Brexit is a reality! It has been the topic that has kept investors in suspense for a long time, but not everyone. The most daring over the previous six months, taking advantage of the wave of uncertainty, have found some excellent property investment opportunities, especially in the city of London.

As of last Friday, the United Kingdom is no longer part of the European Union and negotiations have been going on for a few days. How will the real estate market change? What will be the consequences of Brexit? To answer these questions, we must first look at the facts that have happened in order to predict a trend, what in statistics is called the equalised trend.

-Facts :

The flight from the financial centre of the world’s major players did not happen, nor did the collapse of the pound against the other major world currencies. Unemployment in the UK stands at 3.8% and specifically the city of London is at its lowest level in a decade .

A number of European investment funds in the previous two months finalised the acquisition of major assets in central London and growth in terms of UK Gross Domestic Product in 2019 was 1.3%, exceeding forecasts of 1.2%.

For many institutional investors, leaving the European Union is seen as an opportunity, stemming from government measures that the Prime Minister has stated he will take.

These include:

(a) the decrease of corporate tax to 17 %;

b) raising the minimum wage (already a law in force); c) deregulation of the parameters imposed by the European Union in financial matters.

With the start of the negotiations, Boris Johnson declared that the only agreement that will be signed between the two blocs will be the one concerning trade based on free trade; the same type of agreements that the EU has signed with countries such as Canada and Australia

Will this be possible? Will the European Union grant such an agreement? The answers to these questions we will only have at the end of the negotiations, but an important clue can be provided by the UK’s trade balance figures:

a) Trade between the EU and the UK accounts for 38 % of the UK trade balance;

b) The EU country with which the UK trades most is Germany with a transacted value in 2019 of £70 billion in terms of goods imported from the UK itself;

c) 35 % of ‘just in time’ industrial production for major Franco-German brands takes place in the UK.

-Conclusions:

From these confirmed macro-economic data, it can be deduced that a no-free trade agreement, i.e. Brexit no-deal, would damage the two strongest countries in Europe (UK and Germany) with negative repercussions on the economies of both .

A most likely free trade agreement will allow the respective blocs to continue their functionality on the markets in terms of foreign trade, but at the same time it will allow the UK to implement policies to attract investment from global players, no longer violating regulations that are prohibited within the EU, as the same prohibitions are included in the treaties between the countries themselves. All information on the negotiations can be found at: http://www.gov.uk/transition.

As far as the trend in the London property market is concerned, the relevant data was set out in the previous article and the trend for the year 2020 is positive. We will discuss the trend of the London real estate market, with regard to the first quarter of 2020, at the end of the quarter when the data will be made official.

After considering in the previous articles what are the procedures and consequent taxes to consider when you want to buy a house in London, in this article we have to deal with a topic not very pleasant, but necessary to have a complete overview from an economic, financial and regulatory point of view related to the purchase of real estate in London or in England; the inheritance tax in England.

The Inheritance Tax provides a standard and general rate of 40 % on the NET value of the property subject to inheritance and exceeding £ 325,000.00. Thus :

a) up to £325,000.00 there is no tax chargeable;

b) the rate is applied on the difference in value by imposing £325,000.00 as a subtrahend.

Net Value means the market price at the time of the inheritance less the subtrahend and any security interest, i.e. the mortgage. 

Exceptions :

Inheritance Tax is subject to certain exceptions, which are as follows:

1.Between spouses or civil partners there is no Inheritance Tax liability provided the net value of the property does not exceed £2 million.

2.In passing to children the threshold of non-liability to tax rises to £475,000.00.

Take for example an asset that has a market value of £700,000, the standard rate of 40 % is applied on £225,000.00 or the net value between the market price and the taxable threshold of non-taxability.

This is the case if there is no collateral encumbering the property. Otherwise, as stated above, collateral is also a subtractive element in determining the net value.

In fact, real estate investment aided by the use of leverage can have advantages in terms of taxation and profitability.

Next we will discuss the applicability of gift tax and explain the seven-year rule.

All information regarding the determination and applicability of inheritance tax in England can be checked and accessed at the following website: http://www.gov.uk/inheritance-tax.

Forex: when we want to make a major investment, such as buying a house in London, we must also consider the impact that the pound sterling can have on our liquid financial portfolio.

Analysing the performance of Sterling against the major currencies over the past two weeks we can see that:

(a) the GBP to USD exchange rate has recorded its lowest figure since 1985 at $1.15;

b) the GBP to EUR exchange rate fell to 1.07 EUR.

Dwelling on the latter, sterling was trading against the euro at an exchange rate of around €1.20 in February.

Unanimous forecasts estimate that the exchange rate between the two currencies will be close to EUR 1.25, so differentiating one’s currency portfolio today is a consequential choice.

Currency can be purchased through specialised companies, without necessarily paying the full countervalue immediately.

Indeed, by paying 10 % of the nominal value, one books the entire countervalue and locks in the exchange rate for 12 months on the date of the transaction.

In this way you mitigate the risk of exchange rate volatility when you are about to buy a house in London, with delivery dates not imminent.

Our company has an agreement with one of the main FOREX (Foreign Exchange Market) companies in London, which will be able to assist you by guiding you through all the necessary steps to carry out the purchase transaction at the lowest average exchange rates charged by the main banking institutions.For more information you can write to our contact details or contact the Privalgo Ltd Partnership Manager in the person of William Stephenson at e-mailwstephenson@privalgo.co.uk or consult the website: http://www.privalgo.co.uk/.

Another topic that needs to be addressed when making a property purchase in London or England is the applicability of stamp duty when making a multiple property purchase.

Having analysed stamp duty and its tax brackets in previous articles, we must remember that it is a progressive tax. A progressive tax by tax brackets means that each taxable class is divided into several brackets, each of which corresponds to an increasing rate as the brackets increase.

The principle of progressivity of taxes in the U.K., as in other countries of the world, is linked and applied to the principle of increasing utility of wealth. In order not to dwell on the economic genesis of the tax itself, which could be tedious, we would like instead to illustrate the tax treatment when an SPV or individual buys more than one house or property in London or the UK.

-Applicability :

In this case the investor has the possibility to apply for a favourable Stamp Duty; there are two cases of applicability and under certain conditions. The conditions of applicability in both cases are that the real estate transaction takes place between two parties, i.e. a selling party and a buying party, and that the object of the transaction is the purchase of real estate to be rented out or to be restructured in order to be put back on the market. Having established the basic conditions, let us look at the two cases of applicability of the benefits:

-Cases:

1. a) A buyer decides to buy two or more real estate units, but no more than five. Let us assume for example, for ease of calculation, that four property units are purchased at a total price of £1,500,000.00; if the relief did not apply, the purchaser would pay a Stamp Duty of £138,750.00. If the purchaser opts for the relief, the tax payable will be £80,000.00. The amount of the Stamp Duty relief is derived from the calculation set out below :

-the total value of the transaction divided by n 4 units is £375,000.00 per unit;

-the tax is calculated on a single amount of £375,000.00 which is equal to £20,000.00;

-the amount of Stamp Duty per single unit is multiplied by the number of units purchased, in this case four; therefore £20,000.00 * 4 units = £80,000.00.

It is only a matter of applying the tax not on the total amount of the transaction, but on the amount of the single transaction per unit, and because of the progressivity of the tax it allows an optimisation of £58,750.00.

1. b) A buyer decides to purchase six or more property units. Let us assume, for example, that a purchaser decides to purchase 6 real estate units for an amount of £2,250,000.00, i.e. £375,000.00 per single unit. In this case Stamp Duty can be applied in respect of transactions involving commercial real estate. Therefore the applicability is according to the following brackets :

0%–up to £150,000.00

2%–from £150,000.00 to £250,000.00

5%–from £250,000.00 to infinity.

The profitability of real estate investment in London is a topic that the investor considers when assessing and analysing.

Before going into the specifics, one must first define the concept of profitability, which is based on two main factors: ROI and ROE.

-Definitions :

ROI (Return on Investment) refers to the return on total invested capital, signalling the efficiency of management.

ROE (Return on Equity) means the profitability ratio of invested capital, as equity. The clarification and definition of the two ratios is of fundamental importance from the perspective of capital rationalisation and investment optimisation.

The condition on which the profitability analysis is based is that the property purchased is leased according to standard lease agreements, i.e. not according to short lets. Notwithstanding the condition on which the analysis is based, the return on investment (ROI) on the property in London is in the range of 3.8% to 4.5%. These values may not be exceptional if viewed solely as intrinsic values, but there are other aspects that make real estate investment in London attractive.

These aspects can be traced to the following:

Revaluation of the real estate asset purchased;

Indirect differentiation of the financial portfolio, through purchasing real estate in sterling (GBP);

Flexibility of leases, with a minimum term of 1 year;

Executable eviction proceedings, in the event of tenant insolvency, within three months;

Tenant restrictions on making changes to the property.

ROE or Return on Equity can be maximised through the use of leverage. In the UK it is not necessary as a prerequisite either to be resident or to generate income in the country in order to have access to leverage; on the latter the subject becomes interesting in several respects. Indeed, one can access several dedicated mortgages, which are called buy-to-let.

-The financial instrument:

Buy-to-let mortgages are approved and disbursed by credit institutions taking into account first of all the intrinsic profitability of the property, i.e. assessing the sustainability of the operation. Subsequently, one can opt for two types of mortgages and they are as follows:

buy-to-let with repayment of capital (C) + interest (I) ;

buy-to-let with repayment of interest only (I).

Depending on the type of mortgage one decides to opt for, the ROE takes on different values, as one will end up with a different net result if one decides to also repay the capital share or not.

In the case of opting for a mortgage with interest-only repayment, the capital portion will have to be repaid at the end of the mortgage term, with the possibility of being refinanced again later. This allows the investor to direct the equity replaced by the bank into other types of investment.

Below we illustrate an example of a return on investment of £350,000.00 in real estate in zone 3, accessing a mortgage of 50 % of the investment value, i.e. LTV 50 % (loan to value).

• Mortgage amount in example £ 175,000.00

  I = interest

  C= capital

  As previously mentioned, the real estate investment, in addition to being analysed from the point of view of its direct profitability, should, in a more general way, be assessed taking into account the five aspects listed and especially the first one, i.e. the revaluation of the real estate asset in a longer-term perspective of the investment made.

  The entire regulation of buy-to-let mortgages can be consulted at: http://www.bankofengland.co.uk/prudential-regulation/publication/2016/underwriting-standards-for-buy-to-let-mortgage-contract