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Foreign investors in UK real estate undeterred by cooler welcomePublished on 08 Jan 2020
Property investment in the UK, particularly for foreign investors, has changed immeasurably over the last few years. But with London ranking the top city for international real estate investment for the ninth time in 10 years (Source: Cushman & Wakefield Winning in Growth Cities 2018-2019), the changes don’t appear to be off-putting for all.
The first and primary reason for the shifting landscape is tax changes affecting property. The second reason is the increasing emphasis on the need for transparency, which has seen governments and public opinion placing it increasingly above individuals’ right to privacy with regard to their personal financial affairs.
This onward march towards a world where people’s financial affairs are the business of the international community of tax authorities and, possibly in the public interest, has far-reaching implications for foreign owners of UK property. If so motivated, a person will be able to identify the ‘beneficial owner’ of a property, even if it is owned through a company or a trust.
Property: a national obsession
For an Englishman (for English, read: and/or Scots and Welsh), his house is his castle. The UK is a nation of homeowners, not seen everywhere in Europe, let alone the rest of the world. Inevitably, this has an effect on the way governments respond to the cultural mores of the electorate when it comes to taxing foreign investors in the UK.
Until relatively recently, owning property through a non-UK company, possibly a trust, was a very attractive option for foreign investors looking to tie their money up for a period of time. The tax position was clear, it was well understood and, essentially, very beneficial, offering property owners protection from both Inheritance Tax (IHT) and Capital Gains Tax (CGT).
Non-residents had the option of purchasing property through an offshore company, thereby avoiding both IHT and CGT because shares on that company were not subject to these taxes and the company was not, in most cases, subject to tax on a disposal of the property. This was quite unusual. In other countries, if real estate is located in that county, tax is payable.
Since 2012, however, the Government has brought in many tax changes to try to level the playing field and perhaps even discourage foreign ownership of property. With effect from 6 April 2019 non-UK residents are now subject to tax on all gains realised on their UK real estate assets. Although a company or trust may still be the right structure, there are many more factors to take into account.
A delicate balance
The UK has always been keen to attract foreign talent and investment, but there is a balance to be struck between wanting to remain attractive to foreigners but not so much as to make UK residents feel hard done by.
Until 2017, the rules for ‘non doms’, were very generous. It was possible for someone in this category - resident but not ‘domiciled’ in the UK - to be in the UK for 30 or 40 years and not pay tax on any foreign income or gains. A time limit of 15 years has now been imposed on this benefit.
Political pressures have certainly had their part to play. The press has been known to promote the idea that people come to the UK and use our hospitals and our roads without paying any tax. It is another reason foreign investors are targeted. After all, their disgruntlement won’t lose politicians any votes to speak of.
The government also needs to consider the fact that other countries have beneficial tax regimes for those who move to Italy, Portugal or Israel, for example. They present a bit of competition for the UK in attracting foreign input to the economy.
For non-resident non-dom investors, the landscape is now more complicated. The single most off-putting thing for them is IHT, especially if they come from a country without any sort of estate duty. At 40%, UK IHT is considered one of the most onerous around.
Stamp Duty Land Tax (SDLT) is another. Although not directly targeted at foreign investors, the recent changes affect them. The new rules have the effect of being beneficial to those buying lower value properties and far more punitive for those buying higher value properties.
In addition to this there is now a further 3% surcharge applied to second home ownership. For foreign investors, even if it is the only property they own in the UK, as long as they have a home outside the UK, the 3% applies. When you are looking at properties in excess of £2m, SDLT starts to creep up pretty high. And if you are buying a property for £10m you may be on the hook for tax in the region of £1.5m. This is a significant level of tax to pay at the point of acquisition.
Asking the right questions
The job of an adviser is to ask their clients relevant questions, like whether they plan to live in a given property, and if so, for how long. Do they intend to become a UK resident or are they planning a two-week visit once a year? How long do they intend to own the property? Do they plan to pass it down to their children, say, or their godchildren or nieces?
Asking clients these questions is vital to being able to serve them properly. No two families or circumstances are the same and neither will the tax rules be where they are resident. Experienced advisers know the right questions to ask. They will have seen all the scenarios before and be able to bring that practical wisdom to bear in ascertaining the best way to help people achieve their goals.
Assessing the relative advantages of owning property in a given location is part of this. There are many attractions for foreign and internationally mobile families to owning a property in the UK. These include structural attractions such as the relative political stability, a robust legal system, and an established land registry.
That is to say nothing of the many less technical reasons for owning property in the UK, like the excellent schools and universities, the fact that it is a globally recognised hub for culture including art and fashion. Indeed, London in particular remains very popular for all these reasons and more. Cushman Wakefield’s Winning in Growth Cities 2017-2018 report ranks London number one for ‘financial centre’, ‘technology hub’, ’connectivity’ and ‘innovation’.
Although it is much modified, UK property still has a favourable tax regime for foreign investors. And the fact that UK real estate has, over the long term, proved a reliable investment, is another attraction that is hard to argue with.
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