October 22, 2009
An easy market to enter
The UK property sector has attractions for overseas investors from the tax and legal perspectives
By SAMANTHA BRADLEY AND PHILIP MUNRO
BEFORE last year's global economic crisis, there was a commonly held perception that both the UK housing and commercial property markets were starting to overheat, particularly in the London area. For example, UK house prices rose in the years between 2002 and 2007 by 90 per cent. UK property values fell significantly, however, during the economic crisis and the subsequent recession with the fall in national average house prices being in excess of 16 per cent and notably higher at the top end of the market.
As a result of this fall in prices and, to some extent, because of falls in the value of sterling, we have seen significant interest among overseas investors in UK property investment. From the perspective of an overseas investor, the UK property market has both legal and tax attractions.
From a legal perspective, the UK is a relatively attractive market for property investment. The UK does not impose restrictions on foreign property ownership in the same way as does, for example, Swiss legislation or that applying in the Channel Islands. Further, the UK does not have exchange controls and there are no restrictions on inbound capital investment (although certain cash transfers may be reportable under UK and European anti-money laundering rules). The UK, then, is an easy market to enter.
The English system of Land Registration makes the process of proving title and purchasing property relatively straightforward. Most English land is now registered centrally with records held in computerised form: as at January 2000, the Land Registry held 17,814,640 property titles. Where land is registered, the conveyancing process does not require lawyers to refer to the 'title deeds' that once evidenced title with, to some extent, the UK state guaranteeing that the registered owner has the title shown at the Land Registry.
Further, not only can title be proved electronically, so too can most of the key property searches that it would be recommended that a purchaser undertake such as searches of local authority planning registers. Further, the government recently required that a 'home information pack' be prepared by vendors of English residential property: these packs must contain certain information regarding the property including certain standard searches. This all makes the conveyancing process more efficient such that, assuming cooperation from a willing vendor, a prospective purchaser of UK property would hope to be able to enter into contract for it within a short period of time.
* Inheritance tax
As regards tax, Stamp Duty Land Tax (SDLT) will need to be paid by the purchaser of UK property or land. The rate of SDLT on properties (whether freehold or long leasehold) costing more than £500,000 (S$1.16 million) is 4 per cent: lower rates may apply to lower cost properties.
UK rental income will be taxable in the hands of the recipient whether or not the recipient is UK resident subject to permitted deductions.
In certain circumstances, the UK tax regime does provide that capital gains on property disposals will be taxable. With appropriate planning, however, it is possible for a non-resident investor into UK property not to be subject to UK tax on capital gains on disposals.
In this regard, the UK is very unusual; most European countries will tax gains made on a disposal of a local property whoever the gains arise to. In order for non-resident investors not to pay tax on gains, it is absolutely essential that the property investment does not fall within the UK rules on 'trading' and the management of any offshore vehicle needs to be structured such that it is not deemed (through functions carried on in the UK) to be UK resident.
If an investment in UK property is made by a non-resident individual, they could bring themselves within the scope of UK inheritance tax. In this situation, inheritance tax could apply on the value of the UK situate property at the rate of 40 per cent. If a non-resident investor is completing a UK property purchase, it is essential that the inheritance tax implications of the purchase are considered as there are a number of ways in which planning can be undertaken to mitigate a UK inheritance tax exposure.
For overseas investors, then, the UK has attractions from a tax and legal perspective. There are, however, some tax traps to be avoided and it is important that professional advice is sought before any purchase. From a legal perspective, English conveyancing is a relatively straightforward process helped by the introduction of compulsory land registration.
Ms Bradley is office managing director and Mr Munro associate of Withers Hong Kong
Martin Koh/ Sherry Tang