London calling to investors

By ANNE GIBSON

The thought of forking out pounds sterling for a property might be enough to send even the wealthiest of us running to the hills.

But Alan Lester, a London accountant and property investment specialist, says that although prices in the city are high, the returns are good. So are the tax breaks.

Lester, a partner in chartered accountancy firm H.W. Fisher & Co, says London still lures New Zealand investors despite the poor exchange rate.

Andrew King, editor of Auckland-based Residential Property Investor, is not so keen. He warns against over-optimism, despite the spectacular returns in London in the past few years.

He personally regretted not buying the three-bedroom flat he was considering in Ealing in 1994. He could have retired by now on twice the national average wage.

"But the market has changed over the last few years. Rents have increased but not to the same level as property prices. Rental yields have fallen considerably."

In the early 1990s, gross rental yields were about 12 per cent, meaning that properties would pay for themselves. Property prices were decreasing and there was a real lack of confidence in the market.

Since then, prices have risen and it is harder to buy an investment property with rents high enough to cover the outgoings or expenses.

"There is also concern that the market has risen so far, so quickly, that it is overdue for a correction.

"Although [British] tax laws are quite favourable to overseas investors, anyone contemplating an investment should know the market thoroughly. What looks good on paper can turn into a horrible mess in reality."

Anyone investing in property, no matter where, needs to know exactly what he or she is doing, as the cost of getting it wrong can be high, King says.

"Looking at the investment cycle, the English market has falling yields and peaking property and rental prices, while New Zealand rental and property prices are on the increase."

In the short term, New Zealand is likely to produce better returns and less risk of a falling market, King advises, noting that England went through a long period of falling prices before its dramatic rises.

Fluctuating exchange rates add another dimension.



King says Britain has an organisation similar to the Property Investor Associations in New Zealand, called the National Federation of Residential Landlords. It can be contacted at PO Box 11107, London SW15 6ZE or, on email, at nfrl@which.net for more information.

Lester says British property is attractive to New Zealanders because of the opportunity for capital growth, yield from rental income and a legal system that is familiar and reassuring.

Tax issues are just as significant, but tax rules for overseas property owners are generous.

Rent on British property is subject to income tax at 22 per cent (apart from a small amount of personal tax at 10 per cent), no matter where the owner resides. To ensure that these liabilities will be met, the rules require a tenant or managing agent to withhold tax if the rent is paid to a foreign landlord.

Landlords who get prior consent from Britain's Inland Revenue are entitled to receive the rental gross under the non-resident landlord scheme. The department will agree if a landlord's previous tax affairs are up-to-date and if no tax is likely to arise.

In most cases, no income tax will arise. New Zealanders generally use their own funds to make a down-payment and borrow the rest of the purchase price. The interest on the loan, with other allowable expenses, will usually eliminate a taxable surplus.

The loan must have been taken out to assist with a specific property purchase and must be at arm's length. It should have been acquired on normal commercial terms, without involving connected third parties.

As well as interest, allowable costs can include managing agents' fees, repairs and maintenance, professional fees such as accountancy and legal advice, insurance, ground rent, water rates and cleaning. Under certain circumstances travelling costs are also permitted, as are administration expenses.

Overseas landlords who are registered on the non-resident landlord scheme are still subject to income-tax rules and must submit an annual return to Inland Revenue, whether or not any income tax is payable, Lester advises.

Buyers should also think about the possibility of inheritance tax and, in some unusual circumstances, capital gains tax.

All assets in Britain owned by individuals are subject to inheritance tax no matter where the owners live. But there is a wide range of options.

Foreign residents are exempt from British capital gains tax, but anyone who stays in Britain for 183 days or more in a tax year loses this valuable exemption. Less widely known is that an average stay of more than 90 days in each of four successive tax years has the same result.



This is a trap for the unwary. Consider a husband and wife who jointly own a property in Britain.

Perhaps the couple have a child who is being educated at a British school and the wife is a frequent visitor during term time. If she becomes a British resident under the rules above, and the property is sold during her visit, her share of the asset will be taxed.



Important though tax is, most New Zealanders are understandably more interested in the future pattern of prices.

The plunging values on global sharemarkets have not affected British residential property values. In June, prices rose 3.3 per cent across Britain, bringing the running annual rise to nearly 20 per cent.

Lester says increases on this scale have inevitably led to fears of overheating, and concern that a slump cannot be far off.

No property boom lasts forever and this one will inevitably come to an end, but there is no sign of it happening. Some economists believe that low interest rates and low unemployment, coupled with a pattern of demand that continues to exceed supply, mean that prices will rise significantly for at least the rest of this year.

Says Lester: "A London residential property investment, held for a suitable period, is likely to show a handsome return."

H.W. Fisher & Co