Investing in the UK Property Market
for Overseas Investors
Can you invest in the UK if you live overseas?
Investing in UK property isn’t exclusive to UK nationals or residents. International buyers are more than welcome to invest into the UK property market, either for personal ownership or as rental properties. Some international investors may even qualify for a UK mortgage. However, bear in mind that a UK visa or residency may be required if you intend to live in or frequently visit your UK property.
To complete a property purchase, you’ll need to meet the following requirements:
- Verify your identity to confirm you’re at least 18 years old.
- Provide proof of your current address, such as utility bills or a driver’s license.
- Consent to credit checks to demonstrate your financial stability and ability to carry out the transaction.
- Seek a legal opinion from an independent lawyer within the relevant jurisdiction to ensure the validity of the documents and the transaction itself.
Investment Opportunities
What are the tax implications for overseas investors in the UK?
The UK’s tax authority, HMRC, has specific expectations for non-residents who plan to buy UK property and rent it out. As a non-resident investing in a UK rental property, you should be aware of important tax considerations, the most significant being that rental income from your UK property is subject to UK tax.
Here are the key elements you should understand about these tax implications:
Income Tax for foreign Property Investors
As an international buyer owning a property in the UK, you are obligated to pay income tax on any rental income.
One approach is to set up a private limited company which can be an effective strategy to minimise tax obligations. There are several advantages, including lower corporate tax rates compared to personal income tax rates. Profits can be retained within the company until needed, instead of declaring it in the same year earned from buy-to-let. This could be beneficial for those seeking income during retirement, as dividends can be drawn when required. Selling properties through a limited company may also result in savings, enhancing your profit and loss margin. This is largely because limited companies must account for all expenses, which might not be the case for individual investors.
Capital Gains Tax for overseas investors with rental properties
Capital Gains Tax (CGT) is a tax levied on the profit made from selling a property. While this tax typically applies to UK residents, under certain conditions, it can also apply to international investors.
If a UK resident individual owns a property, they’ll pay CGT at a rate of 18% if they are a basic rate taxpayer or 28% if they are a higher rate taxpayer, based on their income. If the property is held by a company or trust, a 28% CGT rate is applied. Individual taxpayers can benefit from a tax-free allowance of £12,300, meaning any profits earned below this amount are not subject to CGT. The corresponding threshold for trusts stands at £6,150.
Foreign residents can seek exemption from CGT on properties that serve as their primary residence. To qualify for this ‘principal private residence relief’, a foreign resident must occupy the property for at least 90 days in a tax year, meeting the ‘day count test’. Any gains made on the property in a tax year where the day count test is met are exempt from CGT.
Stamp Duty Tax for overseas investors
In England and Northern Ireland, the purchase of property or land exceeding a certain price is subject to a tax known as stamp duty land tax. This is levied on the property’s purchase price.
The calculation of stamp duty land tax depends on various factors, including the purchase price of your home, whether it’s a new or existing property, or its location (for instance, if it’s situated in London). Different rates apply for each property type and location, and there are various exemptions and rules to consider.
It’s essential for foreign buyers to note that, from April 2021, an additional 2% surcharge has been applied. This surcharge is applicable to all non-residential property purchases made by companies, as well as buyers who are not UK tax residents.
What are the different investment models that can be used by overseas investors in the UK?
There are several investment models available for the acquisition and possession of real estate investments in the UK, such as:
Partnerships
A group of investors can establish a property partnership to purchase, develop, or lease assets. It is generally expected that each investor is equivalently engaged in the partnership.
Partnerships don’t constitute separate legal entities; conversely, every partner is fully liable for the total debts of the business. While there are no strict legal regulations or registration prerequisites for partnerships, they are required to submit accounts to Companies House if their turnover reaches certain levels, or if their balance sheet exceeds £10 million (the filing threshold).
REITs
Real Estate Investment Trusts (REITs) are firms that hold or finance revenue-generating properties across various asset types. In order to be classified as REITs, these companies need to comply with numerous conditions. Most REITs are listed on significant stock exchanges, offering a range of benefits to investors.
Joint Ventures
Joint ventures in the real estate realm are typically temporary collaborations, established through the formation of a Special Purpose Vehicle (SPV), amongst builders, financial institutions, and developers, focused on a specific initiative, like a residential development.
These partnerships typically hinge on one collaborator supplying the monetary capital, while the other brings in the ‘sweat equity,’ meaning their time and specialist knowledge. The key to a thriving joint venture lies in appropriately orchestrating the agreement and ensuring each partner possesses the necessary skills and resources for success.
Property Unit Trust
A unit trust scheme is a type of collective investment where the property unit is held in trust for the benefit of the investors. This scheme is defined by a trust deed that is agreed upon by the trustee (usually a bank or an insurance provider) and the scheme’s manager. The manager is charged with investing the trust’s assets in line with its terms, while the investors are the beneficial owners of the property within the trust. Their interests are signified by units in the unit trust scheme.
How to find the right investment property for you?
The UK Property Market is both flourishing and multifaceted. There are numerous prime cities offering an array of rewarding advantages to investors, which can make the process of choosing where to invest challenging.
Nevertheless, certain crucial elements should be taken into account when identifying the ideal property for investment.
When evaluating a city’s potential for growth and prosperity, consider factors such as economic resilience, population growth rate, and average household income. A city with high employment and low unemployment rates also indicates a healthy economy. These elements can guide you in determining whether a specific location harbours potential for sustained growth and prosperity.
When considering costs, it’s vital to factor in all expenses, from the initial purchase price and ongoing monthly costs (such as maintenance and utilities), to future considerations like the building’s age or nearby planned constructions that could affect the property’s resale value. It’s also crucial to calculate the potential rental income each month – this analysis will help you determine the profitability of this specific investment property.
Another factor to consider when finding an investment property is the state of its infrastructure – specifically, transportation systems like roads or railroads that make it easy for people in your target demographic to access your business or space easily. If there aren’t adequate transportation systems in place yet, then you may want to wait until they’re built before deciding on an area where you would like your business located within this particular city’s borders.
Reflect on what kind of investment you’re looking to make: freehold or leasehold? Owning a freehold property typically offers you greater autonomy over your property and its renovations. However, this ownership type tends to necessitate more maintenance and upkeep compared to leasehold properties. While leaseholds are generally more affordable and manageable than freeholds, they often come with constraints on the extent of property improvements and the timing for such work.