tax-efficient.
Finally, we have those market fundamentals that we talked about. That's because at some point, the UK property market is going to have to reset.
When this does happen, it will create value and affordability in the UK property market. Until then, UK property shows all the signs of a market bubble that could pop at any time.
Because right now, those gains are being driven by a belief that markets can't fall, and that isn't the case.
Before we go, here's another opportunity to get our...
"Expat Life Insurance Confirmation Pack".
It's completely FREE and has resources to help you confirm your life cover still works. Plus, it gives you a step-by-step guide of how to do that and gives you questions that you should be asking.
So CLICK the image below and get yours NOW!
Thanks for reading, and we'll be back next week.
Comments