With countries like Portugal, Spain, France, Malta and Cyprus offering such favourable property opportunities in outstanding surroundings, it is not surprising that many Britons choose to retire to their own place in the sun.
Whether they buy their main home abroad or just somewhere to holiday, the house is most likely their biggest asset.
It is usually the most expensive item they will ever buy and has the potential to provide a substantial return on initial investment over time.
Many also view their home as a lasting legacy to secure the financial future of children and other heirs.
But there are risks in relying on bricks and mortar for wealth, writes Blevins Franks’ Jason Porter.
After all, they cannot fully realise the financial benefits of a property while they are still living in it. Compared to other investments, property can also prove very costly to maintain.
Size does matter
Generally, the larger the property, the more expensive the running costs.
Mortgage payments, rates, household bills, plus building and maintenance expenses can all add up to generate a relatively high ongoing burden.
If they are retired with a reduced or limited income, this can be especially draining on resources, particularly if they own more than one property.
Affording retirement
With today’s increased life expectancy, they may need their existing wealth to stretch to 10, 20, or even 30-plus years in retirement.
Are their pensions, savings and investments on track to sustain the lifestyle they want for as long as they need?
Many people find themselves in an ‘asset rich, cash poor’ situation, owning considerable physical wealth such as property but with substantially less disposable income.
Expatriates in particular tend to hold on to UK property in addition to their overseas home.
While property can be a solid investment, it locks money away in a highly illiquid way.
If they want access to capital, they may not be able to sell easily, nor for the right price.
Also, there is risk in tying funds up in one asset class – if the value of property drops, so does the investment.
Property offers potential leveraging opportunities – such as freeing up cash through equity release – but like any debt arrangement, this comes with costs and risks.
For retirees looking to shed debt and leave something behind for children and grandchildren, more borrowing is not the answer.
Benefits of reinvesting capital
Downsizing property can help increase accessible wealth, but it needn’t be a compromise when it comes to investment growth.
By reinvesting in suitable investment funds, for example, they can still invest in property but alongside other assets (equities, bonds etc) to reduce risk through diversification.
And, unlike property, if they require small amounts of cash they can just sell the amount they need, not the whole investment.
A specialist adviser can help explore investment arrangements that suit their particular circumstances, goals and risk appetite while being tax-efficient for their country of residence.
They could also unlock other benefits that property cannot offer, such as a regular income and currency flexibility.
When it comes to estate planning too, there may be more opportunities to reduce succession tax for heirs on investment capital than with real estate.
Reducing taxation
Wherever the home is, charges such as stamp duty and capital gains tax generally increase with the property’s price tag.
Higher-value homes can also tip over the threshold for wealth tax, where applicable, as well as increasing the inheritance tax bill for heirs.
Portugal’s wealth tax
Portuguese property attracts annual wealth taxes of between 0.4% and 1% if valued over €600,000 (€1.2m if jointly owned), regardless of where resident.
France’s wealth tax
Owning real estate assets worth over €1.3m attracts annual wealth taxes of between 0.5% and 1.5% in France (over an €800,000 allowance).
For French residents, this applies to worldwide real estate, including UK property.
Spain’s wealth tax 
It is usual to attract wealth taxes of between 0.2% and 3.5% if the combined value of Spanish property and other assets exceeds €700,000.
Although Spanish residents can receive a €300,000 main home allowance, worldwide assets – including UK property – would be counted to assess liability.
Wealth tax rates seem relatively low, but when applied to property values this can add thousands to a tax bill.
By reducing the amount of tax payable, money can go further in a lifetime and maximise the value of a legacy.
This article was written for International Adviser by Jason Porter, director of Blevins Franks Financial Management.
