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.
Many expats also want to invest in property back home to build security for their future and often use property investment as a pension fund. As a result of the high standard of service we provide and unrivalled investment opportunities, SevenCapital has attracted clients from all over the world, mostly due to the fully managed investment service we provide.
With its robust legal system, flourishing financial sector and world-class cities and education institutions here’s what you need to know if you’re considering investing in British bricks and mortar.
Choosing Where to Invest
The UK offers a wealth of property investment options to suit all budgets. Beyond the obvious draw of London, where prices have been subdued for a while now and value is limited, given the huge competition, there’s a host of regional cities like Birmingham, Manchester, and Liverpool where investors can secure a wider pool of properties as well as superior value and returns.
As with any property, securing the right location is crucial. Typically, properties near to good transport links and major employers, universities, colleges and other facilities always fare strongly. Read our blog post the ‘Where to Invest in UK Property 2020‘ to find out more about upcoming hot spots for investors.
How Much to Invest?
This will obviously depend on your chosen type of property and location. According to latest figures from the Office of National Statistics, the average property price across the UK is £226,071. But looking at the City of London in isolation, the figure rises significantly to £729,134 whereas in Birmingham, the figure falls to a far more affordable £177,728. Apartments are often the preferred choice of overseas investors given their regular availability and strong appeal to a wide audience. Currently, the average price of an apartment across the UK is £203,651.
What Returns can I Expect?
This all depends on where and what you intend to buy, but typical yields on buy-to-let purchases sit around the 4-5% mark. That said, yields of close to 10% are still possible on the most desirable properties in up and coming locations. As with all aspects of the wider property investment process, detailed research really pays, with information on property price trends and the most in-demand locations regularly published online.
Funding your UK Property Investment
Unless you’re buying a property in cash, you will need a special buy-lo-let mortgage to cover the purchase price. A number of UK lenders have specific mortgage offerings tailored to non-residents and expats, though you may find the products on offer are slightly less favourable than those offered to existing UK residents. As always when securing finance, it pays to shop around. There’s a wealth of different products available in the marketplace all offering various terms and conditions.
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) and can expect to pay various fees to arrange one (typically in excess of £2,000). 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 Buying Process
Unlike in many other countries, property buyers 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, to include help with mortgage applications, appointing advisers and how to plan to maximize returns.
Tax Considerations when buying UK Property from Overseas
British property offers excellent values and rental yields for overseas investors but there are many potential tax traps that should be taken into consideration.
During the time that a property is owned by an overseas investor, they should be aware of several taxes that are paid on top of usual running costs including the Non-Residential Landlord Scheme and other taxes upon exit.
One of the biggest costs besides property price is Stamp Duty Land Tax (SDLT). Stamp duty is worked out based on the property value and is always paid on the completion of the purchase.
SDLT is essentially a tax on any property or land that is bought over a certain price in England or Northern Ireland. SDLT adheres to several price bands if the property is an ‘additional property’ bought for buy-to-let:
Up to £125,000 – 3% SDLT rate. £125,001 to £250,000 – 5% SDLT rate. £250,001 – £925,000 – 8% SDLT rate. £925,001 to £1,500,000 – 13% SDLT rate. Above £1,500,000 – 15% SDLT rate.
Non-Resident Landlord Schemes
As an overseas investor, you need to ensure you register to pay income tax under the Non-Resident Landlord Scheme.
For buy-to-let landlords, this works differently for tax purposes and means a non-residential landlord pays income tax on rental profits in the UK, rather than paying income tax in the country they’re based. To be classed as under this scheme, the landlord must live outside of the UK for at least six months.
If the landlord is non-resident and rent is more than £100 a week, either the tenant or letting agent must deduct and pay the tax to HMRC, with the result being paid to the landlord. The landlord would then file a self-assessment tax return each year accounting for rent and any other expenses.
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.