Asian investors, particularly those from Hong Kong and Singapore, are the key overseas buyers for UK residential properties. According to Knight Frank Residential Research, investors from Singapore and Hong Kong led the way for total number of transactions across the prime market in London from overseas (40%) in 2012, and also top the charts in terms of total investment amount. One of the major reasons which drives Asian investors investing in UK property is that they plan the tertiary education for their children. 

 

As a result of  the tax changes, international investors may look to stock market investments instead, although  there are still some options which may help them continue to benefit from investment in the UK property market but in a more tax efficient way.

 

One option is investment in property funds. If an Asian investor is  keen to have exposure to the UK property market, but is concerned about the taxation changes, a potential solution could be to include a property fund as part of  his/her investment portfolio. Property funds can be a great way to diversify an investment portfolio, helping to ensure the portfolio performs well in a number of different economic conditions. As the investor will be holding shares in a fund rather than the physical property, this asset should be easier to sell if needs be since stocks are a more liquid asset. Also, investment funds continue to be CGT efficient if the investor has been non-resident for over five years as investment gains are exempt from CGT.

 

Another option is investment in an offshore bond. Building an investment portfolio within an offshore bond wrapper can help to overcome some of the taxation issues highlighted above. For example, all gains and most income from bonds are on a gross roll up basis, and the tax only becomes payable when some or all of the bond holding is encashed. There are also inheritance tax (IHT) advantages if the offshore bond is placed within a trust wrapper, helping to ensure assets are passed on to beneficiaries in a tax efficient way.

 

Offshore bonds have another key advantage. Since there is no income, there is nothing to declare to Her Majesty’s Revenue and Customs (HMRC), which helps remove the administrative burden of disclosing assets on your annual tax return.

 

For non-residents who already own property in the UK, the following are the key changes in UK taxation which are now effective:

 

a)     Capital Gains Tax exemption removed: In November 2014, Her Majesty’s Treasury confirmed that non-residents will no longer be exempt from CGT on UK residential property gains. This change came into effect from  April 6  2015 and gains from this date will be chargeable at rates up to 28%.

 

b)     Private Residence Relief restricted: The Treasury also confirmed that access to PRR would be restricted. For PRR to be claimed on a UK property, a non-resident would need to live in that property for 90 days per tax year of ownership. This change also came into effect from April 6 2015.

 

c)     Personal allowance for income tax may be removed: Currently the first £10,000 per annum of UK income is covered by the personal allowance. However, this allowance is currently under review and may be restricted for non-residents in future. A consultation is expected on this proposal, with changes likely from April 2017. 

 

There is also IHT to consider. There is a misconception that only the estates of UK domiciled clients are subject to UK IHT. This is not the case and most assets held in the UK, including residential property by non-domiciled clients are chargeable at the standard rate of 40% on assets above the current nil rate band of £325,000.

 

Investment risk and liquidity

 

Next, let’s look at the investment risk and liquidity considerations. Investing directly in residential property may feel like a low risk option, especially as the investor have a physical asset to show for his/her money, but if property prices decline, and the investor doesn’t hold an uncorrelated asset, he/she could lose a considerable amount of money. Property is generally illiquid, so selling quickly normally means accepting a lower price.

 

Holding one type of asset can be significantly more risky than spreading investments across a number of different holdings. Having a mix of assets can help ensure the investment portfolio performs well in a number of different economic situations. A financial adviser is able to build a balanced portfolio which does not rely solely on one asset and which can be optimised for the investor’s personal level of risk tolerance.

 

Investment in the UK property market from non-UK residents may taper following the taxation changes. Property can still offer diversification advantages for most portfolios, and investing in a property fund through an offshore bond can help ensure some taxation, liquidity and diversification benefits are maintained. Those already holding UK residential properties may wish to review their holdings with an adviser to check how these new taxation changes will impact them.