Here’s why rising interest rates shouldn’t stop you from buying a property in the UK.

The inflation and rising interest rates story is creating headlines in the macroeconomic environment, pushing interest rates higher hike to 1.25% today.

With rates rising steadily, spreads have narrowed. Lenders therefore will have a lower capacity to absorb an interest rates rise, particularly if they’ve risen further and faster than anticipated. However, strong competition amongst lenders could lead to smaller margins and consumers not being passed on the full rate rise. In particular for higher LTVs where there is more room for spreads to remain higher than historic averages.

Rising inflation in UK

While interest rates are going up however, they are still historically low. Pre -financial crisis of 2008, UK interest rates were at 5.75%. Fast forward to 2022, the rates are at 1.25% and projected to double by end of 2023. At the same time, property prices have been on a consistent increase for the past 6 years despite the economic climate with Brexit, Covid and now the war in Ukraine.

If we look at the interest rates over the last 4 decades, even with the projected increases, it remains a great time time to buy. It is still a good time to secure a mortgage and to purchase a property.

uk property market

The imbalance in supply and demand for UK property pushed annual house price growth to 14% across the UK in March 2022. The dynamics have not shifted and, even though we expect price growth to cool in the latter half of 2022 and 2023, we don’t expect a big drop as demand still over rides supply. The number of new prospective buyers across the UK is 53% higher than the five-year average in Q1 2022, according to Knight Frank data.

As seen above, several factors, including increased mortgage lending margins, robust demand compared to supply and a higher proportion of lower LTV lending, means the UK housing market is still in a relatively robust position.

What Taxes do Foreigners Pay when Buying or Selling a UK Property?

If you are a non-resident buying a property to rent it out, the UK has clear tax regulations. Additionally, you could be liable to pay tax if you sell property and make a capital gain. 

These are the main taxes you should be aware of when purchasing or selling a property in the UK

Stamp Duty Land Tax (SDLT)

This is a registration tax all buyers need to pay on the purchase of a property. It is set in a tier system with price brackets and increasing tax rates for higher values. The recent increase in the SDLT has impacted all property purchases. Non-residents, businesses and trustees will pay an additional 2% SDLT on residential property purchases from 1 April 2021. You may be exempt if you are in a lettings business or a developer. There is an additional 3% surcharge if you are buying to let the property.

If you purchase a property from a company and the property’s value exceeds £500,000, a 15% SDLT flat rate will be applied. You may be eligible for some exemptions, such as when the purchase is made for renting purpose as part of a rental business or property trading/ development business.

If you purchase shares in a property holding company then SDLT is not payable. However, there are some drawbacks of investing in said company that you should discuss with your tax advisor one of which is ATED (Annual Tax on Enveloped Dwellings).

Capital Gains Tax

This is due at a rate of 28% on any profits realised on the sale of residential property by all sellers. An exemption is possible on the disposal of your only or main residence by gift or sale. Individuals are eligible for this, but companies are not. 

Income Tax

If a property is purchased to rent out, a 20% withholding tax is charged from the landlord’s gross annual rental revenue from the property. To avoid paying this additional tax, the individual must register with HMRC under the Non-Resident Landlord Scheme and receive the gross rental revenue once registered. They would be required to file a self-assessment form each year and pay income tax on the net rental profit at a rate of 20%.

Inheritance Tax

Regardless of your resident status, if you purchase a residential property in the UK, you will be subject to inheritance tax. On your demise, 40% inheritance tax is payable on the value of all UK assets. The debts on the property may reduce the amount subject to inheritance tax. Property transferred between spouses is normally exempt subject to limitations when you pass the property to the surviving spouse, who is a non-UK domiciled individual.

By procuring a mortgage on the property at the time of purchase, you can limit your liability to inheritance tax. You may also seek life insurance to cover any inheritance tax liability associated with the property’s equity.

We always recommend speaking to a tax advisor or tax accountant to understand what way to structure your purchases. We have partners whom we are happy to introduce you to for a conversation.

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