Guide to Buying UK Property for Overseas Investors
An essential guide for Non-UK residents thinking about buying UK investment property.
The UK has long been established as a prime place for overseas investors to invest in property due to projected capital growth and favourable exchange rates.
We work with both domestic investors and expats that are looking to invest – whether they’re building security for the future or using property as a ‘pension fund’.
With offices around the world, SevenCapital is able to work with clients across the globe, delivering a fully-managed investment service to each and every investor.
If you’re looking for high-yielding, high-growth potential properties, here’s how you can start investing in one of the most reliable and secure property markets in the world.
Where Should Overseas Investors Choose in the UK?
One of the strengths of UK property investment for overseas investors is the sheer range of places you can invest in. While the traditionally popular London market has struggled in recent years, a host of regional cities have come to the forefront.
From Birmingham and Derby in the Midlands to Manchester, Liverpool and Leeds in the North, foreign investors can find affordable markets that are delivering exceptional returns.
As always, location is critical so performing the right research (or working with a partner that has local knowledge) can make a huge difference. Typically you’ll want to look for properties with good transport links, major employers and other key amenties.
Want to know more about the top places for UK investment? Read ‘Where to Invest in UK Property 2021’ here.
How Much Should You Invest?
How much you choose to invest will obviously depend on your chosen property type and the location that you opt for.
According to Zoopla, the average UK property is worth around £255,000, which can give you a rough estimate for what a 20% deposit may look like.
When you start to look at individual locations, this can change significantly. London’s average property price is currently around £696,453, putting it at the very top end of the UK’s price bracket and unfortunately, delivering much weaker yields.
That said, if you look at cities such as Birmingham, where the average property price is £226,206, there’s an incredible potential for above-average rental yields and long-term future growth.
What Returns Can I Expect?
If you’re investing in the UK, the average rental yield for a BTL property is around 3.53% so anything above that can be considered ‘good’.
That said, if you dig deeper into the affordable, high-yielding regional cores, we’ve seen yields between 4% and 5%, especially in cities such as Birmingham and down South in the London Commuter Belt.
As with all aspects of property investment, research can really pay off. If you want to know more about the expected rental yields in the UK, you can read our full rundown here.
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Funding Your UK Property Investment
There’s two common ways of investing in the UK for overseas investors – buying a property in cash or using a specialist Buy-to-Let mortgage.
As of 2021, the number of mortgage products on the market is at an all-time high, with specialist offerings tailored to non-residents and expats. As always when securing finance, it pays to shop around. There’s a wealth of different products with different rates, so speaking to an expert can help you find the ideal product for you.
Regardless of your chosen option, you’ll be expected to have comprehensive paperwork for the application process (such as passport, proof of creditworthiness and mortgage affordability). You will typically need a sizeable deposit to access a UK mortgage (upwards of 25%) and will need to demonstrate you can obtain enough rental income from the tenant to cover the interest on the mortgage. The amount you can borrow will depend on how much rent the property can generate, but lenders will typically require your expected rental income to meet at least 125% of the monthly interest payments on the loan.
The Property Buying Process?
Unlike in many other countries, overseas investors in the UK must conduct all their due diligence before entering into a binding contract. Typically, this means things like checking the title of the property, obtaining a survey, carrying out searches of the local and other authorities, obtaining information from the buyer and agreeing the terms of the contract – all of which is usually done through a solicitor, which you should look to appoint locally in the UK. If the property is being financed through a mortgage, then an offer from the lender is also needed.
When both parties are ready to proceed, each then signs a separate but identical contract. Your solicitor will then agree with the vendor that contracts are binding, a process called ‘exchange of contracts’. At this stage, the buyer pays a deposit of between 5 and 10%.
Completion can take place on the same day as exchange, but usually there is a relatively short intervening period for legal and practical matters (usually no longer than 28 days). On completion, the balance of the price is paid, the title is transferred to the buyer and you can then take full possession of the property.
Working closely with a property developer is one way to take some of the hassle out of the buying process. At SevenCapital for example, we work with investors buying Off-Plan property to guide them through the entire process, helping with mortgage applications, appointing advisers and maximising returns.
Tax Considerations for Overseas Investors
The UK property market remains a popular choice with overseas investors, boosted by its reputation as a stable investment market with the potential for incredible returns. This means that for many investors in different countries, it’s important to understand how the tax system impacts those abroad.
The key taxes to watch out for are:
Income Tax – This is a compulsory tax paid on all of the rental returns you make from a property based in the UK. It’s charged at a basic rate of 20%, which can rise to 45% depending on the amount you receive.
Stamp Duty – This is a compulsory tax paid on the purchase of your property. It differs based on the price of the property you purchase, although you can expect to at least be charged 5% if you’re an overseas Buy-to-Let investor.
Capital Gains – This is a compulsory tax paid on the sale of your property and is based on the amount of profit you make upon sale.
Inheritance (IHT) – Upon death, the value of UK property will be subject to IHT at 40%. Property held in a trust whether directly or indirectly is exposed to IHT.
Download the Investment Finance Guide Today
A key part of any investment – and the subject that definitely raises the most questions – is financing this investment. From setting realistic goals to choosing the right mortgage product, having a plan in place from the offset can help you mitigate risk further down the line.
In the ‘Investment Finance Guide’, you’ll find:
What is the Right Finance Option For You? – We break down how investors commonly finance an investment and how you can do the same.
Stamp Duty Land Tax Update – What changes have been made to Stamp Duty Land Tax and how will they affect your investment financing?
Overseas Investment Financing – Investing from overseas? Here’s the things you need to consider going forward.
Stamp Duty Financing Illustrations – Get your free breakdown of the figures behind the latest Stamp Duty Land Tax changes.
Non-Resident Landlord Scheme
The UK Non-Resident Landlord Scheme (NRLS) is how HM Revenue & Customs (HMRC) collects tax on rents from property owners who spend most of the year living overseas.
If you spend more than 6 months outside of the UK – regardless of your tax residence – you’re required to sign up to the Non-Resident Landlord Scheme.
Fundamentally, being a part of the NRLS means landlords can receive their full rent without deducting basic rate income tax immediately. While tax obligations are still in place, it can be done during a self-assessment, which can help cashflow planning.
If a non-resident landlord is not part of the scheme, letting agents (or even the tenant depending on the situation) are required to deduct at the basic income tax rate of 20% as soon as they receive the rent.
To sign up to the NRLS, complete the online application form through the Government Gateway or download the postal form.
Exiting the UK Property Market
Capital Gains Tax (CGT) is the main cost when leaving the market and is paid on disposal of any residential investment property in the UK.
CGT is always paid within 30 days of sale completion. Gains is identified as the rise in the value of the property aside from the purchase price and specific expenses which include:
Buying costs – This could cover the purchase prices, legal charges and SDLT.
Improvement costs – This covers the price of fitting any improvement such as central heating or any extension, provided the improvement is still in place on disposal.
Any legal costs – Includes any legal costs such as a boundary dispute.
Disposal costs – Generally this includes things such as estate agent fees, auction costs and legal fees.
CGT rates at the time of writing are 18% for basic rate taxpayers and 28% for higher rate taxpayers.
Basic rate taxpayers pay CGT at 18% up to any amount of gain equal to their unused income tax basic rate band and at 28% on anything above this.
Higher/Additional rate taxpayers pay CGT at 28%.
Special Concerns for Apartments
Almost all apartments in the UK are subject to a lease, an important consideration given the value of the property will be partly dependent upon its length. Given a leasehold property can only be owned for a fixed period of time before renegotiating or extending the lease, ideally, overseas investors should be looking for a property offering a lease period of 85 years or more.
Apartments in the UK are always subject to a service charge to cover maintenance and repair work in communal areas of the building. This can be passed on to the tenant and should be covered in the tenancy agreement. Typically, such charges are upwards of £2,000 per annum. Furthermore, if you engage the services of a managing agent to handle the letting process, they will also charge a fee, likely to be flat amount or percentage of the monthly rent.