Brexit: What Irish owners of UK property need to know
Uncertainty and currency volatility mean that despite rising prices many face losses
Investing in post-Brexit UK: price growth has been muted in London lately and values may be flat, or slightly down, this year, according to Knight Frank. Illustration: Irish Times premedia/Getty
Thousands of Irish investors rushed into the UK market in the years leading up to the boom, attracted by better rental yields and a chance for diversification into another market.
Others invested in the years since, looking for a better home for their money than what they were earning on deposit.But how is Brexit going to affect their investments?
Already, the weakening of sterling has stung these investors hard, while depending on how exactly the UK tailors its exit, which is still very unclear, this volatility could be exacerbated over the coming months and years. Not only that, but with the UK no longer part of the European Union, there may be tax implications to be considered, while the British property market, which is also showing signs of uncertainty, may also be a concern.
So what do Irish owners of UK property need to be aware of as Brexit looms ever closer? First of all, let’s look at the property market, and how investors’ capital values may have been affected.
Since the Brexit vote in June 2016, the market has been beset with uncertainty, but this hasn’t had as much of a negative impact as might have been expected.
According to Gráinne Gilmore, head of UK residential research at Knight Frank in London, the outlook is “pretty mixed” across the region.
Edinburgh for example, reported the second highest level of price growth across Europe last year, at more than 10 per cent, while the midlands and northern areas have also reported stronger rates of growth.
In London, price growth has been more muted lately and Gilmore is forecasting values to be flat, or slightly down, this year.
If you borrowed in the UK, you will be somewhat hedged, because at least the loan on the property will also be in sterling
Transactions have also started to slow, but as Gilmore says, “where there’s value on offer, there are still deals going ahead”.
And, as Gilmore notes, prices have risen substantially since the previous peak of the market in 2007, so perhaps some tapering of growth – Brexit related or not – was to be expected. Indeed, according to her figures, property prices in Manchester are now 31 per cent higher than 2007; Birmingham is up by 27 per cent; greater London is up by 59 per cent, while central London is up by 62 per cent.
But the problem for many Irish investors is, despite these gains, when they convert their investments back to euro, the sums don’t look so healthy.
Indeed, even at this level, price growth may not have been enough to offset the impact of a weakening sterling. As the panel below illustrates, before the Brexit vote, which has considerably softened sterling, a property which sold for £360,000 would have netted an Irish investor €457,189. Now, however, it would be worth just €398,486, while if sterling continues to weaken, depending on the tenor of the exit, the price could dip even further.
As Frank Greene, a tax partner with Mazars, points out, one risk in buying a property is its value; the second is interest rates; and the third is currency. And for an Irish person purchasing outside the euro zone, all three risks apply.
This may be a crucial issue for Irish investors, who may have purchased such a property when sterling was far higher, putting 25-30 per cent equity (transferred from euro) into it. So depending on when they bought, and on price growth in the interim, the value for a euro investor may have shrunk substantially.
“So you could be sitting on a significant loss by virtue of that,” says Greene.
If you borrowed in the UK, you will be somewhat hedged, because at least the loan on the property will also be in sterling. Low interest rates in the UK, typically of less than 2 per cent on mortgages, would be another upside.
While investors might also be concerned about possible tax implications if the UK departs the EU without a deal, according to Greene, this shouldn’t be an issue.
It could be a good time to consider gifting the property
Ireland, he says, has had a double taxation treaty going back to the 1940s and 1950s – long before, in fact, either country entered the EU. This means that regardless of the outcome of the “deal”, this treaty will still govern Irish investors’ tax treatment, which largely comes down to income tax on rent, and capital gains tax on any gains made when the property is sold.
“And those two taxes are catered for in the double taxation treatment,” Greene says, adding that investors must pay taxes on this income/gain in the UK as well as Ireland. However, thanks to the tax treaty, there is no duplication of taxes and this scenario should continue post-Brexit.
“Individuals will have credit in Ireland for any tax that’s paid in the UK,” he says. And if you’ve bought a property with your pension fund, Greene expects reciprocity rules will mean that the current arrangement will continue.
Also of interest to investors in the UK buy-to-let sector is how property is being taxed at a local level. A number of moves have made the sector less attractive from a tax perspective, including a reduction in the wear-and-tear allowance, and the decision to slash higher-rate tax relief on mortgage interest repayments.
The UK also brought in capital gains tax (usually 28 per cent) on non-resident property owners in recent years, but Irish resident investors would have had to settle CGT in Ireland (33 per cent) anyway.
According to Gilmore, such changes have led to some smaller landlords reconsidering, or exiting, the business.
And speaking of tax, it could be a good time to consider gifting the property, if this is your intention anyway. With a lower valuation once the property is translated back into euro, it could mean a lower capital acquisitions tax bill for your offspring or the person inheriting it should you decide to go ahead and make a transfer. The person who then inherits the property, could stand to gain significantly if the exchange rate strengthens in favour of sterling.
What’s it worth to an Irish investor in the UK?
1– One-bed flat, Camden, London, on the market for £360,000
Pre-Brexit vote (May 2016): €457,189
Post-March 2019: ?
3– Three-bed terrace, Salford, Manchester, on the market for £220,000
Pre-Brexit vote (May 2016): €279,393
Post-March 2019: ?