Britons are famously attached to owning property, with many regarding it as the most reliable investment option. Here we unpick some common assumptions about investing in bricks and mortar.
Myth 1: Property will always make money
On average, UK property values have grown 16.5% 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 UK house prices actually decreased an average 5% in real terms over that period.
With over half of reported sale prices falling 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 property, you also need to consider the real returns – what you get back after inflation and all expenses, including management fees, insurance, taxes and maintenance costs.
Commercial real estate investment firm CBRE estimate 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 added flexibility to manage risk by fine-tuning the portfolio in response to market developments.
While property offers the potential to add value, say, by adding an extension, remember growth has a sting in the tail – the higher the price increase, the higher the capital gains tax.
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.
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.
Myth 3: Owning UK property is tax-efficient for expatriates
This was truer some years ago, when non-residents 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 Portuguese 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.
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 in Portugal 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.
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.
By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks and has been providing holistic financial planning advice to UK nationals in the Algarve since 2007. Adrian is professionally qualified, holding the Diploma for Financial Advisers.