Buy a home, but first do your homework
LAST week we looked at areas where a property investor could look for capital appreciation. The answers were that the fundamentals were certainly in the US, Canada, Australia and Britain. This week we focus on one of these countries in order to emphasise the need to use an adviser approved by the Securities and Futures Commission.
In Britain, a very popular market for Hong Kong money, there are four main taxes to watch out for: stamp duty, income tax on rent, capital gains on the eventual sale, and inheritance tax should you die while owning that property.
Stamp duty is payable on the purchase of properties and is unavoidable unless the cost of that property is less than GBP60,000 (about HK$690,000), in which case there is no stamp to be paid.
Income tax is chargeable on the income derived from that property (rent) if it is greater than the cost of owning that property. Worth noting here is the fact that even though one is not resident in Great Britain, landlords receiving rent from UK properties are allowed to offset that rent (income) against their personal (zero per cent) allowances.
Indeed, all Commonwealth citizens (Hong Kong, non-resident British, Australians, Canadians, etc) are allowed to claim their zero per cent allowances against rent received. A typical example might be as follows: Rent received at GBP1,000 a month equals GBP12,000 a year.
The following deductions may be legitimately claimed against that income: Wear and tear (on furnished accommodation): GBP1,200.
Estate agencies' fees at 15 per cent and value-added tax at 17.5 per cent: GBP2,115.
Insurance: (approximately) GBP300.
Single person's allowance: GBP3,445. If the property is jointly owned by husband and wife and both are non-residents of Commonwealth countries including the UK, then one can legitimately offset the husband and wife's zero per cent allowances and the married man's allowance if structured correctly. This totals a generous GBP8,610.
In the above example there would be little to no tax to pay, in this year at least.
It is generally agreed, however, that inflation currently is running at an historically low ebb in most industrialised countries. Inflation should increase over the years. This is, in effect, good for property purchasers. Inflation is the property owner's friend because it increases the capital value of the asset while at the same time decreasing the real value of the debt (mortgage).
In order to simplify this, if you ask people who bought properties in the 1950s or 1960s, they would tell you that at the time the mortgage seemed enormous.
However, over the passing of time, the mortgage in real terms has significantly depreciated in value, while at the same time inflation has increased the value of their properties. The leveraging of property, as long as there is sufficient inflation to erode the debt and increase capital values, is what makes investing in property so potentially beneficial to investors.
In the above example, no account was made of the normally large interest burden, which can be treated as the cost of purchasing the property and therefore can be offset against the rent. If - and only if - the lender is providing loans which qualify in the eyes of the British tax authorities are concerned.
It is unusual for properties to ''wipe their feet'' in the early years of purchase - where the rent equals the interest and the outgoings, or ''the founding costs''.
Quite naturally, the Inland Revenue in Britain only gives a property investor one bite of the cherry, and consequently one cannot re-mortgage against increased values 10 or 15 years down the line.
There is some leeway given by the Inland Revenue - on ''improvements'', for example - but in a nutshell the lesson to be learned here is that one should go for the maximum mortgage in order to avoid taxes coming up behind you later on and catching you out.
The lender to use depends on various circumstances, but the service provided by Hill Samuel Private Bank is one that I can personally recommend for a host of different reasons.
It is flexible, and while it sometimes seemingly charges more than the other lenders, if one takes the full costs into the account - sending money back to the UK to fund an onshore based mortgage, arrangement fees, etc - Hill Samuel comes out reasonably attractively. In addition, its efficient servicing of clients' queries is handled by both Cantonese-and English-speaking staff.
There are others, but the fact that Hill Samuel, as a bank, has been doing mortgage lending for a number of years and has ironed out many of the potential pitfalls means that it is certainly one of the lenders one ought to consider.
Others do offer similar services - such as BNP, Lloyds and Royal Bank of Scotland - but double-check that the lender is providing qualifying loans as far as the Inland Revenue is concerned, otherwise the interest charge can not be offset against rent.
Because of the zero per cent allowances this may not be too much of a problem for those who buy properties for less than, say, GBP100,000, but otherwise it could pose a serious problem.
Buying a property is not a passive investment, and is one that ought to be looked at carefully. One cannot be ''penny wise and pound foolish''. There are many good advisers who are able to help, but do your homework.
If you have any queries or practices you wish to have answered or investigated, please contact me confidentially by facsimile on 565-1423.