Analysis by OMI, using data from the UK’s Office for National Statistics (ONS) and Centre for Housing Policy, shows that an estimated £1bn ($1.4bn, €1.1bn) was invested in the London new-build property market alone in 2017 from Asian investors, predominantly based in Hong Kong and Singapore.
Asia accounted for 61.4% of total overseas sales; with the Centre for Housing Policy’s research showing that 31.5% came from Hong Kong, 20.8% came from Singapore, 5.4% came from China and 3.7% came from Malaysia.
The research also shows that it’s not just those with surplus cash who are investing in the UK property market, but serious investors are prepared to take a leveraged position; in Singapore 67.5% of property sales are from a mortgage, well above the average of 53.5%, and in Hong Kong 54.6% of sales are mortgaged.
This shows investors in Singapore and Hong Kong are more likely to borrow in order to invest in UK property compared to investors from other regions.
Inheritance tax exposure
With so much money flowing into the UK new-build property market, investors need to be aware of their potential exposure to UK inheritance tax (IHT). IHT is payable on death on any property or assets owned in the UK by the deceased.
This is irrespective of domicile status or whether the deceased lived in the UK or overseas.
UK IHT is set at an eye-watering 40%, so needs to be properly planned for. However, OMI warns that a high number of investors in the region, both individuals and company investors, could be left exposed if they are unaware of the potential IHT liability.
Research carried out by OMI shows over 30% of those surveyed overseas either didn’t know or didn’t realise there would be a UK IHT liability on UK property, and just 7% claim to fully understand UK IHT.
If an investor’s estate is hit with a UK IHT bill that they haven’t planned for, this could potentially create a real headache for their beneficiaries, who may not have the cash to pay the IHT bill and may not be able to sell the assets quickly enough to access what they need.
To help ease this headache, if investors know there is a future liability on their estate, they can put plans in place to provide their executors with the required funds.
For example, by writing a life policy in trust, or using appropriate IHT trust planning alongside their investments during their lifetime.
Investing through an overseas corporate structure
Over the years, a common way for non-UK domiciles to invest in the residential London property market has been through an overseas corporate structure (known as enveloping).
Residential property could previously be held through a corporate structure without being subject to UK IHT on death. However, the rules have now changed, and HM Revenue & Customs will now see through the structure and the individual will be taxed on death as though they held the property directly.
These rules received Royal Assent on 16 November 2017 and were backdated to apply from 6 April 2017. This will impact a vast number of investors, and anyone concerned should seek professional advice to help ensure this new exposure is adequately managed.
Reliable asset class
Ian Kloss, chief executive Singapore, Old Mutual International, said: “It is well known that Asian investors are drawn to the London property market, and have been for a number of years.
“Property prices in London, whilst expensive, have been viewed as a reliable asset class for many Asian investors looking to diversify their investment portfolios. This trend could possibly rise as the investment opportunity becomes even greater following the fall in the value of the British pound.
“The data shows just how important the London property market is for investors based in Asia, particularly in Hong Kong and Singapore. With any investment comes risk, and investors need to ensure they are aware of these risks to enable them to be correctly managed. With professional advice, managing the exposure to UK IHT is fairly straightforward, and could help protect the investor’s beneficiaries on their death.
“The tax regime in the UK is different to that in Asia, and investors may be unaware of these differences, or may think they don’t apply to them as they do not live in the UK. Tax rules are also subject to change, as seen with the change to overseas corporate structures. Investors should regularly keep in touch with their professional advisers to assess how changes in the tax rules could impact them,” Kloss said.
