Guide to Expat Mortgages
Whether you plan to retire abroad or work for an international company for a few years, you may be keen to keep a foot on the UK property ladder to ease your return to the UK or for investment purposes.
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Buying a property in the UK
Whether you are non resident or non-domiciled, but want to buy in the UK property market, you need to bear in mind tax and currency considerations in everything that you do. For instance, if you are buying in sterling in the UK, but receive your income in another currency, you need to protect yourself from exchange rate volatility and if you intend to let the property in your absence, you will need tax advice about the implications of receiving income which arises in the UK.
Questions to ask yourself
If you are buying in the UK, are you more interested in a low mortgage rate or tax efficiency? UK banks are likely to offer keener mortgage rates and charge lower fees than offshore investment banks or lenders.
Which currency do you want to borrow in? This is likely to be dictated by the currency in which you are paid or in which most of your assets are held.
Interest-only mortgage or repayment? Do you want to pay off lump sums every few years on an interest only mortgage, or steadily repay the capital and interest via a repayment mortgage?
Do you want your offshore bank/mortgage adviser to take charge of the property purchase on your behalf or are you happy to do this work yourself? If so, firms like Savills Private Finance and Blevin Franks can introduce you to property relocation services.
Employees of multinational companies may receive free tax advice as part of their relocation package from one of the large accountancy firms, like Grant Thornton or PriceWaterhouseCoopers. But smaller tax specialist companies like Blevin Franks or The Fry Group offer similar services for individuals with offshore financial status. Expats should also be able to find a local financial adviser with experience of UK residential or investment property buying.
Some UK lenders like Birmingham Midshires or Barclays are only willing to lend to borrowers living overseas for a UK buy-to-let property (BTL). This is because BTL is considered a commercial transaction and so unregulated by UK watchdog the Financial Services Authority (FSA). Mortgage lenders view buy-to-let as a better risk because tenants occupy the property and a property manager can oversee rental payments and property maintenance.
Buy-to-let: the tax advantages
For those subject to UK taxation, buy-to-let, which is considered a business, offers certain tax advantages over residential purchases, particularly if you plan to return and live in the property in the future. For example, despite living abroad, expats subject to UK taxation on a UK property are liable for capital gains tax (CGT) at 40 per cent on the sale of a property. The only exception is if the property was formerly your main residence. In this case, you are exempt from CGT if you sell within three years of renting it out to tenants. If the property has never been your main home, you are liable to full CGT for three years.
For more information on this, get the Inland Revenue’s Help Sheet: 1R293: Private Residence. After three years, the proportion of tax charged falls incrementally over the next seven years. See the Inland Revenue’s Help Sheet: Taper Relief which explains how taper relief works in detail. But CGT is applied at your marginal rate and you only pay 40 per cent if your capital gains pushes you into the higher rate tax band. Even then, you only pay tax on the slice inside the higher rate tax band. Each UK domiciled individual has a CGT exemption allowance. For 2006-7 it is £8,800.
Husbands and wives both use their individual CGT allowances to reduce their tax bill. Rental income is also taxable and subject to UK income tax. However, landlords can offset all property maintenance costs and mortgage interest payments against their income tax liability. Only the interest element of a mortgage can be offset against tax - capital is not deductible.
UK tax law is subject to frequent change, so get advice before acting. For more information, see the Treasury website at www.hm-treasury.gov.uk
UK lender or offshore bank?
To buy a property in the UK, the UK mortgage market is one of the most competitive in the world making mortgage rates and fees lower than what you may have to pay with an offshore property loan. But for expats buying abroad in the Eurozone, local banks can offer far more favourable rates.
For example, in France, euro mortgage rates can be obtained from 3.45 per cent, in Spain from 4.50 per cent and in Portugal from 4.40 per cent, which are lower, on average, than UK mortgage rates. See table below:
|Max 80% LTV
||Max 90% LTV in Maltese
||Max 90% LTV
||Max 80% LTV
||Max 80% LTV |
|Max term 30 years
||Max term 30 years
||Max term 25 years
||Max term 30 years
||Max term 40 years|
|€50,000 minimum loan
||£20,000 minimum loan
||€50,000 minimum loan
||£20,000 minimum loan
||€30,000 minimum loan|
||Maltese Lira and Sterling only
||All major currencies
||All major currencies|
|Repayment mortgages only
||Repayment mortgages only
||Repayment and Interest only mortgages
||Repayment & Interest only mortgages
||Repayment & Interest only mortgages |
|Rates from approx 4.80% Variable in Euros
||Rates from 4.75% Variable in Maltese Lira
||Rates from approx 3.45% Variable in Euros
||Rates from approx 4.40% Variable in Euros
||Rates from approx 4.50% Variable in Euros|
Property buyers with offshore financial status buying in the UK. It is possible to arrange a mortgage through offshore mortgage lenders, like HSBC International, Lloyds TSB International or Alliance & Leicester International. But this market is still immature, and so is less competitive with higher interest rates and mortgage fees. In addition, the specialist nature of many of these transactions can increase costs. Offshore/expat mortgage lenders also generally offer a narrower choice of home loan. Fixed, tracker, discount or variable rate loans are common, but flexible loans like offset mortgages are not normally available.
But keeping your costs down may be less important than tax efficiency. If the property is worth more than £1 million, some mortgage lenders are willing to negotiate over rates or fees, so take advice on this. Big investment or private banks like UBS, HSBC International or Citibank offer premier banking services to high net worth offshore clients. These tailored services may offer better cross-border services and easier communication.
Offshore banks like Nat West International, Bank of Scotland offshore and specialist providers, like HIFX, offer currency services. These services enable you to offset the risk of currency fluctuation in the period between putting down a deposit down and completing on a purchase. For example, off-plan developments can take two years to complete. Developers usually ask for a deposit and possibly one stage payment before completion. As such, you are exposed to currency risk on each payment and certainly on every monthly mortgage payment after completion. For example a Spanish property priced at €200,000 would have cost £130,864 at the beginning of June 2004, with the exchange rate at 1.5283. Due to currency movements, that same property would have been £7,429 more expensive at £138,293 two years later by June 2006, with the exchange rate at 1.4462.
If you buy a property for cash, it is rare to make the full payment in one transaction. On average it takes between 6 and 8 weeks to complete a property purchase abroad. Even over one month, currency rates can change dramatically and have a real impact on the amount you have to pay. When buying off plan, the average purchase time rises to between 6 to 24 months. If you intend to make regular mortgage payments while living abroad, buying currency on a regular basis is time consuming and currency fluctuations can make budgeting difficult. Also, international transfer fees can mount up. A currency service from a specialist provider like HIFX allows you to automate payments by direct debit at a fixed exchange rate for up to two years in advance.
The service is also fee-free with no commission, transfer or bank receiving charges at the other end. Bank charges for the same service are likely to be higher. Currency exchange is regulated. There are two categories of foreign exchange - speculative foreign exchange and deliverable foreign exchange. Speculative foreign exchange is regarded by the Financial Services Authority as an investment and therefore falls under its remit. Deliverable foreign exchange, however, is deemed to be money transfer and is therefore regulated by HM Customs and Excise, so this includes the currency services of the main high street banks.
- Find a regulated specialist adviser experienced in offshore financed property transactions that can provide specialist tax planning, currency and independent advice.
- Consider talking to an independent international specialist mortgage and property broker like Savills Private Finance or Blevin Franks.
Buying a home in Spain: the tax and legal issues
Spanish fees and taxes
Before you can own a property in Spain, you need to obtain an NIE number, which is a foreigner identification number. You can obtain this by applying through the Spanish consulates in London, Manchester & Edinburgh or by going in person to the nearest immigration office or police station in Spain. You will need to take your passport, some passport photos, a copy purchase contract and a completed application form. If you are planning to live in Spain permanently, you will also require a residence permit. These can be temporary (for up to one year) or permanent (for five years, automatically renewable). If you are employed, self-employed or a student in Spain, it is not obligatory to obtain a resident's permit, but when dealing with companies such as utility companies, it can make it a much simpler process. If you rent your property, you will be required to pay income tax on the rental income. If you are non resident, this will be charged at 25 per cent of the gross rent, subject to certain reliefs and allowances.
Even if you do not rent out your property and it is used purely as a second home, you will still be taxed as though it is being rented. This charge, called the "Impuesto de la renta de no residents, declaracion ordinaria" (IRNR) is charged by the Spanish authorities at two per cent of the declared value of the property, and then taxed at 25 per cent. Council tax is also payable and you will also need to pay some other small taxes although these will be set by your local town hall. Each time you file your tax return for income tax, you will be assessed for wealth tax. Residents and non-residents must pay this tax on their total assets in Spain (minus any Spanish mortgage) on a progressive scale from 0.2 per cent to 2.5 per cent. Capital gains tax will be applicable if you sell your property. As of 1 January 2007, this will be charged at 18 per cent bringing foreigners CGT liability in line with Spanish residents. Certain allowances apply which may reduce your liability after about five years of ownership. Inheritance tax is a major consideration for anyone thinking about a property purchase in Spain. You should think carefully about whose name should go on the deeds as this will help minimise your heirs" inheritance tax liabilities. Seek specialist legal and tax advice from the outset.
UK banks offering overseas mortgages
|Banco Halifax Hispania
|Investec Private Bank Sterling
||France, Italy, Spain
||Euro, US dollar|
||Portugal, Switzerland, Monaco, Germany
||Australian dollar, Hong Kong dollar, Swiss Franc, Japanese Yen|
|Leeds Building Society
||France, Spain, Portugal, Australia, New Zealand, Canada, USA, Dubai
||Currency of choice|
|Norwich & Peterborough BS
||Gibraltar, Southern Spain
|Royal Bank of Scotland Int.
||Spain, Portugal, Italy, France
But always seek specialist legal advice on issues such as land title, hidden costs, insurance and the home buying process for the property before you start out.
Foreign nationals buying property in the UK
To obtain a mortgage in the UK, a UK work permit is required by UK mortgage lenders. A permanent right to reside in the UK is also helpful. Some mortgage lenders are unwilling to lend to foreign nationals, while others are happy to lend residential or buy-to-let loans to those with leave to remain in the country. However, there are tailored home loans for foreign nationals or employees of government agencies or multinational corporations who expect to stay in the UK for an extended period
You are likely to be expected to:
- have proof of your right to reside which is no more than 3 months old or a work permit
- have a permanent work contract and income references
- offer a lender evidence of a permanent right to reside and paperwork showing you are a taxpayer
UK lenders are unlikely to consider you if:
- you are an asylum seeker
- you come from a country subject to Sanctions Orders
- you have no credit record or proof of earnings