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

Posted on: 13 Nov, 20

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! Even in the current climate with the coronavirus pandemic, the average asking price for a house coming on to the market hit £324,000 in October 2020, 5.5% higher than a year ago. This is the biggest rate of annual increase for over 4 years.

Clark says...
Oury says...

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

While the performance of the housing market has been extremely strong since lockdown, it is difficult to predict if it will remain immune to the economic impact of the coronavirus pandemic.

At the moment all signs point towards a continued housing market boom.

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!

Unlike house prices, private rents have taken a beating in London due to the coronavirus pandemic. Private rents in London have dropped for the second quarter in a row. Apart from London, rents across the UK rose by 2%.

The rise in homeworking since the outbreak of the virus has led to increasing numbers of homeowners and renters moving out of big cities to suburbs, smaller towns and more rural areas in search of bigger homes, cost savings and green space.

The rental sector will recover slowly from lockdown. However, if your client is buying outside of London, he should still get a good yield. If he is looking to buy in London, although rents have fallen it is anticipated that they will bounce back in 2022 and 2023.

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 resulted in more foreigners investing in property in the UK.

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 Registry… and of course I’m a great property lawyer!

Clark says...
Oury says...

Of course you’re a great property lawyer. Now what’s all this about a Public Registry?

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, I can introduce your client to 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 I come in. As your client’s lawyer I 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 from me explaining the results of the due diligence process 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!

Clark says...
Oury says...

Really?

UK renters 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 (currently 6 months under the Coronavirus Act 2020) 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.

Landlords will have certain 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 ensuring that any deposit your 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 tenant fails to pay the rent, the landlord can serve a Section 8 notice. This gives tenants two weeks’ notice to pay the arrears or to leave the property (currently 4 weeks’ notice where arrears are at least 6 months and 6 months’ notice where arrears are less than 6 months), regardless of whether the fixed term has ended or not. The Landlord can then commence Court action.

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 to the amount of tax your client pays.

Our tax advisors can assist in this respect.

Clark says...
Oury says...

Okay. Anything else I should know?

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 the summer of 2015, there has been a shift towards properties being purchased within a company structure.

Clark says...
Oury says...

What’s the market like now for corporate mortgages?

What makes the company route far more appealing now is that corporate mortgages are far more competitive.

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

Oury says...
Clark says...

Are there any other advantages of using a limited company for an investor?

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.
Oury says...
Clark says...

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

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 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. 
Oury says...
Clark says...

Saying on the issue of tax, is there anything I should mention to my client about SDLT?

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.

Oury says...
Clark says...

That’s great. I presume we have specialist advisors who can help with SDLT.

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. See below.

Band Existing residential SDLT rates New additional property SDLT rates
£0 - £125k 0% 3%
£125 - £250k 2% 5%
£250 - £925k 5% 8%
£925k - £1.5m 10% 13%
£1.5m+ 12% 15%

There is however a temporary reduction in SDLT rates until 31 March 2021. No SDLT is paid at all up to £500,000 of the purchase price for residential property. Significantly, it also benefits buyers caught by the 3% Higher Rate on additional dwellings, as such buyers who already own another residential property now only pay SDLT at 3% on the first £500,000.

2. 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.

Oury says...
Clark says...

Ok, thanks Clark. Ever so insightful as always!

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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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