Is it still worth investing in UK residential property?

The past decade has been an interesting one for overseas investors, but residential property in the UK (and in London in particular) still represents a stable and attractive investment for our HNW and UHNW clients. The changes in the market mean preparation and expert professional advice are more important than ever.

A decade of changes

It began with the tax changes. In 2013, the UK Government introduced of a number of measures which sought to make it unattractive to own UK residential property in companies. This presented a challenge to foreign investors who, in general, were used to owning their UK properties within corporate structures. Corporate ownership of property is attractive for a number of reasons, particularly because the ultimate ownership can be easily restructured and succession planning is much more flexible. Broadly speaking, the tax changes have achieved the Government’s goal and mean that using a company to acquire UK residential property is no longer an attractive option. The exception is the acquisition of shares in companies which already own residential property. This remains attractive at the higher end of the market (c. £15m+) where the tax savings can be significant enough to make the liabilities associated with a corporate acquisition more palatable.

Further tax changes followed the 2013 amendments, including the introduction of a 3 per cent surcharge on the stamp duty land tax (SDLT) (the tax paid on acquisition) for anyone who already owns or has an interest in residential property elsewhere in the world (and is not replacing an existing main residence) and a further 2 per cent SDLT surcharge for non-resident purchasers. This means foreign investors buying properties worth £3m or more are liable to pay a 17 per cent tax charge on the majority of the purchase price, ie over three times higher than the rate which applied in 2012.

More recently, further legislative changes have introduced much greater transparency to residential property ownership. Another corporate ownership was attractive to HNW and UHNW owners was the ability to conceal the ultimate owner. However, the new rules mean that a company (whether it is registered in the UK or overseas) which holds residential property must register the identity of its underlying owner on the public register at Companies House. Individuals who hold properties on trust for others must also register the beneficial owners with the trust registration service held by His Majesty’s Revenue & Customs. Admittedly, this is not a public register, but the beneficial owners must still be reported.

The overall effect is that neither corporate nor individual ownership structures offer much opportunity for concealment. This can be an uncomfortable reality of UK property ownership for those who guard their privacy closely.

An interesting market

Over the past 10 years, the UK residential property market has, at times, been challenging to navigate. SDLT changes (those mentioned above and others such as changes in thresholds and temporary tax holidays), elections, Brexit, the pandemic, exchange rates and interest rates have all impacted the market.

While prices overall remain relatively stable, there have been periods of rapid growth and extraordinary demand. It can be difficult to make the correct investment decision without up-to-date, expert knowledge of the particular areas in which you are looking to invest.

As we enter autumn 2023, we face what is set to be another interesting phase for the residential property market. Stock remains low and, in the mortgage-driven price brackets, prices are falling. The prime and super prime markets remain strong but the demand for the best properties can be very high.

Residential property in the UK (and in London in particular) remains a great long-term investment for many overseas buyers. Buying a home in the UK is generally attractive for cultural and educational reasons. The UK’s relative political stability also means it is a prudent option for those looking to diversify their worldwide wealth. The input taxes are not so different to those payable for residential property in Paris, Hong Kong or New York and the holding taxes (certainly for individual ownership) remain low.

However, to secure the best deal, any prospective buyer needs to be prepared and to be able to move quickly. We have prepared our top tips for approaching the acquisition of residential property in the UK.

Our top tips

1. Obtain tax and structuring advice at the outset

There is no longer a one-size-fits-all solution to how a foreign investor holds UK property. The best holding structure will be determined by a number of factors including how the purchaser intends to use the property (in the short and long term), their wealth profile and their succession wishes. Our private client team are well placed to advise on the best purchase structure.

2. Appoint a buying agent

As discussed above, the UK property market can behave unpredictably and it can be difficult for the uninitiated to navigate the market. Expert acquisition advice is essential.

In the UK, the agents who market the property act for the seller only. A buying agent will look after the buyer’s interests and help the buyer to understand the market. Since many properties now transact off market, a buying agent may also facilitate access to some of the more desirable properties. We have an excellent network and are happy to connect prospective buyers with potential buying agents.

3. Ensure that funds can be transferred to the UK quickly and easily

It is important overseas investors obtain early tax advice on the consequences of bringing funds into the UK. Planning the logistics of transferring money to the UK is also key. This involves not only dealing with the liquidation of any associated assets but also ensuring the buyer’s solicitor has completed their onboarding and is able to receive funds. Again, we can assist with this process to ensure all of the arrangements are in place in advance of a property being found. The UK property market is fast-paced, and a buyer needs to move quickly in order to take advantage of the best deals.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2023