Selling a Home in the U.K.

The following article was published in the Jewish Chronicle's Financial Supplement in September, 2009.

To Sell Or Not To Sell.....
By Simon Benarroch

Making Aliyah from the UK has become more popular than ever with figures showing that the number of Olim this year will be the highest for a quarter of a century. Interestingly, this surge has come at a time when the economy has come to a stuttering halt and the property market is but a shadow of its former self. In today’s climate one would consider oneself fortunate to sell a property, let alone achieve the full asking price. I am in contact with many prospective clients who wish to be living in Israel but are unable to move as they cannot sell their home. Thus I am frequently asked if they should reduce the price (even more) or rent out their property. There are three aspects to this question:

Domicile
Tax issues
Investment considerations

Domicile: This plays a very important role in determining your liability to UK Inheritance Tax (IHT). You need to asses how HMRC will view your domicile if you keep your former home. To change domicility, involves taking actions that clearly state that you are never returning to the UK. It could be argued that keeping a former home is inconsistent with this intention.

Tax: Rental income will remain taxable in the UK even if you are no longer living here. Your property is a UK sited asset and will therefore remain subject to UK IHT regardless of where you live (charged at 40% above the nil rate band). If keeping a UK property does influence your Domicile status then potentially your entire world wide estate (including assets in Israel) could become subject to UK IHT. Considering that Israel has no IHT it seems a shame to unnecessarily pay UK IHT.

Although the first two points are usually enough to prevent people from keeping property, I would like to explore the third consideration more fully:

Investment consideration: As an example let us consider a property in Hendon, North-West London worth £500,000. This would command a rent of circa £20,000 per annum. These figures would be similar in other areas. An investor needs to weigh up the returns they would receive and the opportunity cost of locking up £500,000 in a property. In other words, what else could be done with the money?”

Let us look at the expected returns from the property and the expenses which I have estimated:

Agent Fees: (15% finding tenants and management) £3000
Vacant periods: say one month a year, £1,666
Repairs and upkeep: say another month £1,666
Insurance: approximately £350 pa

Tax at 20% (estimate) leaves you with a total income of £10,654. This equates to a 2.13% return. This is obviously an unexciting return. Therefore why would someone keep property as an investment? The answer is that they are expecting property values to increase in the long term thus making a capital gain. I personally do not expect a recovery in house prices over the next few years and perhaps beyond. Property prices quadrupled in the last decade or so and most observers feel it highly unlikely that this will happen again in the next decade. I believe prices will settle and allow wages to catch up.

If house prices are unlikely to substantially increase in the next few years, why would an investor lock up £500,000 of capital for 2.13% return pa. Additionally, managing a property from abroad is not straightforward and dealing with unexpected events can be even more challenging. After taking into account the low returns, the stress involved, the taxation and domicile issues, I do not believe it is wise to keep your property in the UK. Fortunately, there are a number of income-producing investments that are relatively “cheap” at the moment. Thanks to the credit crunch it is possible to find quality investments paying 6-8% income along with the potential for capital growth.

We have been purchasing these investments for our clients in an off-shore structure. This allows clients who are leaving the UK to invest without having to pay (Israel or UK), income tax, capital gains tax or inheritance tax. We manage the investments on a “discretionary” basis which means that we deal with the day-to-day decision making and administration. Thus, we aim to maximise your returns, minimise your “hassle” and avoid taxation. I believe this is a far more favourable option than keeping your property.

For more information please contact Simon Benarroch at 020 8202 1944 or email: simon.benarroch@raymondjames.com

Nefesh BNefesh

Selling a Home in the U.K.