Investing in real estate abroad and what it will mean for your taxes

The UK has historically been a fairly safe and easy place for Israelis who want to diversify their investment portfolios and buy property abroad.

It is especially attractive because London is a five-hour flight from Tel Aviv, and the time difference is only two hours.

You may well want the property to be occupied by a rent-paying tenant to ensure that it will generate a regular source of income. Here are a few tips.

Potential extra costs

One of the newest laws affecting residential apartments and apartment blocks is the new Building Safety Act 2022 (BSA). The BSA was brought into force following the Grenfell Tower fire in 2017.

Devastatingly, a fire destroyed the 24-story block of apartments called Grenfell Tower, and it was fueled by the cladding on the walls of the building.

The good news is that cladding has now been banned, and if you are thinking about buying an apartment in a newly built block, then this shouldn’t be an issue. But if you are buying an apartment that has already been built, then you need to be aware that since 2017, there has been a drive to remove such cladding, and various measures are setting out who is responsible for removing the cladding in these blocks of apartments to make them safer.

This largely depends on the height of the building and is something that your lawyer should look into to make sure you, as the new owner, won’t be liable to pay for the remedial work.

The new legislation has made substantial reforms, giving residents and homeowners more rights, powers, and protections, as well as making it clear how residential buildings should be constructed, maintained, and made safe.

Apartment owners in the UK, as those in Israel, have to contribute to regular homeowners’ committee (va’ad habayit) payments. In the UK, this is called a service charge. In older buildings, they may be required to pay an additional annual payment of ground rent, but this will usually be no more than a few hundred pounds.

If you do decide to rent out your apartment and become a landlord, there are various regulations in place that a good management company should be able to take care of for you. These include making sure that the gas and electrical equipment in the apartment is safely installed and maintained. There is also an obligation for the tenant’s deposit to be protected in a government-approved scheme and to check that the tenant has the right to rent.

Tax considerations in the UK

Within 14 days of completing the purchase, a purchase tax needs to be paid to His Majesty’s Revenue and Customs (HMRC). This tax is called Stamp Duty Land Tax (SDLT), and the current rates for residential property are broadly as follows for individuals: Purchase price up to £250,000 – zero tax; the portion from £250,001 to £925,000 – 5%; for the portion from £925,001 to £1.5 million – 10%; and then anything above this – 12%.

There are various reliefs, but non-UK residents do have to pay a surcharge of 2% on the whole price, and if you own another property anywhere else in the world, then an additional 3% is payable on the whole amount.

Income tax will be chargeable on the rental income, although you should be able to deduct the amount you pay for some of the expenses from the rental income, and everyone has an annual personal allowance.

The HMRC has a Non-Resident Landlord Scheme for landlords living outside the UK, and this allows for rental income to be received untaxed from the tenant. Income tax will be paid directly to HMRC with a self-assessment tax return having to be completed every year. To be allowed to use this scheme, an application will need to be made to HMRC.

Capital Gains Tax (CGT) is payable on the sale of the property if there is a capital gain. There is an allowance that at the moment is £6,000 per person, but the amount changes every year. This year, the CGT rate is 18%-28% for residential property.

Inheritance Tax is another tax that needs to be considered and at present it is chargeable only on assets over £325,000. Structuring how the property is purchased by consulting with a tax advisor may allow for this and other tax liabilities to be minimized.

Israeli tax implications should also be checked out by Israeli resident investors, including reporting requirements and structuring things to avoid double taxation.

As always, consult experienced legal and tax advisers in each country at an early stage in specific cases.abby.korn@asserson.co.uk

The writer heads the Residential Property Department at Asserson Law Offices in Tel Aviv. She is a solicitor of England and Wales.