Investing
in overseas property
Decide whether
you are investing for capital gain, income or both, and let this colour your
choice. For example, British houses usually achieve greater capital
appreciation than flats, but flats are easier to lease.
Not all governments allow free capital outflows. Property in countries such
as South Africa may seem cheap, but make sure you can retrieve your
investment.
In your absence, the success of an investment depends on your managing
agent. Choose one recommended by satisfied clients. Make sure they check
tenant references and carry out regular property inspections.
When assessing annual gross rental yields, remember to allow for one or two
untenanted months a year.
Beware of cowboy agents trying to fleece overseas landlords with management
and tenant-finding fees. Always compare quotes from several agents and
do not be afraid to haggle.
Be sceptical of the sales pitch at overseas property exhibitions in Hong
Kong. That "luxury waterside development" may overlook
some dank, stagnant London canal. A property
may be "10 minutes from the heart of the city", but only at 3 am.
If you lack local knowledge, consult a native.
Local laws and tax changes can affect property investors. For example,
Australia introduced a goods and services tax of 10 per cent on July 1, and
overseas buyers are only allowed to acquire new dwellings
Check the proportion of absentee landlords in your proposed purchase. Many
riverside blocks in London have been so heavily sold in Hong Kong that
several are up to 90 per cent leased. This can deter local tenants and
buyers who prefer owner-occupiers as neighbours.
Investigate the amount of similar new developments and construction in the
area before buying. Even short-term oversupply dampens the market.
Hong Kong buyers often miss opportunities by insisting on expensive
new property in capital cities.
Well-maintained older property in expanding commuter towns, such as Croydon
near London, or second cities, such as Perth or Brisbane in
Australia, can offer better value and returns.
Approach holiday property and time-shares with caution.
Holiday-home investment is a specialised and fickle market and time-share is
a minefield for the unwary. - by ANNA HEALY FENTON
This article first appeared in the South
China Morning Post Business
Gains in British residential market pose
taxing problem for investors
Using surplus cash made from increased rentals to
pay off a loan can bring unwelcome dilemmas
Most people with an interest in residential
property are aware that prices are rocketing in Britain. Hong Kong-based
investors who were fortunate enough to enter the market in the late 1990s or
earlier have seen spectacular gains in value.
They have also seen significant increases in rents
they receive. For many, this has created a dilemma. To understand why,
consider the circumstances of a typical property investor in this position.
Often, they will have obtained an interest-only
loan to buy a house or flat in London. The loan is usually pitched at such a
level that the interest payments together with other allowable expenses are
more or less equal to the rent, leaving no surplus exposed to British income
tax.
However, many of these landlords have been able to
increase the rent over the years in line with increasing values. As the
revenue stream has exceeded costs, a sizeable surplus sum has built up in
many cases. And here is the dilemma: if property investors use this money to
pay off part of the loan, will there be unwelcome tax consequences?
Recall that we are speaking of an interest-only
mortgage, and the main reason for structuring it this way is normally to
mitigate tax.
If the extent of the borrowing was reduced, there
could be significant income tax exposure in the future because the reduced
level of the loan would create lower interest to offset. So, purely from an
income tax perspective, it might not make sense to pay off part of the
principal.
But there is another, less obvious matter to
consider - inheritance tax (IHT). All assets in Britain are subject to IHT,
no matter where the owner resides. However, in calculating the value of an
estate for IHT purposes the net value of assets is used - that is, the
property value less any applicable debt. If an investor paid off part of the
loan, this net value figure relating to the property would rise, thus
increasing the potential IHT.
Surely, some would say, if someone were to use a
British-based cash sum (which would be part of an estate) to reduce the
balance of a loan, the net effect would be tax neutral.
This is certainly true for Britons, who will be
liable to IHT on their worldwide assets. But we are principally considering
investors based in Hong Kong, who are non-UK residents and not domiciled in
Britain. These people could place any surplus cash on deposit offshore,
removing it from British IHT, keeping the loan in place to maximise their
reduction in overall UK-based assets. For such investors, income arising
from the offshore deposit would also escape British tax, as it would arise
outside the country.
But a decision like this is not always reached
entirely on the basis of logic, or purely to minimise tax exposure. Often,
individuals dislike the idea of indebtedness, whatever other factors may
apply. In such cases there may be strong personal and emotional reasons for
taking certain action - including reducing a British loan taken out to
assist the buying of an investment property - tax notwithstanding. Whatever
view one takes, important financial choices should never be made without
professional advice.
For British income tax and IHT purposes, the most
beneficial tax strategy would probably be to maintain the loan at its
present full level and remove any surplus cash to an offshore deposit.
Whether that will be the most emotionally satisfying option is another
matter.
Alan Lester is a partner in London
chartered accountant HW Fisher & Co. - July 21st 2004 SOUTH
CHINA MORNING POST
