A Brief Guide For Overseas Investors When Investing in the UK Residential Property Market.

Selchouk Sami provides a brief guide for Overseas investors investing in the UK residential property market.

Selchouk Sami s.sami@rfblegal.co.uk is a Solicitor at the firm’s West End office specialising in property law.

1. Location, Location, Location

Property prices in the UK vary considerably depending on where you look. Prime Central London (PCL) includes Kensington and Chelsea, Mayfair, Marylebone, St John’s Wood and prime outer London (POL) includes Fulham, Wandsworth and Clapham, Islington and Canary Warf.

Rental yields for these areas in February 2014, according to Tom Bill of Knight Frank in his London Residential Review, is 2.84% in PCL and 3.67% in POL. “Though low by real estate standards, capital value growth means that total returns over the same period were 10.6% in PCL and 15.1% in POL. The latter was the highest among a set of mainstream asset classes in the last year...It underlines the strength of London residential property as an investment class.”

There are of course other areas in the UK where property prices are more modest whilst generating an attractive rental yield.

Knight Frank’s International Residential Investment Report for London 2013 lists a number of reasons why property investment in the UK capital is popular, namely:

  1. It boasts a flourishing entrepreneurial sector, with small tech companies edging in to the City of London, a traditional bastion of banks and insurance houses.
  2. The capital is a leading player in the finance industry, ranking 2nd in Y/Zen’s Global Financial Centres Index in 2014, behind New York and ahead of Hong Kong in third.
  3. London is described as a safe haven with a recognised and transparent legal and political system.
  4. World renowned schools and universities.

Currently the nationalities of buyers, of new build properties in London comprise of 27% UK, 23% Singapore, 16% Hong Kong, 5% China ...3% Turkey. Knight Frank forecast that some overseas markets may also rise in importance. Turkey is seen as an emerging market in terms of prime London homes. Healthy economic growth during the last 3 years – far outperforming crisis hit Western economies, has led to continued wealth creation.

2. Negotiation

Once the buyer decides to buy the property they need to place an offer with the estate agent representing the seller. If you don’t feel confident in communicating with the agent we are able to represent the buyer at the start in the negotiation process to secure the property.

Until contracts are exchanged either party is able to pull out with no financial penalty. The buyer should ensure that the seller’s agent takes the property off the market, all internet portals and stops marketing the property once the buyer has a bone fide offer accepted. The seller may require that exchange of contracts be carried out within a short period of time especially if the property is sought after and there is competition from other potential buyers. At Ronald Fletcher Baker our solicitors are commercially minded and able to review the papers quickly. In particular for high value transactions we can undertake attended exchanges (where appropriate).

3. The Conveyancing Process

In the UK due diligence is carried out before the parties exchange contracts. This is unlike many other countries, for example in Europe, where contracts are entered into very quickly and due diligence occurs afterwards, and before completion. Due diligence will include checking the title of the property, obtaining a survey, carrying out searches of the local and other authorities, obtaining information from the seller and the freeholder/managing agent (if the property is a flat) and agreeing the terms of the contract. If mortgage finance is to be obtained then an offer from the lender will also be required before exchange. When both parties are ready to proceed, each signs a separate but identical contract. The solicitors for each party agree that contracts are binding and this process is called ‘exchange of contracts’.

On exchange of contracts a deposit, usually of 10% is usually paid by the buyer. The deposit is normally held by the seller’s solicitor as Stakeholder which means that the deposit cannot be released to the seller until completion. Completion can take place on the same day as exchange, but usually there is a relatively short period between 7 and 28 days, during which time further legal and practical matters are addressed. On completion it is usual that the balance of the price is paid to the seller’s solicitor, the buyer collects the keys for the property from the agent; Stamp Duty Land Tax paid to HMRC, title is transferred to the buyer following completed registration of the Transfer Deed at HM Land Registry.

4. Funding

Any loan to buy UK property will be secured by the lender taking a charge (mortgage) against it, which is registered at the Land Registry. Mortgages in the UK are ‘recourse’, in other words if the borrower defaults and the lender forecloses, the borrower (and any guarantor of the loan) is liable for any shortfall if the sale price is not sufficient to pay the loan interest and costs. When lending to overseas buyers a specialist bank or lender is usually required, particularly where there is to be an offshore company. Normally a sophisticated investor will use a private bank or the private banking arm of a major bank. We are able to put you in touch with brokers with strong knowledge of lenders able to assist foreign investment acquisitions.

Largemortgageloans.com Ltd, the London based international mortgage broker, actively seeks out private and overseas banks with an appetite to lend on prime London property. These include lenders from Europe, the Middle East and Far East as well as the UK, and they understand the often complex situations of wealthy off shore clients. Currently they have relationships with over 20 institutions that are very keen to assist overseas investors fund their purchases. Your home may be repossessed if you do not keep up repayments on your mortgage.

Ownership Structure

The main issues here are tax and confidentiality. Tax is complex depending on your particular circumstances and accordingly we would always strongly advise that you seek the correct tax advice from the start, to ensure that you establish whether the investment is commercially viable before you proceed to incur legal expenses.

For most higher value properties many people consider it beneficial to purchase the property in the name of an offshore company. This may be done for reasons of confidentiality or for potential tax efficiency. It should be noted that the UK Land Registry is open to the public and so the name of the owner of the property and the price paid can be seen by anyone through the Land Registry’s website. At Ronald Fletcher Baker we have experience in acting for off-shore companies in particular those with shares held in what is known as an excluded property trust.

5. Taxes

Inheritance Tax

This is charged at the rate of 40% on the net value of an individual’s estate above the ‘nil rate band’ (currently £325,000). Various exemptions apply including where assets pass between spouses, which can also be extended if elected correctly where a non-domiciled spouse inherits from a UK domiciled deceased spouse. For individuals not domiciled in the UK only their UK based assets will be subject to Inheritance Tax. Holding UK residential property in an offshore company is a very common strategy for non-resident and non-domiciled individuals. The reason for this is often to protect the value of the property against UK inheritance tax.

Ownership via a company can trigger a liability to an annual charge where the property is worth more than £2million (Annual Tax on Enveloped Dwellings “ATED” at a rate of 0.3% - 0.7% per annum. Ownership via a trust may fall outside the 40% IHT charge. Trust ownership will result in charges every 10 years of up to 6% of the property value. Tax advice is required here.

We suggest you speak with a suitably experienced offshore tax haven consultant, who we can put you in touch with.

Capital Gains Tax

In most circumstances non-UK resident individuals are outside the scope of Capital Gains Tax here, although consideration ought to be given to individual’s past residence if they have previously been resident in the UK or intend to become resident in the future. There can also be an exposure where a non-resident is carrying on a trade in the UK through a branch or agency here. If you do fall within this tax, it is charged at the rate of 18% unless you are a higher rate taxpayer, in which case the rate rises to 28%. Individuals are generally entitled to an annual allowance of £10,600. Offshore companies selling UK property for £2 million will be subject to Capital Gains Tax at 28%.

Income Tax

When a property owner is in receipt of rental income from a UK property they are within the scope of Income Tax (or Corporation Tax if the owner is a company carrying on a UK trade through a UK branch or agency). Generally offshore companies not carrying on a trade here should only pay income tax at the basic rate of 20%. Individuals will be taxed at banded rates, the highest of which is currently 45% on income above £150,000 per annum

Stamp Duty Land Tax (SDLT)

This is a transfer tax due on the gross value for which the property is purchased. The top rate is currently 7% which applies to all residential purchases over £2 million. This rate recently increased to 15% for properties acquired by companies now worth more than £500,000 (previously more than £2 million) whether on shore or offshore.

At the time of writing the 15% SDLT rate will not apply where:

  1. A property is acquired for the purpose of a property development business.
  2. Letting to third parties on a commercial basis or a property trading business, provided that the property is not occupied by a person connected to the company (e.g. a shareholder or, in the case of a company held by a trust, the settlor or a beneficiary of the trust).

Relief from the 15% SDLT will be withdrawn if at any time in the 3 year period beginning with the date of the purchase the property interest is not held exclusively for one or more of the relieved purposes, or a non-qualifying person occupies.

The rates vary and generally are less for commercial properties and mixed use property. The tax is payable when the contract is substantially performed so if the buyer occupies the property with exclusive possession on exchange of contracts then tax is liable to be paid on exchange rather than completion which is usually the case. Annual Tax on Enveloped Dwellings (ATEDs)

From 1 April 2013 ownership via a company can trigger a liability to an annual charge where the property is worth more than £2 million. The tax will range from £15,000 to £140,000. There are exemptions from this charge which may apply.

6. Adding Value

You may be able to add value by carrying out works to the property. Depending on the type of building and the nature of the works, this may require planning and/or building regulation consents, and with leasehold properties probably the consent of the freeholder. There may be other consents needed depending on the nature of the property eg: listed building consent if the property is of historic/architectural importance. If the property is leasehold it may be possible to buy a share in the freehold and/or extend the lease. It is also possible to buy the freehold in the case of a leasehold house. Visit our online calculator if you would like an estimate of the price for extending your lease.

7. Flats

Flats in the UK are usually held under a lease. A long lease is generally marketable but you would not have the highest interest in the building, which is that of the freeholder. Sometimes a flat will come with ownership of a share in the freehold and, it may be possible to force the sale of the freehold by getting together with the leaseholders in the same building under a process known as collective enfranchisement. Once you purchase the freehold you can extend your lease and also have greater say in the management of the building if you are not happy with the current managing agents.

8. The lease

In addition to location, the value of the flat will be determined by the length of the lease. You should ideally have more than 90 years. However, the Prime Central London area is a special market where shorter leases still have considerable value. Generally, for mortgage purposes lenders are looking for leases of 70 years or more. Once a flat has been owned for more than 2 years there is a right to extend the lease. The price to be paid to the freeholder for that extension is based on a number of factors, including the length of the lease. It is important to note that if the lease has less than 80 years remaining and the right to a new lease is exercised, an additional sum is payable to the freeholder which is called a ‘marriage value’. There can be opportunities for profits to be made in buying short leases and extending them, but great care and specialist advice is required. For more details of lease extension please see lease extensions require some forward thinking.

9. Service charges and management

Most flats are subject to a service charge. The building in which they are contained is, or should be, managed by the freeholder or a managing agent on the freeholder’s behalf. Each flat within the building is liable for a certain percentage of the costs for providing the services. We can advise leaseholders and freeholders in the event leaseholders decide to take the management of the block upon themselves by setting up a Right to Manage Company.

This guide is of a general nature and you should take independent advice on the facts that are particular to your case.

At Ronald Fletcher Baker our advice goes beyond the law. We are different as we provide invaluable commercial advice in addition to the law. Our lawyers are commercially minded with substantial knowledge of the property market with strong connections to sophisticated agents with access to different deals. We will cater our advice to meet your specific requirements. Please do not hesitate to contact us. 

Selchouk Sami s.sami@rfblegal.co.uk
Ronald Fletcher Baker LLP Solicitors
0044 (0)20 7467 5757

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