5 Questions Every Foreign Buyer Should Ask Before Buying a London Property

Ugo Arinzeh

February 17, 2021
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5 Questions To Ask Before Buying A London Property Blog

I wanted to share with you my tips for foreign buyers, and the questions you should ask yourself before making a property purchase in London. As a property agent I actually specialize in working with international buyers, helping them navigate this and so these are some of the questions that often come up as we’re having those conversations so i hope it’s helpful for you and if you have any specific questions i’d love it if you’d reach out.

Question number one – What about Brexit?

Four and a half years after the UK voted to leave the EU in June of 2016 a deal was finalized in December 2020. Since the initial vote and now we’ve seen a decline of 5% in the number of London properties owned by overseas companies so we’ve definitely seen them pulling out of the market. However, despite the claims by the Bank of England that leaving the EU could see house prices drop by up to 35% over three years, new research by Keller Williams UK has found that so far this hasn’t been the case. The London and UK property market has so far remained relatively impervious to any post-Brexit related decline, the Capital has actually seen an average price increase of 3.2% even though the city of London has declined by 20.9% and the City of Westminster by 9.3% decline, some of the largest in property prices since the vote.

However, major elements of Brexit still remain uncertain. One of the issues is the exclusion of financial passporting rights in the deal, which could have repercussions for property demand. Once a memorandum of understanding is outlined in March 2021, one possible outcome could be a migration of the financial industry out of London into the EU thereby adversely impacting the demand for property by high-income professionals. The tech sector heavily concentrates around Silicon roundabout, so this could also affect UK property.

Investors should also be aware that Brexit may impact the jobs market. Data modelling from the office of budget responsibility shows that unemployment under a trade deal could peak at 7.5%. A faltering jobs market, which typically gives rise to a growing number of renters unable to access the property ladder could create growing demand in the buy to let space but weaken demand in the sales market. So far the UK and even London have not had significant long-term effects of the Brexit vote with London recording high average prices as of December 2020. The average home in London now costs approximately £514,000 up 9.75% year on year which is now actually in record territory.

House Prices 1

Source – https://www.cityam.com/what-has-brexit-done-to-property-prices/

Question number two – what about exchange rates?

Exchange rates have actually made the greatest impact on what it may actually cost you as a foreign buyer. If you’re a US investor, you may have already noticed your spending power has been slipping in recent months. In the graph below you can see the weakening Dollar relative to the Pound where value has fallen roughly 10% since the March 2020 peak.

Usd To Gbp 1

Now compare it to the five-year graph where we saw that big bounce in mid-2016 after the Brexit vote.

Usd To Gbp 5yr 1

Recently the high was hit in March 2020 after the Coronavirus kicked in and national lockdown took effect in the UK, but since then the trend has been headed towards a continued weakening of the Dollar relative to the strengthening of the Pound.

A few things are impacting this downward trend which includes broad-based Dollar weakness in 2020 according to the financial services firm UBS, due to elevated budget and trade deficits, as well a recovering global economy, meaning people are less likely to treat US Dollars as a safe haven and finally the Federal Reserve’s decision to cut rates, thereby negating the Dollar’s interest-rate advantage over the rest of the world.

For European buyers, their currency has remained fairly strong relative to the Pound, both when looking at it on the one year and five-year graphs.

Finally, let’s look at the Chinese Yuan, which has had a lot of volatility in its currency over the last year. It too saw a spike in value in March 2020, before quickly losing ground and has hovered within a band of 0.110 to 0.115 Pounds per Yuan.

Cny To Gbp 1yr

From 2016 to 2019 we can see the Yuan repeatedly crossed the 0.115 value mark.

Cny To Gbp 5 Yr

If you want more real-time data on exchange rates go here, so you can keep track because again that’s going to be perhaps the greatest indicator of your ultimate purchasing power.

Question number three – what about stamp duty?

Stamp duty is the most significant tax that a London property buyer will pay, especially a foreign buyer. It’s paid to the UK government’s tax agency called HMRC, it’s a tax on the purchase of the property and cannot be financed. Stamp duty is tiered, but currently the rates range from 0-15% for international buyers, depending on the purchase price of the property. From 1st April 2021 there will be an additional 2% stamp duty surcharge for non-UK resident buyers on the purchase of a residential property in England and Northern Ireland. It will apply to both company and individual buyers, and the surcharge will be in addition to the existing 3% percent stamp duty surcharge on purchases of additional dwellings such as buy to lets and second homes, the flat 15% stamp duty rate on purchases of dwellings worth more than £500,000 by companies acting as envelopes, and the existing stamp duty rates for UK home buyers. I have a video here which shares more information on Stamp Duty and what to expect (the percentage bands mentioned will be updated as of 1st April 2021).

Question number four – What are my financing options?

Of course, buying a property with cash is the easiest option, especially as a foreign buyer, not only is it quicker but you’ll be in a very strong position when presenting and negotiating an offer below asking price but the reality is that some foreign buyers will need a mortgage. Unfortunately, compared to a domestic buyer, you’ll have fewer finance options, however, there are private banks willing to lend.

As an American, it is particularly challenging due to US tax reporting requirements that have put off many British high street banks but I work with specialist mortgage advisors who have relationships and access to those private banks and other mortgage companies that will lend to Americans. Be prepared, however – the underwriting process may be more time consuming and rigorous, as a bank based in the UK needs to get comfortable with your asset position and credit profile, so if you’re thinking that you’ll need a mortgage, it is best to start working on that immediately and getting that settled so you’re really comfortable on the budget and all of the major due diligence hopefully has been addressed on the front end.

Question number five – what about Capital Gains Tax?

If you’re buying a property as an overseas investor the last thing you might be thinking about is what happens when you have to sell your London property, but it is worth having a sense of the potential implications.

As a US national selling your property here in the UK, you may be subject to Capital Gains Tax back in the US, this is because Americans living abroad are technically described as “US persons”, and are liable for US taxes even if you are a tax resident in the UK and pay income and other taxes to HMRC. You’ll still need to file tax returns to the US’s IRS, and so, therefore, you might be required to pay taxes on gains of the sale of your main residence wherever it is around the world.

Obviously, each country has its own rules but this is definitely something that you want to make sure you understand and you’re comfortable with. If you need any help connecting with a tax advisor that specializes in helping foreign investors, just get in touch and i’ll definitely be sure to connect you.

So I hope you found this article helpful. We’ve identified several key questions that any foreign buyer should definitely be asking, while obviously there’ll be other questions associated with investments such as buy to lets, and I will address these in separate articles for you. If you have specific questions or want an introduction to any of the specialists I’ve identified such as a mortgage advisor, tax advisor, or even immigration lawyers, then please get in touch.

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