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British law is generous to overseas landlords, and with professional advice you can maximise on tax concessions, writes Libby Peacock
IT IS RELATIVELY simple for buyers from Hong Kong to invest in Britain's property market, but there are legal and tax issues to consider before taking the plunge.
Hongkongers have been buying residential properties in Britain for years and, while some purchase apartments or houses for their own use, most of these acquisitions are now investments.
Rental yields are appealing and the long-term appreciation prospects are good. British regulations treat overseas landlords generously, and investors should consider getting professional advice to maximise the benefit from tax concessions, according to Mai Han-wong, a director and the head of the Hong Kong and Shanghai division at King Sturge property consultant.
Legal points to consider
Clive Sharples, of London-based Riseam Sharples Solicitors, has acted for local property investors in Britain for 20 years. He said buying property in Britain was a 'simple process' for Hong Kong investors, and the process got even simpler if you were buying at one of the regular Hong Kong sales launches for properties in Britain.
'Some buyers never see their properties, but they are able to manage them and deal with all matters comfortably from Hong Kong,' Mr Sharples said.
The English legal system was well regulated, and this gave comfort to foreign investors who knew their investments were sound and their property titles guaranteed, he added.
Rosaline Lam, director of international properties at Colliers International, said there were no legal restrictions on Hong Kong investors in Britain's property market, but before buyers could acquire a property, a proper legal conveyance (transfer of title) was required.
She said the British mortgage market was open to all, and Hong Kong buyers could borrow from local or overseas banks to finance their property purchases.
Security is required on properties, and interest on local mortgages can be offset against rental income, provided the loan is used to buy the property.
Ms Wong said local banks could help most Hong Kong clients buying in Britain. Hong Kong financial institutions were prepared to lend up to 80 per cent of the value of the property for sterling loans and 75 per cent for multi-currency loans.
The British tax structure is generally beneficial to overseas property buyers. Tax rates are low compared with other European countries. Mr Sharples said buying a property to let was 'basically a tax-free investment' because various allowances could decrease the amount of tax payable.
Stamp duty land tax: Since March last year, no stamp duty has been payable on British properties costing GBP125,000 (HK$1.88 million) or less. For properties bought for higher sums, the stamp duty is between 1 per cent and 4 per cent of the purchase price, on a sliding scale. Investors buying property in areas designated by the government as 'disadvantaged' do not pay stamp duty if the purchase price is GBP150,000 or less.
All property owners in Britain, including those living overseas, have to pay income tax on the net surplus rental income from their real-estate investments in that country. The current tax rate is between 10 per cent and 40 per cent, calculated on a sliding scale.
According to Ms Lam, deductions and other forms of tax relief 'usually mitigate, or even eliminate' the amount of tax you will be liable for.
Allowable expenses for tax deductions include mortgage or loan interest, property-running costs, water rates, insurance, repairs, furnishings and some professional fees.
Non-British residents who are British, European Union or Commonwealth citizens also get a GBP5,035 tax-free allowance.
Ms Wong said inheritance tax was charged on death or, in some cases, on the transfer of capital from one person to another. Inheritance tax (IHT) applies to all assets in Britain, regardless of where the owner lives, but the use of offshore vehicles to hold such assets might offer tax advantages.
IHT is currently charged at 40 per cent on the total value of the estate subject to the tax. (Since last April, the first GBP275,000 has not been subject to the tax.)
Capital gains tax
The main tax advantage for Hong Kong investors is that non-British residents do not have to pay capital gains tax when they sell their properties. But, while the lack of capital gains tax means property owners who sell their property can keep all their profit, this only applies if they buy to let.
Buying and selling frequently might well be classified as trading, therefore attracting taxes, Mr Sharples said.
Meanwhile, according to Ms Wong, property owners who are not residents of Britain but have lived there for many years before moving overseas might be affected by a regulation introduced in 1998, which states that British property owners who have lived overseas for less than five years are still subject to capital gains tax, should they sell the property while abroad.
Non-British residents who have been away from the country for more than five tax years are exempt.
When buying in Britain, also budget for managing agents' fees for letting and management, accountants' fees for tax returns and rental accounts, mortgage arrangement fees (if you get a loan in Britain) and survey and land registration fees.
Resident vs non-resident
The taxes you are liable for when buying property depend on your residence status. You are classed as a resident if you have been in Britain for 183 days or more in a tax year, or have stayed there for 91 days or more per year over a period of four tax years.
You are also treated as a resident if you move to Britain permanently or for at least three years, or work there for at least two. If you have spent less time than this in Britain, you should be exempt from capital gains arising in Britain.
London-based Alan Lester, a partner in the audit department of HW Fisher & Company, which acts for many overseas investors in Britain, said it was possible to lose this exemption if your activities in Britain were 'extensive or regular'.
Mr Sharples said there were some 'fairly complex' issues if property owners have gone to live in Britain, whereby they would be liable for capital gains tax on investment properties (but not on their main homes).
Interaction with Hong Kong tax requirements
British tax requirements do not interact with local tax laws. Tax in Hong Kong is levied on a 'territorial basis', so you are only taxed on income arising from Hong Kong.
Hong Kong authorities do not collect capital gains tax and the Inland Revenue Department points out in its website that 'the profitable disposal by a Hong Kong entity of foreign real estate is not assessed to tax in the territory both because the gains are capital gains and because of the principle of territoriality'. So, no tax is levied on profits arising abroad, even if they are remitted to Hong Kong.
Until the beginning of last year, Hong Kong property buyers in Britain were advised not to buy through Hong Kong-registered companies because they would be liable for inheritance (or estate) tax. However, inheritance tax was abolished in Hong Kong in February last year.
Hong Kong had no restrictions on capital flow, Ms Lam said. Because there are no exchange control restrictions in Britain either, legally created money can enter and leave the British system freely - another benefit for Hong Kong investors in Britain.
Andrew Pang, executive director of Knight Frank's international property division in Hong Kong, said the British property market was 'extremely transparent'.
However, Hong Kong buyers of residential property in Britain should avoid investing in serviced apartments or hotel rooms, he advised. This was because there was limited secondary market in those areas (especially for single units) and mortgages were not available, so buyers would have to get commercial loans.
Ms Wong said Hong Kong property investors in Britain should consider the issue of 'withholding' of tax. The country's revenue and customs department requires a managing agent (or tenant, if there is no agent) to withhold a portion of the rental income, representing the basic tax rate, before sending the balance to a landlord abroad.
Ms Wong said landlords could, however, obtain prior agreement to receive their rental in full, without any tax retained, although this did not mean they were free of their tax responsibilities in Britain.