The Property Investor

Most countries tax non-residents on property in their country. Furthermore, most double taxation agreements between the country and the UK do nothing to prevent this. Consider these five categories.

1. Tax on property purchases (similar to UK stamp duty land tax). After over 20 years in the tax advice business, there are few things which still surprise me. One thing which does still amaze me is just how often people still seem to overlook the fact that the UK is not the only country in the world with taxes. Anyone who invests abroad has a potential exposure to overseas property tax. Wherever you buy, you will face overseas property tax. Foreign property taxes generally fall into five categories; tax on property purchases; annual charges; tax on income; tax on property sales; tax on death or gifts. It is interesting to note that all but one of these categories are likely to apply to a foreign holiday home owned by a UK resident and if the property is ever rented out, all five will apply. This just goes to show that, when it comes to foreign property tax, the investor and the holiday home owner have more in common than you might expect. Many countries impose a tax charge of some kind when property is purchased, usually based on the purchase consideration paid.

2. Annual charges (comparable to UK council tax).These come in many different forms and are often charged by local or regional governments. There may be an annual charge on property ownership on either a flat rate or linked to the property value. Additional charges sometimes apply to properties which are not the owner’s main residence. There may also, or alternatively, be an annual charge on property occupation – either at a flat rate or linked to the property’s value. Another common annual charge is a wealth tax. Many countries impose this charge on non-residents based on the net value of the property and other assets which they hold in the country. Where a UK resident suffers annual charges on occupation or ownership, these may usually be treated as running costs and can be deducted as an expense from rental income or trading profits for UK tax purposes. Such costs are only partly deductible where there is some personal use of the property. The treatment of wealth taxes is less clear. These are often regarded as a personal cost with no deduction available in the UK.

3. Tax on income (similar to UK income tax). Most countries will tax profits and income derived from property whether through letting, development or dealing. Rental income may either be taxed on an accounts basis, based on profits after certain deductible expenses, or as a flat rate on rent received. Where an accounts basis applies, each country will have its own rules regarding what expenses are deductible. Flat rate systems allow for little or no deduction of expenses. In many cases, the tax on non-resident landlords is a simple flat percentage of rent received and may have to be withheld at source (i.e. a withholding tax). Reduced rates of withholding tax often apply under double taxation agreements and must be claimed where available. Profits from property development and dealing are usually taxed on an accounts basis and sometimes also attract additional social taxes like the UK’s national insurance. For UK tax purposes, double tax relief is usually available for overseas property tax on property income or they may be claimed as a business expense.

4. Tax on property sales (comparable to UK capital gains tax). Having spent more than 20 years in the tax advice business and having dealt with many overseas property tax authorities, another thing which does still amaze me regularly is how often people seem to think that they can sell a property abroad and not face a tax liability on it. Wherever you sell, you can expect to face up to foreign property tax. Some countries charge tax on the gain arising when a property is sold. Many countries do provide an exemption for the owner’s main private residence although you will find that this is not generally available to non-residents. Properties held for longer periods are also often exempt. Many countries, like the UK, will treat profits derived from property sales by developers and dealers as income. Double tax relief for overseas property tax suffered on capital gains is usually available against UK capital gains tax. Tax on property sales is often overlooked by UK investors, and they do so to their cost.

5. Tax on death or gifts (similar to UK inheritance tax). Many countries do not have any death taxes but just as many which do. Generally, where there is a death tax, there will usually be a similar tax on lifetime gifts as an anti-avoidance measure. Most countries with a death tax will charge it on non-residents in respect of property and other assets within their borders. Double tax relief for foreign death taxes is available against any UK inheritance tax liability arising on the same assets. Double tax relief will also be available for foreign tax gifts if the same gift gives rises to a UK inheritance tax liability although this will be rare unless trusts are involved. Wealth warning: do not assume that there will be an exemption from foreign death or gift taxes in respect of transfers to your spouse or civil partner. This will not always be the case. Furthermore, it is crucial to be aware that foreign gift taxes may apply to lifetime transfers of property or shares in property (e.g. putting a foreign property into joint ownership with your spouse).

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When many people hear the term ‘property investment’ they automatically think of what they have read in the papers: falling house prices, fluctuating interest rates and the failing economy.

They see this press. Take it to its word. And forget that hidden beneath its outer exterior the property investment market has got a lot to offer.

It is not inaccessible either. All it takes to access the true potential of the property market is the knowledge to know where to look and ‘know how’ to make it happen. 

Remember, despite all the hype, property is still an investment vehicle. A vehicle that gives investors – we mean you – the flexibility to control your involvement and how much time you invest within them.

Take a look at stocks. Do you really understand how they work? Not many of us do, but we still invest in them because we know there is profit.

But imagine what you could achieve with an investment that you could completely control? No worries. No fear. But knowing exactly where you.

Well with property you can. Your choices will be endless.

Real Estate Stocks and Mortgage instruments

Now if you wanted to be a passive investor this is the route to take. Here you can place funds into the stock market in the form of equities of major national homebuilder firms, and they will do the rest for you.

Or alternatively you can follow another investment strategy: discounted notes.

The rules to this investment are simple.  Sellers quite often are quite happy to accept a mortgage from a buyer to begin with but later want to convert it to cash. To do this they need to sell the note to an investor – you – at a discount. And the rest? Well. Whilst they are free of the mortgage, you will be receiving monthly repayments from the buyer – when you have never even seen the house. How simple is that?

Appreciation of property values

This one is the more traditional routes and one we’d most recommend if you plan to sell your properties later on.

Take the current financial climate. You can now invest in properties at 70-80% of their original value without a second thought. Giving you instant free equity.

Now consider this. After investing you decide to either rent your property out or live in it yourself. Over time, your property investment will begin to appreciate in value, and if it is anything like what we have experienced before, you will have access to a property that is greater in value than the top properties of 2007.

And if you do eventually sell, you will not only experience a return on your investment… you’ll have that initial extra equity to boot too.

General Price inflation in the economy

Even if your properties are not appreciating in value – as properties are doing now – this is not the end of your property investment. No. Their value can also be affected by economic inflation.

So let’s just say for example that you are developing some properties. If the cost of labour and materials is continually rising, then the cost to build an identical property could be more than the original. And if each property you build in one area is costing a bit more each time, then in turn their value as a complete development site will have risen.

Meaning at the end your property values will be higher than they were to begin with.

Cash flow and mortgage repayments

Compared to traditional investments that require some money on your part to maintain and pay for them, with rental properties you don’t have to deal with that. Your tenants will essentially pay your repayments for you, whilst giving you an additional positive cash flow each and every month too.

With figures like these it is easy to see why property is considered a stronger investment than stocks and a bank account – the gains are much more profitable.

And here is the best part. Even if your rental income covers only the mortgage repayments. No more. No less. You will still have the joy of watching the equity in your property grow over time.

Buying below market value

Look in the papers and you’ll read many reports of investors who are selling up in the current financial climate in order to maintain their profits. This is a big mistake on their part, but one you can take advantage of. You see they will be so keen to access the equity from it, they will be happy to sell it to you for below value. Great!

Then there are other cases when a property has gone into a foreclosure. To sell the property and get their money back, lenders will often take less than the market value so that they can avoid any further marketing expense and begin again with a clear slate.

Now here is the advice you have been waiting for… Find one of these properties and you will immediately enter into an equity position, purely based on profits.

So if you do spot one… gets investing and buys low. The long terms profits will be incredible.

Converting the use of your property

Imagine investing in a run down 5 bed property and being able to convert it into student accommodation or 2 apartments. You could potentially increase your rental income and benefit from having multiple tenants all within one property. Meaning there will always be someone living in your rental property.

This is what is so great about property investment. You can do a similar thing to any type of property. Take for example this concept. You have just invested in some apartments that currently have low rental yields.

With a little remodelling, you can convert these said apartments into condominiums, and nearly double your rental yields.

Create new value

Every region or neighbourhood goes through a price fluctuation at some point. So spotting a potential hot spot – before its property prices have increased – can be quite profitable.

In this one area you can build up your property portfolio and sit back and watch as your properties appreciate in value. Perfect!

Get the picture – property investment can offer you consistent ‘positive’ cash flows every single month, plus can come in all shapes and forms for you to choose from.

So if you are looking to invest in rental properties consider your options for a moment. There is more to property investment than meets the eye.

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