Let’s get busy

Channel Islanders thinking of investing in UK property on the back of a rising market might want to pause for a moment. As David Craik learns, becoming a landlord is by no means simple

The revival in UK property has been one of the clearest indicators that we have finally started to emerge from the economic downturn. The most recent housing index figures from Nationwide revealed that in the year to January 2014, UK house prices rose 8.9 per cent, compared to no rise (or a fall) in the 12 months to January 2013.

However, there is still a disparity across UK regions. While Nationwide"s figures for 2013 show an increase in London of 14.9 per cent for the year, the North of England only witnessed a 1.9 per cent rise.

Buoyed by increased consumer confidence and government loan schemes, such as Help to Buy and Funding for Lending, the banks" willingness to lend to prospective buyers, particularly first-timers, has also recovered. According to the Council of Mortgage Lenders (CML), £17bn of gross lending was made in November 2013, which is 30 per cent higher than that of the same period in 2012.

This is all good news for homeowners, but what does it mean for investors - particularly those looking into the buy-to-let market? And what does this mean for Channel Islands investors either with an already-let property in the UK or who are looking to the mainland for potential returns?

The figures for the buy-to-let sector also stack up well. According to the CML, buy-to-let loans worth £5.7bn were made in the third quarter of 2013 (the latest set of available figures), up 36 per cent on the same time in 2012.

And as far as rents are concerned, LSL Property Services" buy-to-let index showed average rents across England and Wales stood at £753 per month in November, up 1.6 per cent compared to November 2012. London saw the steepest rent rises - up 4.4 per cent - with the South West up 3.4 per cent and the South East 3.2 per cent higher.

As with house prices, however, not every region gained ground, with rents in the East of England down 5.5 per cent, and 2.8 per cent in the West Midlands.

LSL also said that total annual returns on an average rented property rose to 8.9 per cent in November 2013. This equates to an average return of £14,592 - comprising £8,243 rental income and a capital gain of £6,349. Admittedly, all these statistics can be rather confounding, so what does this actually mean to investors?

Jim Coupe, Managing Director of Guernsey-based offshore bank Skipton International, believes rental demand has remained high due to increases in immigration, a continued decrease in household size, and healthy demand from those wannabe first-time buyers still unable to afford the necessary deposit despite all the Government help.

“Help-to-Buy will moderate demand, but the UK is not building properties at the rate needed to meet demand, so the rental sector will remain buoyant,” he states. “There is a north-south divide with the Thames Valley and London helped by migration and rising employment.”

LSL agrees, recently stating that “supply of new homes to rent will be critical in maintaining relatively affordable annual rent rises, compared to rampant house prices”. It forecasts a 10.5 per cent rise in total annual returns in 2014.

Coupe says Skipton has monitored the growth, and has recently launched a buy-to-let mortgage for Channel Islanders looking to invest in the UK either personally or through a trust. “We want to help Channel Islands investors keen to invest in bricks and mortar. Guernsey and Jersey are a finite size and property is expensive. Investors here have been asking us what we can offer them in the UK so they can diversify their portfolios,” he says.

Of course there are risks in buy-to-let lending. Just look at those regions where rents fell at the end of 2013. Investors have to very carefully research the market and gain as much local knowledge as they can with regards to the area they want to invest in and the type of tenant they want to attract.

“Understand the market,” stresses Coupe. “Look to where young professionals are going, such as the Readings of this world, with property near to the railway station to commute into London. If you are using an agent, be clear about what type of tenant you want. Not someone who is going to trash the place. Get a pen and paper, sit down and look at monthly rental income, the capital price of the property and ongoing costs.”

These costs include acquiring tenants through agents or advertising, ongoing maintenance to repair damage and budgeting for times when the property is vacant. “Having a portfolio of properties could help spread your risk in that area,” Coupe advises.

Counting the cost

Michael Morris, Group Partner at offshore law firm Collas Crill, adds: “For Channel Islanders [investing in UK property] there is a problem of distance. You can"t keep your eyes on the asset all of the time. The time taken to manage the property is not always factored in.”

Tax liabilities must also be weighed up - and these are plentiful and complex, as most tax matters are.

Mandy Connolly, Senior Tax Manager at EY says that income and stamp duty land tax are the most immediate considerations. UK rental profits are subject to income tax both for UK and non-UK residents. These need to be declared on a self-assessment tax return, and can incur income tax rates of up to 45 per cent depending on the level of the individual"s income.

Channel Island residents are entitled to a personal allowance, which will be £10,000 from April 2014, to offset against rental profits in calculating the amount of UK tax due. But, Connolly adds, under the double tax arrangements with the UK, credit is given in Guernsey or Jersey for tax paid in the UK.

Stamp Duty Land Tax is payable by the buyer of a property. For residential purchases under £125,000 the rate is zero with the rate thereafter being between one and seven per cent depending on the purchase price.

Connolly also adds that Inheritance Tax may be another consideration as a Channel Island resident who is non-domiciled in the UK remains potentially chargeable to UK inheritance tax on death if they own any UK assets.

Non-UK residents are not currently subject to capital gains tax realised on the sale of a buy-to-let property. However, UK property held in a company may be subject to capital gains tax if it has a value of over £2 million.

What the future holds
Changes to these tax rules are coming. Most pertinently, as announced in the autumn statement in December 2013, Chancellor George Osborne is planning to introduce capital gains tax on the disposal of UK residential property by non-UK residents with effect from April 2015. The maximum tax rate based on the current rate of capital gains tax would be 28 per cent.

“It"s possible only gains that accrue after April 2015 will be subject to the charge,” Connolly says. ”Most UK resident investors are entitled to an annual capital gains tax exemption of £10,900, but it is unclear whether this would be made available to Channel Island residents.”

All of this starts to stack up, and it"s no wonder when Connolly cautions that the new charge “may reduce the attractiveness of investment in UK property” for Channel Island residents. “It is certainly another factor for potential investors to consider, and some may prefer to delay their investment decisions until more detail is available,” she says.

Another intangible is the risk that interest rates could rise from their historically low 0.5 per cent level at the end of this year. This could mean that investors who have overstretched themselves in taking out a loan could be hit by higher repayments.

Numbers aside, Morris of Collas Crill believes buy-to-let investors have in general been canny in their investments as the economy recovers. “They have not been putting themselves on the line. They have been sensible and not borrowed much more than 60 per cent of the property value,” he states. “People are a lot less emotive than when they buy their own home. They look at it more coolly.”