2016 buy-to-let abroad boosted by UK tax changes?

January 8, 2016

The UK buy-to-let scene has changed. A series of policy moves have made overseas buy-to-let, a whole lot more attractive for UK-based investors. From pension liberation rules, to tax relief limits, to the introduction of a 3% Stamp Duty surcharge for buy-to-let landlords, these initiatives will suffocate UK buy-to-let profitability……

Buy-to-let property hotspots abroad

This is prompting some property investors to look elsewhere, including abroad. Take cities in demand around Europe like: Barcelona or Valencia in Spain, or Warsaw and Krakow in Poland, where the property price and rental yield dynamics are now attractive for investors.

Pension or property Investment pot

These cities are a serious alternative for those seeking 6-12% yields and who wish to avoid the stamp duty surcharge in the UK.

Given the eye-watering tax changes for the higher rate tax-paying, reasonably leveraged, property investor, they face a number of alternative choices, including:

Moving their properties into a Limited Company vehicle, which would attract Corporation Tax treatment on profits, rather than the new proposed personal tax regime which operates from the principle of taxing income, rather than profit.

Selling off properties, which may well have a knock-on tax effect, either in relation to Capital Gains or Inheritance.

Investing in hotel rooms or fractional schemes, which are not subject to these tax changes.

Or start Buy-to-let investing abroad. This avoids, not only the stamp duty surcharge in the UK, but this new punishing, UK tax regime.

Overseas buy-to-let property offers tax advantages

Let’s consider a UK-based buy-to-let investor snapping up property interests in Poland, as an example. Mortgage interest is an allowable expense to offset against income in Poland. An investor therefore computes and pays tax due, using the local rules of where the property is generating income. It is this net figure which is used to work out whether any tax is due in the UK, based on the differential between the overseas tax rules and the prevailing UK tax rate. Assuming a Taxation Double Treaty is in place (it is for many countries) then any tax already paid abroad, is offset against any taxes which may be due in the UK. So in Poland the prevailing income tax rate starts at 18%, rising to 32% whereas it is 20% for the UK (although there will also be differing allowances) rising to 45%. So any shortfall against UK’s higher tax rates would need to be settled. But the point is, the taxable amount will be lower, given mortgage interest is allowable and offest against the income to produce the taxable profit beforehand.

Investing in a buy-to-let property abroad, helps spread risk, when building up a portfolio of buy-to-lets or as part of pension-planning. It only takes a bit of tinkering with legislation, as we have seen in the UK, to upset the profitability of a buy-to-let business

As UK property prices continue their inexorable climb, there are other markets which provide a more digestible entry level price. A modern, city-centre apartment in Krakow or Warsaw could cost £130,000 or in Barcelona from £200,000. So getting on the buy-to-let property ladder in a European city is a lot more accessible than in the UK.

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The focus is mainly greater Europe: Poland property, UK investments, Spain property, Turkey property, Cyprus property

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NB: Property Venture® is not a financial advisor nor a tax advisor. This information is for guidance purposes only and is explained in layman’s terms. For a full disclaimer click on the link at the bottom of the website.

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