Proceed with care


for maximum returns

Many UK property investors have benefited greatly by buying overseas, but there are plenty of pitfalls to avoid, says David Lawrenson. Those buying property abroad should proceed with care.

In the last few years there has been a massive increase in buying and letting property abroad, a trend driven by rising British property prices, the opening up of new destinations by budget airlines and cheaper air fares.

Letting abroad can work well and is a great way for landlords with properties in the UK to spread their risk. However, there are many things to be aware of.

Obviously, language, distance, local customs and restrictions can be a barrier, especially if you’re doing any building work. In some areas properties must be renovated or built using local materials and techniques, thereby raising costs. With newer properties there may be unusual residents’ regulations to comply with. Also, property taxes, legal fees, land registry and mortgage costs all tend to be higher outside the UK.

It is essential to employ good lawyers, architects, surveyors and builders, so spend some time checking their credentials. The Law Society has lists of British solicitors with offices outside the UK. Check references locally.

In many countries you’ll have to also deal with a notary - the civil servant whose job it is to check the title deeds, draw up contracts and make a record of the sale. However, their job is not to advise you, so you’ll probably still need a lawyer.

In most places you’ll be committed to the purchase at an earlier stage than at home. Get your legal adviser to establish that you have a good legal title to the property and to check the person you are buying from really does own the land. If there are any complications with getting a good title or establishing rights of way over land, ask your lawyer to make this clear.

Your lawyer should also explain how local planning permission operates. If you bought for a sea view, he or she must check that the land in front of you can’t be built on. Some councils have tight planning laws which will stop the area being swamped with hundreds of ‘me too’ developments while others have an anything goes approach.

For architects and surveyors, the Royal Institute of British Architects and the Royal Institute of Chartered Surveyors www.rics.org have small databases of practitioners abroad. Try to get a local practitioner so as not to offend the locals.

Be clear why you are buying. As well as letting, you may also be buying with an eye to one day living there or using the property yourself as an occasional holiday home. It’s OK to have a mix of reasons, but you still need to be clear how much money you wish to spend, how much you think the property will get in rent and what the running costs will be.

If you are thinking of ultimately retiring there, consider how suitable the property will be when you’re older. Also check with the Department for Work and Pensions and the Department of Health to see if you’ll be able to access your British pension and whether you qualify for free health care in that country.

If you are buying purely as an investment then personal preferences won’t count, so you can focus on things like demand, occupancy, advertising, agent fees and rent, unencumbered by any other personal objectives. You’ll need to budget for marketing the property, maintaining and insuring it, agency and service charges, cleaning and dealing with any problems as they arise.

Check before you buy you need to know that you’ll be allowed to let it out, so check the local letting laws, safety requirements and on how you’ll have to account for your income locally.

Talk to people who have let property there before and find out what problems they had and how they overcame them. Your landlord association may be able to put you in touch with other local British landlords. Unless they come with unimpeachable recommendations, treat with due scepticism any advice from people who are trying to sell you something.

Look out for any local regeneration initiatives that may push up property prices and rents. If a big new airport or connecting road is being built, that’s good news if you are in the holiday letting business, providing you aren’t too close to the flight path or the motorway.

If you are going to let to holidaymakers, the property must look good on a website and be easily accessible. Outside the main tourist areas there may be a more authentic feel but if it’s too far from the nearest airport and miles from the nearest shops, it won’t let easily. Seaside areas are usually more expensive to buy into but should get higher rents. However, they may not let outside the summer season unless there is another attraction like good golfing. Properties in cities may be attractive for both year round holiday lettings, business lets and for the longer term tenant market. It all depends on local demand and supply, so check this carefully.

If your property is served by a single airline there is a risk they could stop flying there, so look for places that can be reached in a number of ways.

If you are using an agent, tell them you have a local friend who will keep an eye on the property. That should stop the agent pocketing money from holidaymakers who turn up at their office wanting to let your place for cash. Keep a payphone in the place and ring occasionally. If someone answers you’ll know it has been let and can challenge the agent if the rent doesn’t show up.

Variations on holiday home ownership include time shares where you buy with other owners and each have a share of the property. Clearly you need to be satisfied with the arrangements should one or more of the owners wish to pull out or sell his or her share. Another alternative is ‘leaseback’, and arrangement by which investors buy the property then lease it back to a developer or manager who guarantees a fixed income. Check the small print of these deals carefully.

In the longer let market you’ll need to check out local tenancy laws and regulations as well as local rent levels. Tenants may have more protection than in the UK and it may be harder to evict. Also, rent controls may exist, putting a cap on what you can charge.

Getting finance

More UK banks and mortgage brokers are now lending on foreign properties, sometimes in foreign currency. Borrowing locally from a foreign bank may involve higher fees and the lender will usually look at your net income rather than taking any note of income multiples.

Buying abroad means you are at the mercy of exchange rates (although when Britain joins the euro, this will cease to be a problem in most of Europe). If you are buying off plan or buying a property which must be paid for in stages, you could fix the rate by buying the currency now or arranging a forward contract with a bank. Alternatively, you could finance it by remortgaging your UK property.

Getting insurance

Most British insurance brokers offer good insurance policies from well known insurers for places such as Spain, Portugal and France, thus avoiding the complications of a policy written in a foreign language. Check you are covered for the period between exchange and completion, for unoccupied periods and for the cost of emergency travel and temporary accommodation following a big claim.

Unfortunately, for many countries, cover for a foreign property is only considered if you’re UK home is insured with the same company. For more out of the way countries, you may have to use a local insurer. Policies may be quite different though - for example, subsidence is not covered at all in some countries and public liability cover may not extend to holidaymakers or tenants - and if you end up in dispute with a local insurer you’ll have the hassle and expense of fighting it out in a foreign court.

Watch out for ‘community insurance’ and residents’ schemes as these may be limited in what they cover.

Do your own research of historical records and local government to assess the risk of hurricanes, tornados and earthquakes in the locality and try to get cover for these too. Local insurers may be more prepared to consider these risks as they’ll have more data on them. If the property is out of action for a long time following, say, a hurricane, it won’t be generating revenue. This is something you may wish to insure against. If the property is unoccupied for long periods, you may be able to reduce premiums by paying someone local to visit it regularly.

Taxes

As long as you are a UK resident you are liable for UK income taxes on rental profits from properties abroad as well as capital gains tax on the money you make when you sell. The only exceptions are for people who come from another country, (called ‘non-domiciled’), and people who intend to move abroad later.

‘Domicile’ is a complex area (more permanent than residence but different from nationality) and affects your tax position. The main advantage of being a non-domiciled taxpayer is that you are only taxable on profits or capital gains from foreign investments if and when you bring money back to the UK. A non-domiciled husband or wife of a domiciled partner should therefore try to ensure foreign investments are made in the name of the non domiciled person and are therefore free from UK tax as long as no funds are remitted to the UK.

If you are UK domiciled but have emigrated you’ll be exempt from UK tax on foreign property (though you’ll still be taxed on income from UK property). However, you must stay away for at least five whole UK tax years or else the Revenue can claw back capital gains tax.

Many people set up companies as vehicles to invest. In fact in some countries, investing through a local company may be the only way a foreigner can actually buy property. If you don’t intend to emigrate it may be a good thing to use a UK company as a vehicle but it will depend on your circumstances and how long you want to invest for, so speak to a tax adviser.

But beware, the Revenue is taking an interest and if you use the property as a holiday home you may end up getting a tax bill for this ‘benefit in kind’.

If you intend to emigrate (or are non UK domiciled) you’ll want to avoid using a UK company for foreign investments. Indeed, many British investors have bought abroad using companies based offshore to avoid local land taxes. However, this may have complex implications – and more so in the future with an international crack down on tax havens. So, if you are thinking of doing this, discuss your plans with an accountant who is expert in this area. If you do set up an offshore company it must be set up and run properly. It’s not cheap either and income and gains will be taxable in the UK while the controlling shareholder is still UK resident

As well as UK taxes, you’ll also need to consider local taxes, which are often higher than in the UK. Many countries will tax foreign property owners on their income and capital gains. In most cases however, the Revenue ‘double tax relief’ which ensures you aren’t taxed twice although you will be at the higher of the two countries’ rates of tax. Our Government won’t compensate you for the higher tax burdens of a foreign land!

Think beyond income, capital gains and stamp duty taxes. Another country may have weird and strange forms of tax that we don’t have. Double tax relief will not apply for these because there is no UK equivalent and even foreign land taxes, the equivalent of stamp duty, cannot be set off against UK tax. So, find out about every other type of tax before you invest.

Schemes to avoid tax are sometimes based on loopholes that are already closed by the local government (or are about to be.) In some countries, it’s common to pay local land taxes on the basis of the price declared in the deed of sale and not what was actually paid. If you are found out penalties include compulsory state purchase of the property plus big fines. As in life, there’s really no such thing as a free lunch.

Despite the hassle there is no doubt that many UK property investors have benefited greatly by buying overseas. But the wise ones have only done so after acting with due care and usually after taking appropriate advice.