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The Right Time to Buy London Property – An Opportunity for Overseas Investors?

 Following the credit crunch and with the fall in sterling we have seen an increasing number of overseas investors looking to buy property in London.  The reasons for this are fairly simple:-

Attractive prices - Property prices have started to get back to near their 2007 highs in some areas but there are still plenty of opportunities. If you are looking for investment properties to rent there is high demand by tenants and a shortage of good property to rent. Rents and hence yields are increasing

Weak sterling - The low value of sterling against the major currencies, the dollar, the euro and the Swiss franc.

Low interest - Interest rates on mortgages are at an historic low and attractive fixed rates are available.

Lack of other good investments -  Although there has been some recovery in stock markets, interest rates remain low and it is difficult to find investments producing even modest income let alone the potential for capital growth as well.

So if you think that UK property is worth considering, here are the answers to some key questions you might have:-

  • Why London? - There may be other towns and areas in the UK where there are investment opportunities.  However, the London market is familiar to most investors, is easily accessible and here more significant returns are more likely.
  • Where about in London? – We would generally recommend looking at what is known as the prime central London areas of Mayfair, Westminster, Kensington, Knightsbridge, Chelsea and some of the immediate surrounding areas such as Notting Hill and Holland Park.  This is because in the long term, historically these have been the areas where prices have seen the biggest recovery after a recession.  In a difficult market it is always better to go for the “traditional” areas.  There may also be some other up and coming or desirable areas such as Hampstead, Richmond, or south of the River Thames such as Battersea, Clapham and Bankside or properties with views of the Thames near Tower Bridge, or prime Docklands, such as Wapping, Limehouse and Canary Wharf which could also be worth looking at.
  • Should I buy now or wait? – This is always the key investment question.  It is not an easy one.  Clearly, there is a risk that prices may fall and in certain areas they have done whilst in others – Prime Central London prices are rising. Choosing the right location is key .  As well as general trends, it can depend very much on the individual property concerned.  We have seen instances now of some desirable properties in prime central London areas which may have been on the market for some time with a substantial price reduction where the price has now started to increase again, although not to the value that the property originally had, say, two years ago.  All we can say is that property is a good long term bet and it is very difficult to buy right at the bottom of the market.  Also, the value opportunity in terms of strength of the major currencies may be lost as sterling recovers against other currencies, as a number of commentators have forecast, and interest rates may rise again.
  • What about rental yields? – With the loss of so many key jobs, particularly in the financial and services sectors there was some weakening of rental demand.  However, again the picture is improving rapidly but is mixed and can depend on the desirability of the individual property concerned. As stated above we are now seeing a shortage of properties available to let which is good news for the investor.
  • What about buying costs? – These are typically lower than in continental Europe.  Solicitors’ fees will generally vary depending on the price and also whether the property is freehold or leasehold.  There is a competitive market for fees, but very roughly you may be looking at 0.25% of the price plus VAT for a good quality firm.  For an overseas investor, particularly buying in Central London, you need to use a high quality lawyer who can make sure you are protected from the many potential legal pitfalls and also may be able to add value on tax saving and similar.

You will also need a surveyor/valuer to assess the physical condition and value of the property.  There are a number of payments such as search fees which are part of the due diligence process which typically amount to, say, about £500 and there is a fee for registering a property at the Land Registry which varies on a scale depending on the value of the property which goes from £40 to £700.  A major cost will be Stamp Duty Land Tax, which is payable to the government - see below.  If you are obtaining a mortgage there may be arrangement fees.

  • What about taxes?
    • Stamp Duty Land Tax.  This is based on a sliding scale which increases to 7% for properties of over £2million. If buying via a company at this value the rate increases to 15%. For properties in that bracket there are potentially ways to mitigate this tax, particularly if you are a cash buyer but we would need to discuss these with you separately.
    • Inheritance Tax.  This is a complex area but in simple terms if you buy the property in an individual name then on your death there is a potential liability to Inheritance Tax which, subject to various exemptions, could be as much as 40%.  If the property is bought in the name of an offshore company there is no Inheritance Tax in the UK assuming you are not domiciled in the UK. However, depending on the tax laws in the country in which you are resident for tax purposes and/or domiciled, there may be duties in that country on the transfer of the shares or other interest in the holding company.  There are no forced heirship rules in England. Please see our separate article on IHT.
    • Capital Gains Tax.  If property is owned by an individual who is not UK resident, then there is no Capital Gains Tax on the disposal of the property. Offshore Companies selling for over £2 million will be subject to CGT from 6 April 2013 onwards. Certain reliefs apply which may be relevant, including for buy-to-let properties. Again, there may be captial gains tax in your country of residence depending on your situation.
    • Income Tax.  Income from UK property is potentially liable to income tax. There may be withholding tax. It is possible to deduct interest paid on any loans and the cost of repairs against rental.
    • Property Tax.  There is a local property tax called council tax, the level of which depends on the value of the property and in which administrative area it is located.  When checking a prospective property to buy, the current council tax rate will normally be provided by the agent or on the relevant website if the property is advertised in that way. 
    • Annual charge. From 1 April 2013 an annual charge will apply to £2m+ properties held by companies. This ranges from £15,000 to £140,000. Again there are exemptions from this charge which may apply to your circumstances.
  • How easy is it to get a mortgage? – It is not as easy as it was, with all lenders operating much stricter lending criteria.  However, it is still easier than you would think and borrowing rates are at an historic low.  Overseas investors tend to be able to pay a significant cash deposit and if you are putting down, say, more than a 25% or 30% of the price and if you can provide reasonable proof of your financial standing, there should be no problem obtaining finance, if you need it.
  • What about UK commercial property? – There are also possibilities here but the issues involved are more complex so beyond the scope of this article.  We are happy to discuss the commercial property market if it is of interest.

If you would like further information, either about the London property market or the buying process, please do not hesitate to contact us.  We are able to recommend agents, surveyors and lenders should you need help with these.

Sykes Anderson is a niche property, tax and commercial firm acting both in the UK and internationally.  Our website has further information about our services.

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February 2013