Considerations when buying Abroad
Have you ever considered buying property overseas, either as an idyllic home in the sun or a lucrative investment?
If you have then you are not on your own. A recent survey by YouGov revealed that 55% of adult Britons were “seriously considering settling in another country” and the British Centre for Future Studies predicting that by 2020 ten percent of the current British population will be living or working abroad! Many citing that they are disgruntled by the current UK economic outlook and others that are just hell bent on living abroad and re-creating that holiday experience every day of the year.
Couple with this the statistic that there has been a 250% increase between 2000 and 2004 in the number of Britons buying abroad for purely investment reasons and that now over 1.25m Brits own property in France or Spain. The ONS (Office for National Statistics has also revealed that over 200,000 Britons travel abroad every year with the intention of remaining there for at least twelve months.
This is therefore a situation that is not likely to change anytime soon.
Things to consider before buying abroad:-
- Property Markets abroad may not be like the UK
- Travel costs
- Tax Implications
- Who's going to manage the letting?
- Wills
- Speaking the Language
- Is setting up an offshore company a good idea?
- Financing the purchase
- Local Bank Accounts
- Exchange Rates
Property Markets abroad may not be like the UK Market.
The UK property market is very different to most other property markets in the world. The British are positively obsessed with Bricks and mortar therefore it is essential that you study the property market in the country you planning on buying as it might not follow the same trends as the UK housing market. Basically – DO YOUR HOMEWORK.
Brits have had money sloshing about their own home in the form of equity. Many have released this equity and bought cars, given children money for a deposit on their first home and some have decided to use the money to finance a property abroad. As a result many of the overseas property developers have targeted the UK population knowing they are in the financial position to be able to afford to purchase.
Do your homework to see whether the property market you’re interested in can support and sustain your particular hopes and ambitions for it. In countries such as Northern Cyprus and Bulgaria the real estate market has been suppressed for so long that property prices remain highly competitive and many can see the room for substantial growth in the market. In other countries such as Spain, France and Portugal where the property market has been soaring for years can you expect the same levels of growth to continue? Be aware that every country’s property market is different. If you decide to compare overseas markets to the UK housing market some may not appear as buoyant, however consider examining the longer term trends.
Search the internet or publications to determine if the property market in that country is on the up, stable or on its way down. If it’s stable then you’re more likely to enjoy a steady, realistic increase in your property’s value rather than the extreme peaks and troughs that the UK market tends towards. If it’s on its way up double check this through as many sources as you can to confirm the accuracy of the information you receive. Many local developers and Estate Agents will show you the positive side of the story to get you to ‘sign on the dotted line’ but few will tell you any harsh realities about to bite!!!
Look for Properties for Sale Overseas
Market your overseas property
Have you considered the cost of getting to and from you chosen paradise?
You need to add all the sums up when contemplating buying property abroad. Factor in regular travel costs needed for visiting your second home when you establish your budget.
Consider having a ‘contingency’ budget for those hidden surprises that can catch out every property investor. Such costs may include flying out to repair leaking roof, failed heating system or even a break in. This sounds so obvious but sadly many people are caught out and find that they cannot holiday in their new home as often as they like: or worse still - once they move abroad they find they can’t get ‘home’ for visits to the family etc. Budget wisely and don’t get caught out!
Consider the tax implication in both countries.
Living in one country and investing in another can mean your finances and taxation planning becomes very complicated. If you intend to rent out your second home you must declare this income to the tax authorities in you country of main residence. Furthermore you will more than likely have to declare it in the country in which the new house is located depending on the double taxation agreements in place between the two countries. Some countries, like Spain for example, will charge non residents a higher rate of taxation to residents of that country.
You also need to consider the additional purchase and disposal taxes. The UK has relatively low purchase and disposal taxes and costs compared to some countries where purchase costs can exceed 10% of the purchase price.
Make sure you seek solid tax planning advice before agreeing to buy anything abroad. Always speak with an accountant and lawyer that works independently of the developer or Estate Agent you are planning on purchasing from – they may have a conflict of interest!!
Who’s going to manage your property?
Television programmes make the rental returns on foreign property seem very good. They forget to consider all of the costs you will incur. Such costs include the management costs for the day-to-day running of your property and organising the rentals side of things. You need to get a good agent to ensure they maximise the time your property is let out but also ensure the property is kept in good condition.
You’ll need a good agent to make sure your best interests are always protected especially if you’re not going to remain resident in the country the property is located in. Factor these extra costs into your budget or reduce them from your projected rental income to get a realistic idea of the income potential of your property. Remember you’ll still need to pay a management agent during any weeks and months the property remains unoccupied. Typically for a complete management service you can expect to pay about 20% plus the local equivalent of VAT.
Don’t forget about your will
Specialist legal advice regarding wills should always be sought when you hold property in more than one country as inheritance laws not only differ greatly depending on the country, but certain local inheritance laws can completely contradict and invalidate your main will.
Do you speaka da lingo?
Although not absolutely essential, it may be wise to understand the language of the country you are planning on moving to / investing in. Even if you do, it is very unlikely that you will be able to understand the double and triple negatives held within a contract of law written in a local language. Therefore, either appoint someone you can trust to translate the contracts into English or request that the contracts be drawn up in English – English is the legal language of the world and many international business contracts will be drawn up in English and arbitrated in English courts so this shouldn’t be considered an impossible request.
Consider setting up an offshore company
Buying through an offshore company brings with it both advantages and disadvantages. It may allow you to avoid being liable for certain taxes and expenses but it may make it complicated when you want to dispose of the property.
Two factors need to be considered:-
- Firstly, which country are you planning on buying in; and
- Secondly, local agents may be incorrectly advising foreigners by basing their advice on the local situation. This method of approach can be beneficial but it could land you in a whole lot more taxation mess both abroad and at home!
There are specialist companies out there who can advise you based on your individual situation and as with all tax planning related issues it’s not a case of one method suiting all, be careful and get informed.
Find out the following:-
- If you do buy through an offshore company and wish to take the property out of that company in the future how easy will it be to do?
- Will you incur an expense?
- Will there be further tax liabilities if you decide to sell your company owned property?
- What happens if you try to take the profit from the sale, will you be taxed?
- What is the situation with the tax authorities in your country of main residence?
- Can you only sell to someone prepared to buy an offshore company?
Financing the purchase
This could turn into a degree subject in its own right. You need to consider the following:-
Raising the capital to purchase
A good way to raise the finance for an overseas purchase is to release equity from yuor main residence. This is the choice of the masses as it means that you don't have to dip into your saving to raise the cash. Before entering into such as decision it is best to seek professional financial advice. If you would like a professional financial advisor to contact you click here now.
If you would prefer just to use a deposit and finance the purchase with a mortgage you need to decide if it is best to get a local mortgage in local currency or a mortgage from a UK bank in sterling? Again, this is an important decision that must not be taken lightly.The help of a professional financial advisor will allow you to make the most informed decision. Click here if you would like a no obligation discussion with a profession financial advisor.
Do you need a local bank account?
If you decide to opt for a local mortgage you will inevitably have to open a local currency bank account to make the monthly payments, in addition you will have to receive the rental income.
What about exchange rates?
Exchange rates can fluctuate massively, making big differences to cost of your dream home abroad. You could agree to purchase the property for €150k when the Euro / GBP exchange rate is at 1.50 and buy your dream home for £100k GBP. BUT if GBP weakens against the Euro to 1.36 between the date you agree to buy and the date you exchange, the same property will cost you over £110k. If then GBP recovers against the Euro back to 1.50 the property will only have a GBP value of £100k again. You have effectively lost over £10k due to the fluctuation of currency - now you can see why currency traders make so much money!!!!
You can overcome the uncertainty by buying currency forward through a broker but you cannot overcome the risk as such unless you take out an option which has a cost of their own.
Click here for more information on currency conversion services available
Conclusions
When it comes to the considerations you need to make when exploring the idea of purchasing a second home abroad these tips are by no means exhaustive but should provide some food for thought. Going forward from here you should remain informed; don’t enter into an idea abroad that you wouldn’t entertain ‘back home’ and seek professional legal, financial and taxation advice at every step of the way. Te key message is DO YOUR HOMEWORK!!!!!
