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Bricks and mortar is a mainstay of the UK investment market.

While many sectors have more significant potential for fluctuation, the property market is a stable, long-term investment option where price dips are usually short-term.

For many expats, retaining a British property when moving abroad as a rental asset is an appealing option. Likewise, holding an investment portfolio, and adding to it over the years can be a way to accumulate a significant asset base with steady, reliable returns. However, as with any investment, there are costs to consider.

Recent changes to taxation regimes for landlords and the upfront costs of a property purchase mean that it is essential to budget properly before deciding on any real estate investment.

In this article, the Chase Buchanan team summarises the key taxes and charges to prepare for, and an indication of the impact on your investment budget.

Budgeting for a Property Purchase

Firstly, it’s vital to work through all of the administrative and legal costs associated with any UK property purchase.

  • Surveys are essential to identify any issues with structural integrity and typically cost from £400 to £1,500 – depending on the property’s size, type, and location.
  • Conveyancing or legal fees are required to transfer the ownership of the legal title or deal with charges or liens against a house or land. The average UK cost is from £780 to £940, depending on the complexity.
  • Valuations are sometimes carried out independently of the survey. A valuation is mandatory if you take out a mortgage, usually carried out by a surveyor appointed by the lender. On the other hand, surveys are a health check on the property on behalf of the buyer. If the mortgage lender is not covering the valuation costs, these tend to be in the region of £700.
  • Mortgage fees vary considerably. They can be rolled up into the cost of borrowing or might be a one-off charge for arrangement fees, or brokerage costs. UK mortgages cost up to £1,500 in expenses.
  • Stamp Duty is payable on UK property purchases for everyone who is not a first-time buyer, provided the purchase is above the value of £125,000 (in England from 1st April 2021 at the time of writing). Rates are 2% against the value up to £250,000 above the threshold, and a further 5% against any value between £250,000 and £925,000. Landlords also pay an additional 3% additional property tax for a second UK home.

If you’re investing in a rental property, you’re unlikely to need to budget for removals costs, but need to be realistic about other fees, such as:

  • Redecorating, ongoing maintenance and upkeep costs.
  • Letting agent service charges to manage the tenancy on your behalf.
  • Landlords insurance to cover the building itself (tenants are usually responsible for content insurance).
  • Utility bills and council tax, if these are included in the rent.

Once you have a reasonable idea of the initial outlay required, and the ongoing costs, you’ll be in a good position to evaluate the investment’s profitability and what returns you stand to make.

Owning UK Property as an Overseas Expat

Should you live overseas, whether in Europe or further afield, it’s essential to account for the taxation costs.

A lot depends on your tax residency status, whether you live as an expat permanently, have residency in that country, or have a holiday home, which you live in for part of the year.

Many investors might consider themselves exempt from British taxes if they are a permanent resident in another country. Still, the reality is that there are several UK taxes you may be liable for – and potentially additional taxes against any rental income or sale profits in your host country.

  • Non-Resident Capital Gains Tax is a tax charge paid when you sell a UK property. The exact value depends on the asset’s market value, and you need to submit a declaration to HMRC within 30 days of the sale. CGT is charged at 18% or 28%, on accrued property value since 2015, depending on your marginal rate.
  • As a non-resident, you may need to declare your earnings from a UK property investment. You can report your earnings through a self-assessment tax return by completing an NRL1 form. Alternatively, you can appoint a British lettings agent to deduct basic rate tax from the income, accompanied by a tax certificate. If you are domiciled overseas, you will not usually need to pay tax on UK income in Britain.
  • Note that, in many countries, if you are a resident or hold citizenship, you will also be required to report your overseas income, which may be subject to local taxes. Double tax treaties come into play if you are liable for tax in both the UK and your new home country, but must be applied for correctly to claim the right to offset.

From April 2020, there have also been changes to tax relief for investment landlords in the UK. In the past, if you were financing a property through a buy to let mortgage, you could deduct the interest paid from your rental income when reporting your earnings.

A staggered change to the tax regime means that:

  • Mortgage interest is a declarable expense, but may no longer be deducted from your declared income – potentially placing you in a higher tax bracket.
  • You may not offset any part of your interest payments against your income. In previous years, landlords could offset 75%, 50% and then 25% of this cost, reducing in stages from 2017-18 to 2019-20.
  • Interest costs are now eligible for 20% tax relief in total.

It’s also crucial to consider the taxes in your host country, which can be substantially different from those in the UK. For example, in France and Spain, your total global assets are considered in calculating a wealth tax liability.

UK properties are included in this calculation, and so a sizeable portfolio or high-value property could mean your total asset value reaches the threshold, and you become liable for additional tax charges.

Evaluating the Investment Value of UK Property

With so many considerations, it is essential to seek professional financial advice.

It may be that your rental income exceeds all running costs and tax charges, but without analysing all of the long-term cost implications, it is impossible to know. Other impacts exist, such as succession planning and inheritance tax – and moving assets into a trust, restructuring, or transferring ownership to a company might all be options worth considering.

As taxes continue to change, the best way to achieve the optimal profits from your asset portfolio is to oversee the risks, costs, income and taxes.

If you are considering investing in the UK property market as an expat, or are deciding whether to keep hold of an asset, please get in touch with your local Chase Buchanan office for a private consultation with one of our experienced expat advisers.