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Everything UAE Investors Need to Know About Financing a UK Property

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With around five million rental homes in the UK’s property market, property investors continue to make up £1 trillion worth of rental properties. Research by JLL has found that more than half of UK residential property investments now originate overseas – driven by the stability and potential return on investment that the UK can provide. Despite politics dominating the headlines, evidence shows that the UK remains a leading international investment target – an ideal market for any investor exploring new opportunities. Whether you’re an investor from the UAE or simply a UK expat living in the region, having a firm understanding of financing a UK property investment is vital for ensuring a smooth investment journey.

 There are several unique challenges for investing in UK property from the UAE, which we’ll cover below – from securing a mortgage and other fees to how events are shaping the market for the future.

Securing a Mortgage

For Buy-to-Let property purchases securing a mortgage is the most common method of financing, although it comes with its own unique challenges. In terms of specifically financing a UK property, it’s important that any international investor has a trusted, specialist partner. These specialists tend to have a wider outlook on the market and can offer a broad range of products, better interest rates and more favourable terms.

One major difference in a mortgage application by an expat and a UK resident is the time it takes to complete the process. While it may only take a month for domestic investors, international investors may see a three-to-four-month process.  

UAE investors will typically have fewer lenders to choose from with rates that will generally be higher, additionally the minimum Loan-to-Value (LTV) will usually be higher than the minimum of 25% for UK residents. While these are challenges that an international investor will face, the idea of overseas investors not being able to access mortgages for UK property is far from true.

It’s these extra steps that make a specialist partner vital. Many lenders are now opening up their products for international or expat investors, offering both fixed and tracker rates as well as interest-only and repayment options. This allows for different requirements to be met whether a cash-flow focus (fixed rates and/or interest-only products) or loan reduction (repayment).

We can see the effect this is having on the market already. According to Skipton International, 23% of BTL mortgage applications have come from British expats in the Gulf States since 2014, while the largest proportion of mortgage enquiries for the UK in 2019 originated from the UAE

Fees and Taxes

When UAE investors choose the UK market, there are several fees and taxes that should be considered. There have been several changes to tax laws recently and any investor, whether based in the UK market or overseas, would be advised to seek specialist help on any property tax matters.

Stamp Duty Land Tax is the main consideration. While Stamp Duty Land Tax (SDLT) doesn’t apply in Dubai, it does in the UK on all properties over £125,000, rising to a maximum of 12% on properties over £1.5 million. In April 2016, it was announced that property buyers would pay an additional 3% on each stamp duty band for second homes or properties bought for Buy-to-Let purposes.

As an overseas investor, you also 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 under this scheme, the landlord (individuals, companies and trustees) must live outside of the UK for at least six months. In partnerships, each person is considered a separate landlord.

Consider talking to an independent financial advisor (IFA) to understand how best to manage your personal tax circumstances for the best.

Financing a UK Property

While the process for every investor is likely to be different based on your individual circumstances, it’s important to reflect on the following if you decide to go ahead with a purchase.

  1. The Dubai government doesn’t place restrictions on the amount of funding that can come into or out of the country, though if you’re buying a property in the UK, you’ll need to ensure that you have the correct supporting documents proving identity and income so you can pass the required regulations.
  2. While the taxes and fees mentioned above are all vital to consider, Stamp Duty Land Tax (SDLT) is probably the most important. SDLT doesn’t exist within the UAE but UAE investors still have to pay it. It applies to all properties over £125,000 in the UK. Make sure you check the tax bands above and see how much you may be expected to pay. Similarly, if this is an additional property, you can expect to pay the 3% levy.
  3. Consider that you may need a property agent. They will typically source and look after your tenants as well as the maintenance of the property. Property agents obviously come with additional fees so you need to consider adding these into your financial. Remember that you’ll pay VAT on any services that an agent sources. 
  4. Surveying is a key part of the process and ensures that the property is worth what you’re proposing to pay and also in good condition. If the property your purchasing is older, you can request your own survey through a third party. For a new build, it’s recommended that you instead opt for a snagging survey which will run through the general state of your development. Like SevenCapital, some developers will automatically carry these out as part of the completion process.
  5. Once your offer has been verbally accepted, you’ll enter into the completions process. Once you and your solicitor are happy everything is in order, you’ll exchange contracts and pay the deposit. At this point you’ll have a completion date and will need to ensure that your funds are ready to be paid.

Leaseholds

UK property is generally considered a ‘leasehold’ or a ‘freehold’. As a leaseholder you do not own the land the property is built on. A leaseholder essentially rents the property from the freeholder for a period of time – this will be noted in the initial contract. 

Owning a leasehold ensures that you have the right to live in a property for however long the lease specifies – which can be years, decades or even centuries. However, you need to remember that although you can buy and sell the property, you don’t technically own the property, you own the lease. You’re a tenant of the freeholder for that period. With this in mind, under the lease agreement you will pay an annual ground rent which could increase over time. It’s not typically very expensive but it’s a factor that needs to be considered in your plans. 

Strength of Foreign Exchange

The UK market remains popular with UAE investors post-Brexit, with an overwhelming majority (96%) of UAE property investors declaring the UK as their preferred investment destination.  

An investment in the UK market right now represents a key opportunity to take advantage of a weakened Sterling. While the property market has maintained relative stability, a weaker UK currency means that overseas investors can take advantage of the ‘Brexit discounts’ that come with political uncertainty and discover a prime UK development. 

It’s these factors contributing to the idea that for off-shore investors, the UK market right now is an opportunity that may never happen again – a perfect storm of low-interest rates, high tenant demand and nationwide undersupply. Despite the current climate, there’s plenty of signs that the right investment can be incredibly lucrative, especially if the fundamentals of financing a UK property are followed, simply because of all these factors are coinciding at the same time. 

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