Investing in UK property: Three common myths busted

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Is bricks and mortar really a safe, reliable investment? We explore how investing in UK property fares as an option for British expatriates.

Britain is famously attached to owning property, with many Britons seeing it as the most reliable kind of investment. Here we unpick some common assumptions about investing in bricks and mortar and explore how it fares as an option for expatriates.

  • Myth 1: Property will always make money

UK property over recent years has seen impressive growth, averaging 16.5% nationwide in the decade up to June 2017. However, the cost of living has also soared. After factoring in inflation, The Office for National Statistics found that UK house prices actually decreased an average 5% in real terms over that period. 

With over half of reported sale prices fell below the asking price in August-October, The Royal Institution of Chartered Surveyors predict a stalled housing market ahead. Some experts even forecast a severe downturn as wages fail to keep up with inflation amidst Brexit uncertainty.  

As with any investment, you should be prepared for volatility. Many will remember the near-40% plummet in house prices in 1989 followed by years of widespread negative equity. 

When renting out investment property, you also need to consider the real returns – what you get back after taking off all expenses plus inflation. For residential landlords, this can include high management fees, insurance, taxes and maintenance costs.

Commercial real estate investment firm CBRE estimated that in the decade preceding December 2016, the average rental income from UK properties (excluding London) was reduced from 5% to 3.75% after expenses. Property price growth of 2.19% (December 2016) boosted the average total return to 5.94%. 

In the same timeframe, an investment portfolio of mixed assets would have made similar returns – albeit usually with much lower management fees and the added flexibility to manage risk and returns by fine-tuning the portfolio in response to market developments.

While property offers the potential to add value, say, by adding an extension, remember that growth has a sting in the tail – the higher the price increase, the higher the capital gains tax when selling. 

  • Myth 2: Investing in property is a safe bet

This is never true of any investment. While it can be reassuring to see your capital in the tangible form of bricks and mortar, its value can shift unpredictably in either direction. 

Good investments are about more than returns. One consideration is liquidity – how easily you can retrieve your money. Property can be difficult to sell quickly, especially for an acceptable price. Rightmove estimates that it takes an average 63 days to sell a UK property (86 for upper-end London properties). 

Some investment funds, on the other hand, have daily liquidity – so you can just sell the amount you need, not the whole investment, and receive your funds within days. 

Then there is diversification. If you already own your home, buying a second property can make you overweight in this asset class, especially if you do not have other investment holdings. When property prices fall, both properties will probably fall in value; meanwhile, share and bond markets may be performing well. 

See more on how property compares with other investments

  • Myth 3: Owning UK property is tax-efficient for expatriates

This was truer some years ago, when non-resident individuals and trusts did not attract UK capital gains taxes. Now, expatriates with British residential property are liable for ‘non-resident capital gains tax’ of 18%, 20% or 28% on growth accrued since 6 April 2015. 

Another recent reform was a 3% additional stamp duty on second and subsequent homes. This includes overseas property, so if you already own foreign property when you buy a UK home (even if it is your only UK property), you could be subject to charges of up to 15%. This only applies to purchases in England, Wales and Northern Ireland (Scotland applies a different but similar tax).

Expatriates should explore tax-efficient alternatives. Investments wrapped in an insurance bond, for example, receive ‘time apportionment relief’, so if you return to the UK, you receive full credit on any growth during your years abroad. Some investment structures, like trusts, can also mitigate UK inheritance tax. If you are seen as UK-domiciled, property will attract 40% inheritance tax, generating potential taxes of tens of thousands for your heirs.

See more about effective tax planning

You can still include real estate in your portfolio without buying an actual property. Investment funds, for example, can offer more liquidity, diversification and tax-efficiency by combining a range of assets like property (or real estate securities) alongside equities, bonds, etc. You can potentially invest however much you want without the costs of owning direct property, and withdraw income in Euros instead of Sterling to avoid conversion costs and exchange rate risk.

Of course, many expatriates own their own home abroad and prefer to retain their UK home for family use or as somewhere to return to if they move back to Britain. However, to maximise tax efficiency and minimise market risks, consider looking beyond property as an investment option. A professional adviser can help establish a suitably diversified portfolio tailored for your unique aims and circumstances.

Find out about our investment review service 

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.