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Property Tycoon or a typhoon of restrictions to discourage foreign investment?

Posted on: 25 May, 18

For foreign investors, parking money into UK bricks and mortar has always been a sound investment, especially in the London property market. However, is this still the case with the UK Government seeming to shun foreign landlords after tax hikes?

Oury says...

Clark, I have an overseas client who wants to invest in a UK property and wants to understand the current market. Can you help?

Hi Oury, of course, I live for this! How can I help?

Clark says...
Oury says...

My head is spinning as there seems to be a lot of confusing information on whether the UK property market is still a good place to invest in.

Of course it is! Average UK house prices reached their highest on record last month. Also, the average house price in London in December 2017 was £484,500, a 2.5% increase from the previous year.

Clark says...
Oury says...

Really! But haven’t activity levels in the property market "softened"?

Yes, but that does not seem to have had an effect on continued growth in house prices. Most are forecasting that, in the UK as a whole, there will be house price growth of 2.5 percent in 2018.

Clark says...
Oury says...

That’s positive news! Do you have any insight on the UK rental market at the moment?

I’m a property guru, so yes, absolutely! Private rents in London increased on average by 0.4% in the year to December 2017 and private rents increased by 2.0% in the rest of England.

In fact, a good friend at Savills is forecasting that rents will grow faster than house sale prices in London for the first time since 2011 and that over the next five years they will rise by 17 percent.

Clark says...
Oury says...

That’s great news for investors!

What about Brexit?

Brexit, it’s like the UK got drunk and accidentally unfriended Europe on Facebook.

Clark says...
Oury says...

I mean in terms of foreign investment!

Ironically Brexit has helped foreigners buy up more property especially in London.

Clark says...
Oury says...

Why is that ironic?

Well, Britain's decision to exit the European Union was predicated in part on a desire to reduce immigration! Instead, estate agents I know have been swamped by investors from China, the Middle East and India.

Clark says...
Oury says...

Interesting. Maybe this has something to do with currency?

Yes, absolutely. A weak pound makes foreign investment more attractive because you get more for your money.

Clark says...
Oury says...

As a foreign buyer, can I just come to the UK and buy? Surely that sounds too good to be true?!

Actually, there are no restrictions on overseas investors acquiring UK real estate. Real estate can be purchased, rented, or leased by individuals or companies, whether domestic or foreign.

Clark says...
Oury says...

That’s fantastic. My client will be pleased to hear that.

Also, our legal system and legal due diligence process that needs to be carried out on any residential or commercial property acquisition will give comfort to your client.

Clark says...
Oury says...

How? Could you explain please?

Well, the UK has one of the strongest legal systems and Public Registries in the world. Ownership of land and property in England and Wales is registered at HM Land Registry, which is a non-ministerial department. This ensures that the seller purporting to sell the property to your client is not doing so fraudulently and your client will get a Title document for the property as evidence of his ownership.

Clark says...
Oury says...

Don’t we have the legal principle of caveat emptor meaning 'let the buyer beware' which places the onus on the buyer to find out if there are any physical defects in the property or legal issues relating to the property?

Yes, we do. In relation to any physical defects in the property you will need to use a professional surveyor. The surveyor will inspect the property and prepare a survey report confirming the condition of the property and the survey report will also give a valuation for the property so your client has comfort he is not paying over market value.

On legal issues relating to the property, that’s where you will need a decent lawyer I’m afraid. Who will undertake various legal due diligence on the property? This will include undertaking property searches, investigating the property Title and reviewing enquiry forms provided by the seller. Prior to committing to the purchase of the property your client will get a Report explaining the results of the due diligence process and highlighting any adverse matters your client should be aware of.

Clark says...
Oury says...

What about tenants’ rights?

I would say UK law is pro-landlord when it comes to commercial property tenancies. However, for residential lettings, the position is a lot more balanced as no society wants to create homeless people.

Clark says...
Oury says...

Can you elaborate please?

It is fair to say UK residential tenants have fewer rights than those in other European cities. Landlords can ask tenants to leave the property after the initial fixed-term rental period ends, which is normally 12 months. This is done by serving on the tenant a Section 21 notice giving at least two months’ notice so that the tenant has time to find a new property and get their affairs in order.

If the tenant does not vacate on expiry of the notice, the Landlord can apply to the court for a standard possession order. It’s called an accelerated possession order.

However, Landlords have to comply with certain statutory requirements and obligations.

Clark says...
Oury says...

Like what?

Providing to the tenant at the start of the tenancy:

  • Energy Performance Certificate
  • Gas Certificate
  • a copy of the government's 'How to Rent' guide

and must ensure that any deposit the tenant pays is kept in a Tenancy Deposit Protection Scheme.

Clark says...
Oury says...

What about if the tenant does not pay the rent (this would get me so angry)?

If the tenants aren’t meeting their obligations, the landlord can serve a Section 8 notice. This gives tenants two weeks or two months to leave the property, regardless of whether the fixed term has ended or not. This type of notice requires the landlord to give the full text of the grounds for eviction under Schedule 2 of the Housing Act 1988. For most landlords, the grounds will generally be two months of late or unpaid rent or damaged property.

Clark says...
Oury says...

That’s good to know. Do you have any views on whether an overseas investor should purchase property in their personal name or in a company?

There is no straightforward answer to this I’m afraid. All investors should consider whether or not to purchase investment properties using a company. It is vital that your client gets the ownership structure right as this could make a difference in the amount of tax your client pays. Indeed it’s mostly about tax, so really it’s a question for you Oury…

and I seem to remember you breaking down some of the issues at the end of your two previous blogs…

Clark says...
Oury says...

Good point Clark! yes… so

Prior to 2015, there was no real compelling need for investors to buy properties within companies. Especially when considering mortgages for companies were less competitive.But since the changes to the treatment of mortgage interest introduced in summer 2015, there has been a shift towards properties being purchased within a company structure.

What’s the market like now for corporate mortgages?

Clark says...
Oury says...

Corporate mortgages now are far more competitive which is what makes the company route so appealing at the moment.

Andrew Thomas our Financial Services Expert will be able to assist as he works with access to the whole market and regularly arranges limited company mortgages for new and existing clients.

Thanks Oury and can you explain any other advantages of using a limited company for an investor?

Clark says...
Oury says...

Love to - Purely from a financial perspective, the rate of Corporation Tax is far lower than the higher rate of income tax, which is a big saving.

Your client would still be taxed on the dividends if he takes profits out of the company, but your client could time dividend payouts for maximum tax-efficiency. Alternatively, just leave the profits rolling up within the company to buy the next property.

I have heard a lot about ATED. Will it apply to my client if he decided to purchase the property using a company?

Clark says...
Oury says...

It depends on the value of the property. ATED is an annual tax payable by companies that own UK residential property valued at more than £500,000.

For a property valued between £500,000 and £1 million, the current annual charge is £3,600.

Your client may be able to claim relief from ATED if the property is let to a third party on a commercial basis.

Speaking of tax, is there anything I should mention to my client about SDLT?

Clark says...
Oury says...

Stamp Duty Land Tax (SDLT) is a tax charged on 'land transactions' payable by the purchaser on the purchase of property or land in England where the amount paid is above a certain threshold.

SDLT rules are complex and the rates differ for residential properties purchased by individuals and companies.

Love this tag team chat, we should form a proper tag team and do professional wrestling and be called… the Titanic Technical Tax & Legal Tag Team…

Clark says...
Oury says...

Erm… yes, perhaps Clark.. but what people will need is advice on Stamp Duty as it’s a key fact in deciding whether or not your client purchases the property in a company.
The only two points I would add in relation to SDLT are:

  1. As an individual, a higher rate of SDLT will apply to your client on the purchase of a residential property if he owns another property anywhere else in the world.
Band Existing residential SDLT rates New additional property SDLT rates
£0 - £125k0%3%
£125 - £250k2%5%
£250 - £925k5%8%
£925k - £1.5m10%13%
£1.5m+12%15%
  1. As a corporate entity purchasing a residential property over £500,000 the rate of SDLT will be a flat rate of 15% on the purchase price. This can however be reduced if the company is a qualifying property rental business

Ok, thanks Oury… love your technical tax tips…

Clark says...
Oury says...

No No Clark – love your legal levelling learning luring me into thinking about buying property!

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We are but two fictitious characters throwing out ideas and comment to stimulate debate and collect information. As professional service firms, we are open minded people and think independent thought and debate is essential to help understand, as well as navigate, complex problems. By joves – doing business across Europe (and the world) is set to become a whole lot more complex in light of recent seismic political events. As businesses - we provide information and hopefully some wisdom - and we see this blog and its caricatures merely as a much more fun, perhaps slightly controversial way, of stimulating debate and collecting ideas. We’re searching for some true pearls of wisdom, and as we find them, we’ll share them with you.

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