Guide to Buying Property Abroad
The Good Points about buying a property overseas Pitfalls when buying a property abroad Buying an existing property or off a plan? Where do I get the money from? How to get a mortgage for overseas property? What currency is best? What UK taxes am I liable for on overseas property? What taxes are payable on overseas property? What other costs are there?With the world becoming a truly global economy, and air travel reaching most destinations on the planet, the idea of owning property in another country sounds like a good idea. Also, now that we are in the European Union, our career paths and job opportunities are no longer limited to the confines of the UK, in other words ‘the world is your oyster’ and this goes for buying property too. One of the main reasons that people buy property abroad is because of the British weather, rather than spend the winter months (and sometimes the summer ones as well) shivering and wet, just think of breakfast on the porch, overlooking the blue sea, whilst the sun shines.
In some countries properties are not as expensive as in the UK, so that the four bedroom detached palace that you looked at in the UK may be far less expensive in another country. It may well be that you are looking to buy property overseas as an investment, which could also be used as a holiday home. What ever the reason to buy a property abroad, more and more of us are taking the decision to purchase a property overseas.
| The Good Points about buying a property |
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If you are looking to purchase a property in another country as an investment opportunity, the emerging countries such as India, China and Brazil are those with a potential for substantial growth in their respective property markets. Those countries that are newer members of the EU, also have the potential for growth, although some of them seem to have reached their peak, for the moment anyway. If you are considering buying a property overseas to rent out as holiday accommodation, then of course, you not only gain the benefit from any increase in the equity of your property, but also you get an income from the rental generated by your overseas property, and if your overseas property is in a country that you like, then you can also use it as your holiday home.
| Pitfalls when buying a property abroad | Top |
There are many pitfalls waiting to trap the unwary and the unlucky prospective buyer. It is of vital importance that anyone wanting to buy a property overseas thinks very carefully about which country they are looking to buy a property in. Basic research should be carried out to find out such things as the economic climate of the country, political stability of the country, popularity of the country as a holiday destination, rental potential of the prospective property, ease of travel to and from the country. All these basic questions should be answered before embarking on the next step of overseas property purchase.
Once you have decided on which country suits you, the next research is regarding that country’s property laws.
Make sure that the country of your choice allows for foreigners to actually own land, and not arrange any purchase of property to be made through ‘purchasing companies’. In former communist countries, the land registry is usually out of control and there is a definite danger that you could become a victim of a fraud whereby a property is sold to different people all of who believe they are the true owners. Another problem to watch out for is that in some countries, there are restrictions placed on non-residents who want to buy or build property on agricultural or forested land.
In Spain, it is the property, not the person, which is a debtor. Anything that has gone wrong of any application that has not been filled out correctly or approved is the responsibility of the property, so you could end up in a heap of trouble with no way of any recourse from the previous owner.
Regardless of whichever country you are contemplating buying a property in, make very sure that you understand all the rules and regulations regarding property purchase in the country that you are thinking of buying a property. If all the rules and regulations seem a little too daunting, then I suggest you engage the services of a very good independent local property solicitor to help you with the purchase , it will be money well spent and could well save you from potential disaster. The British Embassy should be able to recommend one to you.
| Buying an existing property or off a plan? | Top |
Usually, it is cheaper to buy a property from a developer off a plan rather than buy an existing property due to the fact that developers need the cash to continue building the next stage of the development. Another advantage is that you usually are required to make stage payments for an off plan property which are normally spread over one year.
The downside to buying a property off plan is that you place your trust in the hands of the builders, and unless you can visit the development on a weekly basis, you may well not end up with the colours and materials chosen at the initial meeting with the developers. Keep in mind that just because you have paid out money for your property, it doesn’t mean the painful task of parting with your hard earned money has finished. On the contrary, it is just the beginning.
Monthly, quarterly and annual expenses will be payable such as service charges, ground rents, repairs and maintenance to the shared spaces of the block and communal cleaners, and these charges are not for maintaining your own property, that’s another expense you will have to deal with. It is very important that when you are working out your finances, you take into account all the additional charges associated with your overseas property.
If you intend to rent out the property, make sure there are no hidden rules or regulations regarding renting out property to holidaymakers within the area that your property is situated in. To take Florida as an example, Disney attracts more than 40 million tourists a year and claims 365 days of sunshine. However, in 1990, the state government introduced 'zoning restrictions'. These set down minimum terms of tenancy from area to area and even street to street in a bid to avoid constant disruption to native residents. If you had bought property in Florida to rent and had not known about the ‘zoning restrictions’, I expect you would not have been well pleased to say the least. Once again, before you enter into any contractual agreement with an overseas builder or developer, I suggest you engage the services of a very good independent local property solicitor to help you with the purchase.
| Where do I get the money from? | Top |
In recent years, UK house prices have boomed, giving rise to many home owners being able to release enough equity from their UK property to be able to put down a deposit against an overseas property, and in some cases be able to purchase an overseas property outright. However, a word of warning for those of you planning to increase you mortgage in order to raise the finance to purchase an overseas property.
The RICS (Royal Institute of Chartered Surveyors) and some leading building societies are forecasting that property prices will be flat this year, and there are other sources that actually forecast a fall in property prices. If this is true, then it is not a foregone conclusion that your property, whether it be in the UK or overseas, will keep rising in value. Weigh up all the pros and cons regarding the purchase of an overseas property in the present economic climate, it may pay you to hold off making a decision on whether to wait to purchase an overseas property until the property markets of the world have settled down.
| How to get a mortgage for overseas property? | Top |
FIf you require a mortgage to purchase an overseas property, you are going to have to apply to a mortgage provider based in the country that you are intending to purchase the property in, because nearly all UK mortgage providers only provide mortgages on properties built in the UK. Before panic sets in regarding language, fees, etc, one solution is to find a UK mortgage provider that has subsidiaries overseas that provide mortgages and other financial products to UK holiday homeowners and expatriates.
At the risk of repeating myself yet again and again and again, I suggest you engage the services of a very good English speaking independent local property solicitor to help you with the purchase. Taking advice from a professional is vital in these circumstances as there are all sorts of intricacies associated with borrowing money, and every country is going to have their own individual set of rules just waiting to unhinge the poor unsuspecting UK property buyer.
Let us look at some examples of certain rules associated with different countries.
In Italy, a bank will only lend if the property is fit to live in. If you are looking for a renovation project to turn into your dream home, this caveat can and most likely will cause problems as you cannot get a mortgage until you have made the property fit to live in, which means you will have to find the cash to pay for the renovations before the Italian bank will grant you a mortgage.
In Spain, the property will usually have to be registered as a habitable dwelling for a minimum of five years.
In some Caribbean countries like Jamaica, it is almost impossible to get a mortgage, and even if you are lucky enough to be offered one, most likely the interest rate of around 22% will be enough to make you change your mind.
Banks in other countries, such as Northern Cyprus, only offer mortgages for 15 years, which means higher repayment charges. And finally, there are some countries where it is impossible to get a mortgage at all.
| What currency is best? | Top |
In most cases, you can choose the type of currency you want to borrow in. The most common currencies are Euros, Dollars or Sterling. However, bear in mind that unless you take out your loan in Sterling, the interest rate you will incur, will look nothing like the UK interest rate. Another thing to take into account when borrowing money in a foreign currency is that you are exposing yourself to any fluctuations that the currency may be prone to, and this could have an adverse effect on your monthly mortgage repayments.
It can take up to 20 weeks to complete the purchase of an overseas property, and in the currency world, 20 weeks is a very long time and many things can happen. Currencies can rise and fall at quite an alarming rate, and this could have the unwanted result of adding several thousand pounds more to the cost of your overseas property. This problem gets even worse if you have bought an off the plan property where stage payments are required and large sums of money have to be transferred five or six times during the course of the transaction. To overcome these potential problems regarding currency, it may be beneficial to use the services of a currency exchange specialist. The specialist can arrange to set the cost of funds at an exchange rate that is acceptable to you, or alternatively you could instruct your currency specialist to buy your money when the exchange rate hits a certain level.
| Am I liable for on overseas property taxes? | Top |
If you are a UK resident, you will have to pay income tax on any rent received from a property, regardless where in the world it is. This will be payable at your marginal tax rate but it is important to be aware that any extra income could push you into the higher rate tax bracket if you are a standard rate taxpayer.
As your overseas property is not your primary residence, when you come to sell your home abroad, you will also be liable for Capital Gains Tax on any profit made from the sale, although you may offset your CGT annual allowance against this (£9,200 in 2007/08). The property will form part of your estate on death, which means that Inheritance Tax (IHT) may also be payable.
The UK has what is known as a 'double taxation agreement' with certain countries such as France, which stops UK residents from paying some taxes twice on property and income from abroad. You really need to take advice from an independent UK tax adviser to make sure you do not fall foul of the UK tax laws.
| What taxes are payable on overseas property? | Top |
Each country has its own specific rules and regulations regarding taxation.
Some countries in the world have very heavy taxation on property. In Australia, for example, Stamp Duty is payable at up to 4% on the purchase price of the house, but can be payable on the mortgage, too. An additional 'and tax' can then be charged at up to 5% of the value.
In South Africa, 'transfer duty' is payable at 5-8% of the property value, compared to stamp duty land tax of 1-4% in the UK. However, VAT is payable on some properties instead of transfer tax at 14%! And that's before you consider the South African Stamp Duty that is payable on all mortgages at 0.25%.
However, there are other countries that have far lower taxation on property than the UK. Florida has one of the lowest property taxation systems in the world. If you are taking a mortgage, all taxes and buying costs will amount to no more than 4% of the property value. If you are buying your property for cash, it will not be higher than 1%.
Best of all in terms of taxation is Dubai. The emirate is totally tax-free in terms of both property and income. However, one must balance this with the cost of living in Dubai, which is higher than that of central London, add to this that it is very difficult to obtain a mortgage, and it does not sound so appealing to live in Dubai after all.
| What other costs are there? | Top |
There is no substitute for experience, and if you are contemplating buying a property abroad, you are going to need all the help and advice you can get. Good professional advice is going to cost you money, but will be well worth it. In almost every property transaction a property agent will be involved and that means that there will be commission to pay which is usually around 1% of the final purchase price. You may also need the services of a mortgage broker who will also charge a commission fee of around 1%, and finally (once again) you will need the services of an English speaking lawyer who understands the intricacies of buying a property in the country involved. Make sure you have fixed the fees upfront before entering into any agreement with the lawyer.
It may seem to be a very daunting proposition when first venturing out on the long road to buy a property abroad, but with good preparation, the right people advising you, and a little bit of luck, you will get there in the end, and you too will be sipping champagne on the porch overlooking the setting sun.
