A guide to purchasing property in the UK as a foreigner
So you’re contemplating investing in British property from a foreign country, however you may be wondering if the process of purchasing property in the UK is the same as in your home country.
Overall, the fundamentals of investing in British property are similar to that of other countries, however it should be noted that there are some dissimilarities in various taxes among other aspects.
By the end of this guide we hope you have a good understanding of the process of purchasing property in the UK along with the advantages, current pitfalls and differences.
Decide: Invest and let, or purchase and live in, the property
One of the first decisions you must make is whether you will be purchasing property in the UK whilst staying in your home country or moving to, and working in the UK whilst investing in property.
Foreigners are able to purchase British property, however, it may be difficult to apply for a mortgage for an investment property in the UK as a non-resident.
That said, British mortgage providers are much more likely to lend against a property if you intend to move and work in the UK and use the property as your main residence.
If however you have the available funds, investing in UK property with no mortgage (i.e. all cash down) is a fairly straightforward process, whether it is an investment property or for your own residence.
Advantages of investing in the UK property market
If you are able to secure a mortgage or have sufficient funds of your own, purchasing a property in Britain can be a great investment.
In general, the UK property market has shown year on year growth, meaning that if you are investing for with a long term view, your assets value will grow by on average 2-5% per year.
Whilst capital growth is a major advantage of investing in British property, it should also be noted that certain areas of the UK produce very profitable monthly rental yields.
For example, you could purchase a property in the North of England for under £100,000 (~$130,000). Depending on how you have financed the property, you could expect a rental yield of around 12%. It should be noted however, that where property produces higher monthly yield, the capital gain won’t be as large.
If you are considering applying for UK citizenship, home ownership in the UK is viewed as advantageous during application.
Current pitfalls of the UK property market
Currently there is uncertainty surrounding the UK property market due to Brexit. However despite the uncertainty and current stagnant market, many investors are seeing a potential opportunity on the horizon – property prices may decline after a hard Brexit, meaning prices are much more attractive to first time buyers and investors.
There are not as many tax deferral options as there are in countries such as the USA. For this reason you should ensure you have a clear picture of how your investment will pan out over the years with the inclusion of all British property taxes.
Further to the above, the British government are contemplating introducing a tax on foreign investment in UK property.
If you have a British spouse, have dual nationality and own property in both countries, taxes can become complicated.
UK Property taxes to consider
If you continue to live in your home country, your foreign assets will contribute to your home-income tax. However if you are considering a move to the UK, you will be required to pay all relevant British property taxes.
The taxes you will be expected to pay on UK properties include:
Stamp Duty Land Tax (SDLT)
Whether you are purchasing property in England, Scotland, Wales or Ireland, you will be required to pay Stamp Duty upon purchase. Depending on which country you purchase property in, Stamp Duty taxes are slightly different.
For your first property purchased, depending on the price of the property, Stamp Duty will range from 2%, up to 10% of the value of the property. Additional properties purchased will be on a slightly higher rate – between 3 and 15%.
Any income above the threshold of £12,500 P/A is required to be taxed. There are various income tax bands depending on your annual income, which is capped at 45% for an income of £150,000 and above.
If you are investing in UK property as a corporation, you will be subject to a 20% tax rate as a non-resident.
Capital Gains Tax (CGT)
Whether you are a UK resident or non-resident, you will be subject to Capital Gains Tax upon sale of a property. This tax can be up to 18%, however only the capital gain component is taxed – not the whole value.
Inheritance Tax (IHT)
In the unfortunate event that you pass away, any property which you owned is subject to inheritance tax at 40% of the property value.
There are various costs to consider when purchasing a property in the UK. These costs consist of, but are not limited to, the following:
- Mortgage fees – Booking, arrangement, transfer
- Solicitor fees
- Valuation fees
- Estate agency fees
- Survey fees
- Land registry fees
- Removals/Moving costs
- Monthly bills
Step by step guide to purchasing property in the UK
Determine your budget
Firstly consider your budget. Prices of property vary greatly depending on the location, i.e. property in London is far more expensive than rural Scotland.
Determine property type and consider terms
Determine which type of property you intend to purchase. You could invest in a flat in central London or a detached house in a Northern city; each area comes with advantages and disadvantages.
Each property will be sold with certain terms, so this should also be considered. I.e. a flat will usually be a leasehold (the buyer owns the flat but not the land on which it is situated), or a freehold – buyer owns the property and land.
Search for property
After determining your budget and property type, you can begin to search property for sale in the UK.
Ideally you should have a good idea of the location you intend to purchase property in. This way you can contact an estate agent in the area who will help you in your property search.
It should be noted, various properties in the UK are listed buildings; either grade 1 or 2. If you purchase a listed building, you are unable to make changes to the original structure – only strict renovations are permitted.
Discuss your financing options with an IFA or mortgage broker early on. Ideally, this should be done before everything else, as to ensure you will be able to secure a mortgage and complete on a property.
Further to above, you should ideally have a maximum loan to value (LTV) of up to 75% – anything higher than this will cause monthly payments to be significantly higher.
Obtaining a mortgage with as low of a LTV as you can afford will ensure you have a sensible monthly interest rate.
Unless you are offering the full asking price, expect your first offer to be rejected. Have a figure in mind that you are happy to go to.
The property market in the UK is cyclical, i.e. there are times when it favors the buyer and times when it favors the seller. Once your offer is accepted you can move on to the mortgage application process.
In order for your mortgage lender to provide you with a mortgage, they will need to conduct a survey on the property to determine its value, check for structural damage or any other issues. As the buyer, you will be required to cover the cost of the survey.
At this point in the buying process you will need to instruct a solicitor or licensed conveyancer to complete the necessary legal transactions and finally transfer the property deeds into your name.
Exchange of contracts and completion
Once the titles of the property have been transferred, you and your solicitor will then exchange contracts with the seller. At this point the sale is legally binding.
To complete on the property, you will obviously be required to transfer the necessary funds to the seller. This is handled by the solicitors on both sides, therefore your deposit funds and the mortgage funds are paid to the solicitor’s bank account, and the solicitors on both sides handle the financial transactions.
While many may believe it is difficult to purchase property in the UK as a foreigner, this is not necessarily the case, provided you are either able to purchase the property without a mortgage, or are working in the UK as a foreigner. However, the slight differences in taxes should be noted, as to ensure your purchase will be a profitable one.
Investing in the UK property market can be a very good decision – on average, property prices have increased year on year, and are expected to carry on doing so in the long term. Various cities across the UK also offer an excellent monthly cashflow from their rental income.
About the author
This article was written by EMC2 Property – Search property for sale in various locations across the globe.