Most British expats I speak to owned a house in the UK before moving overseas.
The default option for many is to rent this out.
But will that be the easiest option?
Does it make sense to your personally?
And will it make you the most money?
We’ll talk through 6 key questions to help frame your choices:
- The emotional decision
- The cost to keep your property?
- The cost to sell your property?
- Do property prices always go up?
- What’s the alternative to real estate?
- Does property outperform stocks?
The emotional decision
Is your home in the UK your dream property?
Is it the place you’ve always pictured yourself retiring, and know you’ll one day return to?
If the answer is yes, then of course it makes to keep the property.
But many people I speak to, own a house out of circumstance.
It was the one they could afford at the time they got on the property ladder.
Or somewhere big enough for the kids, who’ll soon be moving on to university.
But if they moved back, they might not even live in the same city, let alone the same house.
So once the emotional decision is solved, it becomes a numbers question.
The cost to keep your property?
The costs of owning property in the UK add up, even if you’re renting out your home.
Council Tax – About 0.6% of the property value each year.
Maintenance Costs – About 1% of the property value each year.
On top of those, if you rent out your home, you’ll probably need to pay these:
Landlords Insurance – 0.5-1% of the property value each year.
Agents Fees – 5-15% of your rental income, so about 0.56% of your property value each year.
Income Tax – 20% tax on any income received over £12,570 per year. If your property is worth over £250,000 you’ll likely be in scope for this.
The average rental yield in the UK is 5.6% so after costs you can usually expect an income of about 3.5% per year.
Assuming you pay no tax, manage the property yourself, file your own tax returns, and have no mortgage interest to pay.
The cost to sell your property?
Living overseas, if you choose to sell your house, you’ll need to pay Non-Resident Capital Gains Tax.
This is levied at a rate of 18-24% of the increase in value of your property since April 2015.
But there is some good news.
If you lived in the property after 2015, you’ll receive Private Residence Relief for the years your occupied it.
This proportionately reduces how much of any gain in value is taxable.
And means if you’ve just moved overseas, there may be little or no tax to pay.
For example, if you lived in the property for 5 out of the 10 years since 2015, 50% of the gain will be taxable.
This means the longer you live overseas, the more Non-Resident Capital Gains Tax you’re likely to pay.
So if you’re thinking of getting rid, it’s wise to sell sooner rather than later.
Do property prices always go up?
Contrary to popular belief, UK property does not always go up in value. Inflation-adjusted house prices in the UK actually peaked in 2007.
All things being equal, before costs, property should keep pace with inflation.
And over the last 40 years it certainly has, but only if you held property for the whole period.
If you bought in the last 20 years, or even the first 20 years, it’s not been such a smooth ride.
What’s the alternative to real estate?
Owning a single property as an investment, means you’ve cut down the investment universe from approximately:
- $288 trillion of residential property
- $130 trillion of bonds
- $100 trillion in stocks
- $51 trillion of commercial property
- $41 trillion of agricultural land
- $12 trillion of gold
…to No. 5, Country Lane, Shropshire, England… a single property is not diversified.
Building up a diversified physical property portfolio is possible, but it’s difficult and expensive to do.
But by investing in financial markets, through mutual funds or ETFs, at click of a button you could own 10,000 global companies, or over 8,000 fixed income securities.
If you’re really set on property, you could even own a Real Estate Investment Trust (REIT), with hundreds of commercial properties inside of it.
It’s easy to avoid having all your eggs in one basket.
Unlike property investments, non-UK residents can hold investments in stocks and bonds offshore to mitigate the impact of UK taxes.
You also have daily liquidity, meaning you can sell small quantities of your investments if you need access to cash (much easier than remortgaging a property).
And instead of the +2% costs of renting your house out, you can access these markets for around 1.55% per year, by using low cost investment platforms and fee-based financial advice.
Can property returns outperform stocks?
Since 1980, UK property has dramatically underperformed an investment in global companies.
If you invested £10,000 in property in 1980, and £10,000 in a diversified portfolio of global stocks…
By 2024, your investment in global stocks had grown by £381,497 more. And that’s before we consider shareholder dividends.
So stocks certainly beat vacant property, or owner occupied property.
But what about rental property?
Over that 44 year period – UK residential property grew by 5.52% per year, and global stocks grew by 9.05% per year.
If we expected those average returns to continue into the future…
1. UK Property – Including a net rental yield, of about 3.5%, we could expect property rental property to return 9.02% before taxes.
And remember this assumes you pay no tax, manage the property yourself, file your own tax returns, and have no mortgage interest to pay.
2. Global stocks – including the current dividend yield on the MSCI World of 1.83%, we could expect stocks to return about 10.87% before taxes and costs.
After deducting investment fund, financial advice and investment platform costs (approximately 1.55%) – stocks are still expected to have higher returns, be more diversified, more liquid and more tax efficient.
In summary, renting out your UK home, might be the first thing that comes to mind. But it’s unlikely to be your best option.
If you found this useful, you might like our free 13 Step Financial Checklist for British expats living overseas.
Or if you’re looking for professional help with your life insurance, pensions & investments – click here to book your free initial consultation.
