Property: Bricks, Mortar & Money

Jess:
Hello, and welcome to the fifth and penultimate episode of Essential Finance. A video content series, in partnership with bdhSterling, focused on providing financial tips for the Australian business and ex-pat community in the UK.

I’m Jessica Sullivan, the member and project manager at the Australia – UK Chamber of Commerce. The fifth edition of our six-part video series will provide an overview of Property: Bricks, Mortar and Money.

Delighted to be chatting with you again Stephen, welcome and thank you. The last time we spoke, we delved into the role financial planning played in growing your wealth. But our focus now slides to property homeownership and investment. With approximately 120,000 Aussie’s making the UK their home, either indefinitely, or for their working career, living arrangements are a top priority. Many Aussie’s may be wondering whether it’s worth buying or renting in the UK market and if they have either property back home or property in the UK, whether they sell, hold or rent.

Stephen:
Well, I think it depends on which direction. I do think this is another area us Aussies we also love property investment and it’s something that’s ingrained in us. It’s probably arguably the most complex area. It’s complex because it’s easy to make more mistakes than usual. And, because you really obliged to work in two systems.

So, once you’re in the UK, you have to fundamentally put in a tax return in both countries. But tax’s are calculated very differently. So, you have to contrast those.

One big mistake that I think again back to my own circumstances and how things have changed is, in Australia, we had negative gearing which means you can offset some of the losses in your personal income tax or reduce it. Once you leave the country that goes away.

The other big big change that’s happened is that if you have a home in Australia, and you don’t sell it before you leave, you lose your primary residence benefit. So, you ended up basically turning that asset into something that’s now subject to capital gains tax in both countries.

If you are here, I guess it does depend on your stage of life and what your intent is. If you’re not here for very long, it’s a difficult case to justify buying something unless it’s a fixer-upper perhaps. Eventually, you’re going to pay stamp duty, you’re going to have selling costs, you take the risk that that money is not going to grow whatsoever versus other alternatives, and it’s not very liquid.

I think you need to decide that if you’ve got one in Australia. It’s a very difficult situation to try to decide what to do, you are now working in two tax regimes. So just to contrast in Australia, interest on your mortgage is 100% deductible. In Britain only 20% is. You’re more likely to have to pay taxation on that.

You’re going to have to submit a tax return in Australia. So you’re going to have to pay the fees to get done that under one set of rules, and then you’re going to have to get another one done in Britain, where the rules are different. And so that’s just automatically pumping up the costs.

I think one of the difficulties is if you are living in Britain, you’re obligated to acknowledge your worldwide income. But you get two methods of calculating. One we’re used to, which just means as it arises, you just put it in your income statement and pay tax. The other one’s called remittance. That means that fundamentally, to use that method which can work in your favour, but you lose your personal allowance and use your capital gains allowance.

If you have a property and you’re in the 40% tax bracket, it’s just going to mean that that’s going to get added onto your income statement, and less likely you’re going to pay a quite hefty tax on the property. You can claim credits between the two countries but you need to know what you’re doing in those circumstances.

The last point is selling it then. So, if you are renting it out, and you’ve left it in Australia, it will be subject to capital gains. If it was your home for example, now there’s a likelihood, you’ve lost all of the capital gains but as you continue, there are two sets of calculations. The tax in the UK on capital gains is a fixed amount but it’s higher than other assets as an example.

So, it’s 28% or 18%, they add another 8%. You need to understand the pros and cons, not only of the property and that as an investment, but how that might compare to other alternative investments. That depends on your time frame.

Jess:
It’s not particularly straightforward at all. That’s why we need this really robust advice. Key to such decisions Stephen, what should I be aware of if I do decide to rent my Australian property when I moved to the UK? We talked about some of those nuances, will be great to delve into that. Are there any unexpected expenses I should look out for regarding the Australia / UK property market in that respect?

Stephen:
Well, I think that where they’re quite different. I think if I just try to summarize the broad buckets. You’re going to have to do two tax returns. So, you can’t really avoid that. That impacts the method as I said, your British return as well. So that can start to cause more tax here, and you lose some of the advantages.

That just depends on how much you paid sometimes you have to forfeit them anyway, so it’s not a great deal of loss. But the inadvertent consequences double whammies you really, because you lose some benefits, along with having to pay British tax.

The other thing that people often aren’t aware of is sometimes the banks insist that if you are renting, you have to go on to a buy to let mortgage. Often, they charge a higher interest rate. So, when you are leaving, particularly as a foreigner, they’re getting more nervous because now you’re not here.

So you have to expect, possibly that you will have a high-interest rate now. The other one is insurances, so that varies by country. But in Britain, sometimes they expect other insurances like landlord insurance to be part of what you pay.

Other ones are just things that come with common property ownership. If you’re in a foreign country who’s looking after the place in terms of maintenance? You’ve got someone you trust. Sometimes properties can degenerate. There’s the whole vacancy period if you don’t have tenants in there, and it’s the usual cost of that. In Britain, it’s actually quite hard to sometimes get tenants out if they don’t want to. There are those contrasts, whereas in Australia it seems a little bit simpler if tenants aren’t playing ball. It’s all those indirect issues you really have to weigh up., along with just standard calculations if buy to let properties are a good investment.

Jess:
You instil confidence, Stephen in that respect. Particularly as we look to make these big decisions. You really help us understand the value of bricks and mortar for those of us living between the two countries. To summarize, do you feel properties is a good wealth asset overall?

Stephen:
I think it really depends. I will say that everyone’s circumstances are different, and no real investment choices can be made in isolation of the other ones. So, I think it’s a bit of a package deal. It’s a bit like you move one bit, you really have to see how that affects the other bits.

What I will say is, that property can be and we know that particularly as Aussies and I know if you’ve been keeping tabs on the Aussie property market has gone fantastic in the last couple of years like 15 / 20% growth in some areas. So, it really does depend a lot on did you pick a good property? Was it in a good area? Is the population growing there?

I guess the second one is did you renovate it? Because quite often if it is your home you buy it, you fix it up and renovate it and then sell it as your primary residence. That can be a good one.

Most investments, you can’t borrow money to invest, but the property is one way you can. So, it’s not just using all your money so the return on investment can generally be much higher. It’s a savings plan, isn’t it. If you’ve got a capital and interest mortgage then fundamentally you’re buying more of that property as you go along, as you pay the mortgage. So, you’re basically saving except someone else is now paying for it.

From that point of view, it’s a great asset. The drawbacks are that it’s taxable, and there’s not a lot of flexibility on that. Unlike, say an ISA, where there’s no taxation so your growth is shielded from all that end,  and you don’t have to put in tax returns all the complexity.

It is one asset in one place. So, that’s a bit of a gamble in that you picked a good property. London used to be traditionally a bit of a faithful place to buy property but that’s now a bit more questionable. Should I buy here? Should I buy there? You’re taking a punt. One house, all the maintenance issues we’ve talked about, I guess there are the opportunity costs. What could you have done with the money that would have done better? Now that’s an inevitable question you should always weigh up.

I think the last couple of points is it’s very hard to know the value of something. When you get nearer the end of your working life and you’re heading into retirement. Now you’ve got this question mark over, well how much money do I really have? Because I don’t know the value of the house if I sold I don’t know what value it would have.

But even more difficult is unlike other investments, you’ve got capital growth on that property but you can’t access it. You can only get the rent. So, the return on it, you’re only accessing half. Whereas if I was in an ISA for example. I can get the capital growth from that fund growth and I can get any distributions of income. So, I can access the whole lot.

It’s much more flexible at that stage in life. So, there’s pros and cons I think. People have their own preferences and their own comfort. We just have to respect that you need to weigh that up for everybody.

Jess:
Fabulous. Thank you again, Stephen. It’s been quite enlightening for me personally and you’ve made me feel very reassured regarding getting my house in order. No pun intended there and how I can best manage property acquisitions and investments between Australia and the UK.

Again, can you remind our network of the best way to get in touch with you and your colleagues at bdhSterling to discuss this further?

Stephen:
I think the simplest way is if you just jump on our website which is www.bdhSterling.com, you’ll find loads of information there, but also you will find the contact details. Send us an email and we’ll have someone call you for a chat.

Jess:
The final edition of the Essential Finance video series will be released as June comes to a close. We’ll be welcoming bdhSterling’s Simon Harvey from episode one back, to chat with Chamber CEO, Catherine Woo to round out the series and focus on your essential finance checklist. Thank you.