Investing in property in the UK is increasingly popular with people from other parts of the world, Middle East, Chinese and North American buyers, among others, have become some of the most prevalent investors in the UK, thanks to the strong returns, growth in prices, and resilience, that the UK market often shows.
Even through financial crises and political uncertainty, UK property continues to perform well, which is why it is popular with those from overseas, who cannot find that stability elsewhere. But if you are investing in UK property, there are some top tips you need to know.
Here are the 7 most important things to consider before you invest in UK property as a foreign investor:
- Knowing what you want from the property purchase
- Financing the investment
- UK taxes and other legal requirements
- Currency exchange factors
- Choose the right location
- Knowing the buying process
- Strategizing and management
1. Knowing what you want from the property purchase
Knowing your exact motivations behind the property purchase you will help you choose the right kind of property and investment.
The UK’s property market offers a wide selection of ways to invest from second homes to buy-to-let commercial and assets.
With so many options available, knowing the reason behind your purchase will help you set your expectations and budget accordingly.
Whether you are looking for a passive income, wish to diversify your property portfolio or you are looking to invest for your pension, the UK’s real estate market can generate strong rental returns and, in some cases, great capital growth potential.
2. Financing the investment
One of the most important considerations that anyone coming from overseas to invest in the UK has to make is how they are going to finance their purchase of property.
Many foreign buyers coming into the UK market will make cash offers, because it allows them the best chance to secure a deal, but there are other avenues it can be worth exploring.
While mortgage products are available both in the UK and in many other nations, off plan property tends to require cash buyers. Those wishing to invest with a mortgage should seek professional advice before doing so to ensure that their financial obligations are fully taken into consideration.
Investors entering the off plan investment market will often find that payments are spread out over the course of construction. This is particularly useful for overseas investors in countries that impose restrictions on the amount of money that can be moved overseas by individuals. In this scenario, it is worth speaking to the developer to ensure that funds can be transferred in a timely fashion to ensure that contracts are not breached.
Projects with favourable stage payments often appeal to those in countries which have tighter limits on transferable funds overseas.
3. UK taxes and other legal requirements
3. UK taxes and other legal requirements
Taxation in the UK property market is quite unique, and always changing, so it’s understandable that people coming from other countries might not know all that much about the situation. However, not knowing how and why you will be taxed can end up being a pricey mistake to make, as failing to factor in such charges can severely affect returns.
Remember things like Stamp Duty, and how any investors who are buying property to rent out also have to spend an additional three per cent levy on top of this thanks to changes brought in last April. As an investor from overseas, it’s always vital to keep tabs on anything that’s new in the market so you don’t fall foul of the law and end up facing tax penalties.
Buy-to-let and second home Stamp Duty tax bands
| Brackets | Standard rate | Buy-to-let/second home rate (1st April 2016) |
|---|---|---|
| Up to £125,000 | 0% | 3% |
| £125,001 – £250,000 | 2% | 5% |
| £250,001 – £925,000 | 5% | 8% |
| £925,001 – £1.5m | 10% | 13% |
| over £1.5m | 12% | 15% |
3. UK taxes and other legal requirements
3. UK taxes and other legal requirements
Taxation in the UK property market is quite unique, and always changing, so it’s understandable that people coming from other countries might not know all that much about the situation. However, not knowing how and why you will be taxed can end up being a pricey mistake to make, as failing to factor in such charges can severely affect returns.
Remember things like Stamp Duty, and how any investors who are buying property to rent out also have to spend an additional three per cent levy on top of this thanks to changes brought in last April. As an investor from overseas, it’s always vital to keep tabs on anything that’s new in the market so you don’t fall foul of the law and end up facing tax penalties.
Buy-to-let and second home Stamp Duty tax bands
| Brackets | Standard rate | Buy-to-let/second home rate (1st April 2016) |
|---|---|---|
| Up to £125,000 | 0% | 3% |
| £125,001 – £250,000 | 2% | 5% |
| £250,001 – £925,000 | 5% | 8% |
| £925,001 – £1.5m | 10% | 13% |
| over £1.5m | 12% | 15% |
Non-residents of the UK are classed as overseas landlords and may apply to HMRC in the UK for exemption.
In general terms, an individual or company will be liable to tax on income generated by UK property whether or not that individual or company is UK resident for tax purposes.
Under the “Non‑resident Landlords Scheme”, the agent of a non‑resident landlord or a tenant paying rent to a non‑resident landlord, is required to deduct tax at the basic rate (currently 20%) from any rent payable to the non‑resident landlord.
When working out the amount of tax payable, the agent/tenant can take off qualifying deductible expenses. Agents/tenants are then required to account to HMRC on a quarterly basis for any tax due on rent payable to the non‑resident landlord.
4. Currency exchange factors
Data released by JLL has shown that Asian investors made up 28% of UK property transactions in 2016, up from 17% in the previous year.
In part, this increase has been driven by the falling value of sterling in light of the UK’s decision to leave the EU in June 2016.
The Office for National Statistics explains that, “The depreciation in sterling shortly after the EU referendum coincided with increases in the number of positive respondents to the other gains and losses question on the FDI [Foreign Direct Investment] survey, which contributed £33 billion to the £65 billion increase in FDI assets in Quarter 2 2016.”
As most overseas buyers are cash purchasers, the fall in the value of sterling has enticed more people who are looking to generate an income from or own a property in the UK.
Chinese and Hong Kong based investors have continued to snap up UK property since Brexit, spending £2 billion a year since 2013.
5. Choose the right location
For those from overseas, keeping tabs on how different places in the UK are performing can be a difficult ask. For the majority of people, London will still be the beacon of the property market, thanks to the way it bounced back from the crash of 2008 and the fact prices are always rising, but this doesn’t necessarily make it the best place to invest.
It can be a good idea to look towards new places such as Leeds, Manchester and Liverpool as investment options, where cheaper properties that are in high demand from tenants can be a great option. It’s also always important to consider who you are renting to and what they would want from their home before you invest.
London commuter belt properties have also witnessed a resurgence as more investors look outside of the capital for better value for money and take advantage of the demand from London workers who do not wish to live in the capital.
Overseas clients typically see UK student accommodation as a good investment. Some investors, who have family members studying overseas, wish to buy and own student accommodation rather than rent. Many buyers in this market opt for purpose-built property as it helps to provide a safe environment for their loved ones while still providing the ‘university experience’.
Investors who have previously lived in the UK whilst studying also understand the market and the premium people are willing to pay for high quality accommodation. This knowledge of the student sector has helped global student property transactions increase by 40% over the last 12 months.
6. Knowing the buying process
Once you have found a suitable property that matches your requirements, it is then time to put in an offer.
When buying through Experience Invest, you will also be required to pay a reservation fee which will come off your final balance.
The legal Exchange of Contract and transfer of the property (conveyancing) is the next stage. You will need a solicitor or a licensed conveyor for this.
You will need to appoint a Solicitor at this stage. Ensure you clarify whether VAT and/or disbursements is/are included in the upfront quotation. Conveyancing proceeds through an exchange of notes between the Seller’s Solicitor and your Solicitor. A “Draft Contract” will be drawn up by the seller’s solicitor containing the price and information about the Seller’s Title Deeds, etc.
Your solicitor will check this and negotiate with the seller’s solicitor. Searches, enquiries and surveys undertaken on your behalf will include a Local Authority Search, to check that the property is not in the way of any project; a search at the Land Registry to check security of title. Other enquiries will check on things like mineral rights, flooding, pollution, etc. This part of the conveyancing process will take a minimum of two weeks and up to 8 weeks.
Once you and your solicitor are satisfied, you sign final contracts. This process binds both parties legally. At this point you hand over a non-refundable Exchange deposit. If the property is off plan it is now good practice for the clients’ funds to be held in a client solicitor account, which is then release at drawn down stages during the building upon satisfactory stages of the build and Architect Certification.
A transfer contract documenting the transfer of title will next be prepared and signed by both parties. A Completion date will also be agreed upon. Between the contract signing and Completion Date, proper arrangements with the Land Registry office are made: Stamp Duty and other fees connected with registering are paid. Payments are now completed and the deeds are handed to you.
7. Strategizing and management
Finally, when you are buying a home as an overseas investor, it’s absolutely vital that you take the time to consider how the property will be managed and how your income will be sustained. As you are more likely to not be in the UK for the majority of the year, you need someone to hand who can deal with lettings, rent collection, maintenance and other issues.
Setting this up when you buy is an absolute necessity for overseas investors, but for those purchasing through an organisation like Experience Invest, it’s something you can rely on. When you buy in purpose built developments, you get the peace of mind that someone will always be looking out for your property and ensuring your investment performs as well as it can.