There was a collective sharp intake of breath late last year when UK owners of homes overseas were threatened by the Inland Revenue that they may be liable to a new and substantial tax. The change would affect anyone who owns a property through a company, rather than those who hold properties in their own name.
The IR indicated that it was minded to treat such properties as a 'benefit in kind' and tax them under UK legislation. The concern about the new property tax arose in the wake of a House of Lords ruling over whether shadow directors of a company should be liable to pay tax on benefits in kind. Company directors must pay tax on benefits in kind – payments in forms other than cash and which include having the use of a property.
What has changed in the wake of the Lords ruling is that a so-called shadow director, defined as someone who gives instructions or orders to a director, may also now be taxed in the same way.
What this might mean is that the IR may now take a closer look at companies, including property vehicles, where the owners, even if they are not directors, might be defined as shadow directors. They too could be liable for income tax on the property.
The ruling, says Simon Rees of PricewaterhouseCoopers, could have significant consequences for property owners, whether the house is a holiday home or main residence. Even if the property is not rented out, owners could find themselves liable to pay income tax on the market rental value of the house as well as paying an extra charge on the value of house if it is worth more than £75,000.
Rees adds that imposing a tax on people for living in their own homes is absurd and not what was intended as a consequence of the House of Lords ruling. “People do not expect to pay tax on something they have already paid for, especially if they are not looking to make money from it by renting it out.”
While there is concern over the implications of the Lords ruling, the decision has yet to be tested. “A lot of people have panicked over this ruling, but the problem is no-one knows exactly what the position is,” says Niall Murphy, a partner at Blake Lapthorn, solicitors specialising in French property transactions.
“The IR is simply rattling cages believing that it can tease out a tax bill. If it thinks it has a case it can win it will bring it before the courts.”
If the IR is successful, costs could be applied retrospectively and would include interest charges, Murphy adds. However, he says tax experts are already examining scenarios and devising ways in which any such tax may be avoided or mitigated.
Most people looking to buy property abroad have other potential tax liabilities. For example, many of those looking to buy properties in Spain do so by going offshore to Gibraltar where a company formation domiciled on the Rock avoids Spanish Stamp Duty.
Owning a property through a company is also done to minimise transfer taxes in countries such as Spain and Portugal. Owning a house in France via a French company or Société Civile Immobiliere is one way of avoiding inheritance legislation that favours children over spouses. It may also be used when a property has co-owners.
While it remains a grey area, prospective purchasers are advised to look carefully at the implications of buying through a company. In France, for example, says Philippe Pièdon-Lavaux from Blake Lapthorn's French legal team, there are other options for buyers who are worried about the impact of inheritance law.
For those who own a property through a company and which hasn't risen substantially in value, it remains possible to change the ownership structure without a big capital gains tax bill.
An increasing number of UK lenders are offering mortgages to buy properties abroad, particularly in Europe. Mortgages are usually available for up to 70-80% of the purchase price and can be in a currency of the buyer's choice, so it's important to be aware of any currency fluctuations.
In all cases you can borrow and buy where the lender has an office. The principle is that the security of the mortgage (the property) must be within realistic repossession range of the lender. An international mortgage broker can help expatriates find the right loan for a property in their home country, country of residence or elsewhere.
Mortgage brokers will either have a panel of pre-selected lenders or an open list that allows them to choose from any suitable lender. Specialist mortgage brokers are particularly useful for an expat as they can organise many of the processes that a housebuyer or seller needs to undertake, such as surveys and legal agreements.
Most countries have slightly different regulations for mortgages. This can include having to use notaires in France, for example, and having legal documents translated to comply with local laws. “That can be difficult if you are abroad,” says Richard Verlander at Hamptons International Mortgages, the mortgage brokerage arm of estate agent Hamptons International. “The benefit of going to just one firm is that it arranges the whole process.”
In some circumstances an overseas mortgage may have slightly higher costs than domestic mortgages but the difference is small and they are usually comparable. Mortgage brokers can charge a flat fee or a fee as a percentage of the loan. A flat fee of around £250-£300 is the norm.
Lender interest rates also tend to be only slightly higher than a domestic mortgage. “But that,” says Jonathan Cornell at Hamptons International Mortgages, “is largely because of the smaller pool of potential lenders. Most lenders will not offer loans for 100% of the value of a property – 70-85% is more normal. The UK market is far more evolved than it is overseas. It's like looking at what UK mortgages were like eight years ago.”
Most brokers will also be able to arrange a buy-to-let mortgage. But, says Adrian Wright, principal at International Mortgage Plans which caters for UK expatriates looking to buy property in the UK, “most lenders won't offer more than 70% mortgages for buy-to-let because of the perceived difficulty in chasing bad debts abroad if the buyer defaults. They will make exceptions for people employed by multinationals and people who are returning home shortly.”
Some people looking to live overseas may want to keep the origins of their wealth secret. As Cornell says: “They may have money but may find it difficult to prove how they earned it.”
This creates difficulties as lenders require extensive proof of income and confirmation that the buyer pays tax. “If they don't pay tax they don't want to know,” says Mark Ellery of Costa Del Sol-based international brokerage Intervest Belgravia. He says there are ways around this, by going through Gibraltar for example. But he points out that Gibraltar-based lenders will still need to know that the buyer has the ability to pay off the mortgage.
For those who have had credit problems in the past and would find obtaining mortgage finance difficult, some companies can still help in arranging an overseas mortgage. Letsmortgageit.com has a number of lenders offering competitive rates for those who may have had trouble in the past.
“Whether you have had arrears, county court judgements or have been made bankrupt it may still be possible to get mortgage funding at competitive rates. We currently have rates from 5.85% variable,” the online broker says.
Research indicates that expatriates own an average of two houses – usually one in their country of residence and one back home. Roughly 70% of expats surveyed retain property in their country of origin. The buy-to-let route, where property is bought for investment, is being pursued by increasing numbers of expats who want to tap into the property asset class. Crucially, income from rents can often be paid tax-free into an offshore bank account.
Verlander at Hamptons International Mortgages says a specialised expat mortgage broker can sift through lenders to make sure they are only considering those who have tailored expat services. “Lenders like Halifax International have a long record of sorting out mortgages for people based abroad,” he adds. “We have close contacts with the ones that do expat work.”
Wright says most brokers will be able to arrange things such as tax advice and setting up offshore trusts. “Some international brokers won't be able to do it themselves,” he says, “but they should be able to point you in the right direction. We have tax and legal partners who will arrange these things along with the purchase of the house.”
Private offshore lenders also tend to be more experienced at understanding the requirements of expats. “The expat mortgage market is a small one for a UK onshore provider but a significant one for us,” says Michael Craig, senior product manager at Royal Bank of Scotland International. “This means we can put more resources and energy into it. We understand the employment and tax situations of expats and we accept payment in foreign currencies.”
The range of expatriate mortgages available appears diverse. Many of the offshore varieties are packaged with an impressive range of bells and whistles, but are in fact almost identical in rate terms to their onshore equivalents. There are several new or relaunched mortgage products on the market. RBSI introduced its basic rate tracker mortgage in October last year. The mortgage is always fixed at 1% above the Bank's base rate for loans under £250,000 and 0.5% above for higher loans. This gives a current rate of 5% and 4.5% respectively. The product is targeted at expats or foreign nationals who want to purchase property in the UK for occupation by themselves or their family. But the big advantage is that the property can be let out while they are overseas. The maximum loan to an expat is 80-85% of the property's value.
“The base rate tracker would suit someone working abroad who wants to take advantage of all the offshore banking benefits such as interest paid gross, multi-currency accounts and relationship management, while ensuring they are getting a competitive mortgage rate,” says Craig. “It is also proving popular with Middle Eastern customers who are keen to invest in the UK.” The product is available in Jersey, Guernsey and the Isle of Man.
For clients looking for a pure in-vestment opportunity in central London, Investec Bank relaunched its Resfin product in September 2001. The bank will assist the buyer in finding a property, refurbishing it if necessary and finding a tenant.
Mort Mirghavameddin, managing director of Investec Bank (Guernsey), puts the financing structure simply: “Say the client wants to buy a property in central London for £400,000. He deposits £100,000 with us and we lend him £300,000. The mortgage payments are serviced by rental income. We hope the property will rise as predicted by 5% next year and the client will have made £20,000. For a deposit of £100,000 he has made a 20% return.” Interest rates are linked to the UK base rate.
Another mortgage relaunch came from Standard Chartered Bank in May 2001. For those looking to buy property in the UK, there are two services on offer. Through the London branch you can buy property up to £350,000, while Jersey caters for higher priced properties mostly for clients in the Middle East or Hong Kong. Loans are made to 70%. For higher value properties, Standard Chartered makes the most of offshore trusts and company structures.
“For our international clients, it makes more sense to put this kind of investment through a company or trust to maximise tax benefits,” says Graham Buckland, senior manager at Standard Chartered.
Several other lenders have set up mortgages through offshore tax efficient structures including Abbey National, Fortis, Lloyds TSB, Kleinwort Benson and RBSI. Arrangement fees for this can be up to 1% of the loan.
There are other factors to take into consideration when looking at mortgage packages for an expat client. Can repayments be partly based on securities such as a share portfolio? Will the lender accept currencies other than sterling? Will the bank lend to non-UK domiciled buyers? Is there any discrimination between buy-to-let purchasers or those planning to let their property and occupy later? How much will the bank lend to a client?
UK lenders rarely offer loans of more than 80% to expats. This is because the lenders are unable to obtain a mortgage indemnity guarantee for overseas borrowers (again due to the short-sighted view that an offshore client is more of a risk). Portman Building Society probably has the highest loan to value rate at 90% for UK properties with family occupation.
Many lenders discriminate between someone who is buying to let and someone who is buying with an intent to occupy at a later date. HSBC, for example, will lend up to 70% for pure investors and up to 80% for those planning to rent now and occupy later. One way a client can obtain more is by basing part of their repayment on securities they already have, such as an endowment policy, investment bond or share portfolio. Investec Bank will only lend 70%, but if additional security can be found, up to 100% may be borrowed.
Britons buying into the UK can generally get a more flexible deal. As they tend to be buying a property with the intention of eventually living in it, they will find it easier to buy for investment.
A spokesman for Bristol & West International in Guernsey explains. “If we can work on the basis that the buyer will occupy the property in due course, we are much happier to allow a rental arrangement in the interim.”
Prospective buyers must be able to prove secure employment overseas and the charge is usually around the standard variable rate plus 1%.
For UK residential property for investment purposes, buyers may choose to use an offshore company or trust, or both in conjunction. This is important – buying via the offshore company/trust route changes the asset from a large solid income-producing asset tax inefficiently sited in the UK to an offshore share certificate that might be owned by an offshore trust. Effecting such a transaction has fee implications.
Flexibility is a key requirement for expatriates since they often receive bonuses or an ad hoc lump sum and may want to pay off a mortgage early.
Some lenders have onerous redemption penalties for fixed and discounted terms, and sometimes the penalty for repaying early can be as much as nine months' gross interest. Some lenders are more generous. Portman's flexible tracker mirrors the Bank of England base rate until 2004 and there are no early redemption penalties. And Abbey National allows capital reductions equivalent to 10% of the balance to be made at the beginning of each year without penalty.
Finally, because there are over 40 lenders offering terms to expats, the variation on interest rates is enormous. According to IMP, many lenders have settled on a base variable rate of around 5.75%. However, as with loan to value, some lenders discriminate between pure investors and those intending to occupy the property. When investing to let only, the rate can go up so it's worth checking. RBSI and HSBC, however, allow normal variable rates even when property is let.
For prospective borrowers, the impact of the euro is important as the currency remains volatile against sterling and the US dollar. Expatriates paid in euros, therefore, will regard UK property prices as more expensive as they might seem at home. Expatriates paid in sterling or US dollars will regard European property as cheap.
Some UK lenders offer euro mortgages for borrowers paid in euros looking to finance property in the UK. However, the more obvious opportunity is for sterling/US dollar borrowers to raise cheaper finance in the euro market and to buy there.
Brokers should advise clients first that the past performance of a currency is not a reliable indicator of its future performance and, secondly, that they should build up a contingency reserve in the currency of their loan to provide for any unexpected interest rate movements that might increase their monthly repayment. This applies to those borrowing in a currency in which they do not have capital or an income.
Demand from UK expatriates to buy homes in their country of origin or elsewhere remains strong. The potential threat to offshore centres, which in theory could no longer offer as many obvious advantages once the euro was up an running, has yet to fully materialise and demand for euro-denominated mortgages among internationally mobile workers is weak.
For those looking to break into the market there is a strong case for getting alongside as many mortgage lenders active in the expatriate market as possible and offering some added value – like offering to help with the planning for the non-closures.
You need a contact book full of mortgage lenders prepared to deal with expatriates and you need at least a working knowledge of the residential lending criteria applied to prospective borrowers who do not live in the country where they want to buy property. Oh, and a huge cache of Air Miles wouldn't go amiss.
Deals available in France and Italy
Min Loan £50,000
Max Loan Subject to status
Interest Calculation Standard variable – linked to EUROBOR + loading Max LTV 85%
Income Multipliers 3 + 1 or 2.75 Joint
Loans below £75,000 are restricted to 80%
Mandatory level term assurance required
Maximum 20-year term
Available for main, second home or buy-to-let purchase only
Min Loan £25,000
Max Loan Subject to status
Interest Calculation EUROBOR three months
Max LTV 75% UK and France only
Income Multipliers Affordability
Mortgage term cannot exceed age 75. UK Credit search will be made
LTV drops to 60% maximum for other EEC countries and 50% for the rest of the world. (0.25% on value of loan) Mortgage registration tax
Interest-only loans will only be approved on loan to value of 50% or less. The property must be habitable without requiring improvements, and not be isolated. Adequate buildings insurance covering fire, flood and environmental damage is compulsory in favour of the bank Deals available in Portugal and Spain
Min Loan £25,000
Max Loan £450,000
Interest Calculation Bank base rate euro or Sterling
Max LTV 75%
Income Multipliers 3+1 or 2.5 joint
LTV drops to 60% if value of property is less than £50,000. 1 x secondary income can be taken into account
Purchase of new home must be made in the name of an offshore company – established in Jersey, Guernsey, Gibraltar, BVI, or Isle of Man
The management of the offshore company must be a firm acceptable to the lender. Loans restricted to the Algarve and Lisbon Country Spain
Min Loan £15,000
Max Loan £1.8m
Interest Calculation Bank base rate EUROBOR & LIBOR euro or Sterling Max LTV 75%
Income Multipliers 3 + 1 or 2.75 joint
Maximum loan to value may be restricted to 60% if not in a tourist area
Mortgage term cannot exceed age 70.
Rental income may not be included in income calculation
Subscribe to Spanish Property Secrets to get the facts about buying in Spain Spanish-property-Secrets.co.uk Borrowing in Spain: Taxes, fees and high commission
In a recent survey of its Global Mortgage Service clients by Moneynetinternational, Spain was the most common location for expat mortgages. The UK was second, with France, Italy, the US, Cyprus, Thailand, Australia/New Zealand, Canada and the Czech Republic making up the top ten.
However, one hears horror stories of people who have been ripped off or even conned out of all their money while attempting to buy their dream Spanish villa. Undoubtedly there have been and will continue to be isolated cases where buyers will fall into the hands of unscrupulous sellers, but confusion about the Spanish system is often the root cause the problem.
For example, it is standard practice for estate agents to add as much as 10% commission on to the owner's asking price. These high commission charging agents have made an absolute fortune, building up successful businesses over the years. The secret of their success is that buyers have no idea how much commission is included in the price they're are paying for their property.
The owner of the property knows exactly how much their property is worth and they tell the agents what they want to receive. The agents will then ask their high commissions and sell the property to unsuspecting buyers. This means the buyer could be paying as much as 10% above the market value for their property.
Part of the problem, says Mark Ellery, is the attitude of the Spanish banks.
“Most of the banks don't want to know about non-resident clients, some are 20 or 30 years behind the times in their attitudes and business practices.”
Ellery is a consultant with Costa del Sol-based international brokerage Intervest Belgravia. He is witnessing the size of the company's mortgage business expand rapidly as it has become a one-stop shop for property purchases.
“It can be very frustrating for foreigners trying to arrange mortgages in Spain,” he says. “Go to two different branches of the same bank in Spain and you will receive two different answers about the same scenario. We have built up good relationships with local bank managers and we can usually come to an arrangement on behalf of the client.”
Another complication arises with the vendor. They will often ask for 10% up-front. This is known as black money and is a widespread practice. Often the first question to be asked is how much black money the seller requires. This kind of negotiation is arduous and that's where local brokers like Intervest Belgravia come into their own.
They will often advise potential buyers to approach their existing British-based lender in the first instance as it's often possible to release equity on their home if they are intending to purchase a holiday bolthole. But British banks will not give mortgages on Spanish properties per se.
Some non-status lenders will help, but these can be very expensive with up-front charges and legal fees on top.
There is the choice of using subsidiaries of British Banks such as Abbey National in Gibraltar, but they will charge up to 2% more on their interest rates, but there are no up-front fees.
Most of the lending institutions deal through brokers and Intervest Belgravia has 25 agency agreement with banks. But the banks still pay more in commission to the estate agents than the brokers do, even though the broker does all the due diligence and not just the referral. Commission is anything between £250 and 1%, and Ellery says that has gone up a lot over the past six months because of the value and quality of the business.
For Spanish non-residents, local banks will offer a maximum loan of 70% loan to property value.
The buyer will need to produce proof of income – last three salary slips, P60, if self-employed one to three years books depending on the bank. Interest rates are from approximately 4.19%.
For those with no proof of income or tax returns, interest rates start from 9.9% with a maximum loan of 70% of property with a maximum 20-year term with the property used as security.
Again he warns that estate agents take massive percentages and that it works out much cheaper for the purchaser to do business through a broker.
London-based Estate Agents Spain has introduced a 'revolutionary' concept to buying property on the Costa Del Sol. It claims to take no commission from the seller and adds nothing to their asking price. Instead it charges a set fee of 5,000 euros for finding the property, if you don't buy a property there are no fees to be paid.
The following taxes must be paid before the title deed can be registered in the new owner's name:
It is normal practice to give your lawyer at the notary 10% of the declared purchase price for him to take care of all the taxes and fees.
If the property you are purchasing is a resale property then the tax that you will pay will be a transfer tax at 6%. If the property you are buying is from a developer or a promoter the you will need to pay the equivalent to the United Kingdom's VAT which the Spanish call 'IVA' plus Stamp Duty at 0.5%.
Another tax that needs to be paid is the 'Plus Valia', normally paid by the seller, but it can be put into the contract that it is paid by the buyer. The tax is on the increase in the land value during the period in which the present owner has owned the property. Depending on how long the present owner has owned the property it could be anything from a few hundred euros to thousands of euros. Your lawyer will advise you of how much this tax will be and also who will be responsible for paying it.
Notary fees: The scale is fixed by law and increases in line with the value of the property.
Land registry fees: The scale is also fixed by law and normally 70% of the Notary Fees.
Legal fees: Lawyers will normally charge 1% of the Purchase Price plus I.V.A at 16%.
Making your clients' dreams come true
Expat mortgage brokers will typically correspond with clients by phone, fax and increasingly by e-mail and over the internet, although legal documents must be sent to the expat and signed. Some, such as Moneynetinternational's Global Mortgage Service, operate primarily over the internet. The GMS service offers expats a maximum loan up to 80% of the value of a property. There is a range of repayment vehicles (capital and interest; endowment, and pensionor savings-linked), and a service that allows one mortgage to be taken out which covers more than one property in more than one country. Crucially, there are no early repayment or letting penalties.
Moneynetinternational in association with OneMortgageSolution can now provide UK expats and international investors the facility to invest in UK or overseas property, mortgaging through them.
Surrey-based International Mortgage Plans uses the internet to generate business. Through an exclusive deal with the Portman Building Society, the only significant mutual lender in the marketplace, it is offering a five-year capped rate mortgage at 4.79%. The fix is to February 2008. There is a 5% early repayment fee within the fix, but no extended tie-in, and there is the ability to pay up to 5% of the loan in each calendar year without penalty. Portman offers its entire UK domestic product range to expatriates. There are a variety of capped, fixed and discounted rate deals and one of the most attractive deals on offer is its flexible tracker. This mirrors the Bank base rate with no addition for two years, when 0.75% uplift is added. The interest is calculated daily and there are no early repayment penalties of any kind. There is no loading for letting, no conditional insurances and loans can be arranged as interest-only.
Since Portman acquired Sun Bank in September 2001 it has been able to negotiate special terms with this lender, who will lend to foreign nationals and for buy-to-let propositions that are not covered by IMP's Portman main schemes. Its usual 0.5% loading for expatriates is waived for IMP clients.
IMP also has access to a top-up scheme via Newcastle Building Society, where loans of 90-95% of the surrender value of existing endowment policies can be put in place to augment the usual lenders' loan to value restrictions. However, some Middle East countries are excluded from this deal. Where loans are required via offshore repayment vehicles, IMP recommends a loan package via Fortis Bank, which offers a keener margin than most lenders of 1-1.25% over LIBOR. Interest-only loans are allowed, portfolios can be accommodated and there is an arrangement fee of £500, but there is a minimum loan of £150,000.
Letsmortgageit.com is a financial services website aimed at individuals or companies wishing to either purchase or refinance residential or commercial properties for minimum loans of £250,000. It is fee-based and arranges mortgages, dealing with all the major UK lenders and a number of specialist property banks that deal only through a select panel of intermediaries.