House prices may have reached pre-crash levels in some parts of the UK, but that is definitely not the case in France or Spain. In fact, house prices in France fell by an average of 1.5 per cent in 2014, and only one ‘hotspot’ – Languedoc – recorded an increase in values last year, by a meagre 1 per cent. So, is now the time for UK residents to take advantage, whether by buying somewhere to live or to rent out?
There are two solid plus points to support such a venture. Interest rates on Europe-originated mortgages are at an all-time low. The eurozone is experiencing a prolonged economic trough, and the European Central Bank is unlikely to push rates higher any time soon – certainly not before they start to rise in the UK. It’s true that banks have moved to increase their margins, but mortgage rates in France, for example, have still come down from 6.3 per cent in 2008 to just 2.1 per cent. And with growth and inflation remaining low, mortgages are likely to remain historically cheap. The strength of the UK economy has had a transformational effect on exchange rates, with the euro now at a seven-year low against sterling.
There have also been changes in the taxation covering sales. French residents who sell their second homes in France are subject to 19 per cent capital gains tax plus 15.5 per cent in social charges. However, the latter tax has now been scrapped for non-resident owners, which cuts the potential tax bill almost in half when selling a French holiday home. This should provide a shot in the arm for the market, as more properties are likely to come up for sale.
In addition, for non-resident owners, the capital gains tax is subject to a number of discounts, depending on how long you have owned the property. After five years of ownership, this comes down to 13 per cent; after 21 years, it drops to 4 per cent; after another year, it disappears altogether.
Opportunities such as those offered by the current situation are relatively rare, but it’s worth considering that an investment should be viewed as a long-term strategy. Exchange rates and property values are notoriously volatile and inevitably cyclical. Anyone who bought a villa in 2008 will have seen exchange rates and property values take a significant chunk out of their investment. The property boom in France mirrored that seen in the UK, but the peak-to-trough decline in values in France between 2007 and 2009 was more moderate at 9 per cent, compared with 14 per cent in the UK. This has led to suggestions by the OECD that values in France could be as much as 30 per cent too high.
So, should you wait for prices to fall further? Perhaps not. For years following the fall in UK prices, there were a number of reports suggesting that house price deflation had a long way to run. Subsequent trends have shown these projections to be completely wrong. However, this may reflect the strength of the economic recovery in the UK, something that has yet to develop in France, although tax incentives and monetary easing may yet enable prices to recover in France, too.
Algarve attractions
For those looking to pull up their roots and move abroad on a permanent basis, the attractions start to increase, particularly in the wake of the pension reforms that started in April. Making such a move has to be done correctly to conform with tax legislation in the UK; breaking your tax status is not as easy as it used to be, and spending as little as 30 days a year in the UK could render you liable for UK taxation rules.
This is extremely important, because you could save a lot of money if you achieve tax residency in your new jurisdiction. Portugal, for example, has a double taxation treaty with the UK, and in 2009 the country introduced its non-habitual residents regime. This means that new arrivals who become tax-resident can take all foreign sources of income, such as pensions, tax-free for the first 10 years, unlike in the UK, where withdrawals of over 25 per cent of your pension pot attract tax at the marginal rate. This is not available, however, for those who have already been resident for tax purposes during the past five years.
There are also signs that property values have bottomed out in Portugal. “It’s not so much a question of why you would buy in Portugal as why on earth you wouldn’t,” says Chris White, director of estate agency Ideal Homes Portugal (IHP). Apart from the nice weather and attractive tax breaks, one-bedroom apartments in the eastern Algarve cost as little as €72,000 (£52,000), and IHP reckons that expected gross rental yields are among the highest in Europe, with 14 per cent achievable on the right property.
French connection
The situation in France is also attractive. Lump sum withdrawals from pension funds are not taxed at the marginal rate, but they do attract a 7.5 per cent income tax charge. That said, the definition of a pension lump sum is open to interpretation, and local French tax districts may take differing views. Taking a lump sum has an advantage over not doing so, because, as a tax resident, regular or annual pension payments are taxed at the normal marginal rates locally, after an allowance of around £2,500.
The buying process requires careful consideration. In broad terms, a lawyer known as a notaire acts on behalf of the buyer and vendor. His fee, which can be as much as 7 per cent of the purchase price, includes a property transaction tax, much the same as stamp duty in the UK, which he passes on to the French government. The buyer and seller prepare a compromis de vente, the equivalent of exchanging contracts, before proceeding to an acteauthentique, or completion. But while in the UK it can take months to exchange contracts and a week to complete the sale, in France exchange of contracts happens almost immediately. Once contracts have been exchanged, you can’t pull out without risking losing the deposit, typically 10 per cent of the purchase price.
If you wish to check the property for obvious flaws such as dry rot or similar infestations, you will need to employ a specialist. Furthermore, the notaire does not operate in the same way as a solicitor in the UK; he or she does little more than make sure the state receives its tax payments on the transaction. In short, it’s definitely worth employing the services of a specialist property lawyer.
On the plus side, gazumping is unheard of. Once contracts have been exchanged, the vendor cannot pull out. However, an alternative document, known as a promesse de vente, enables sellers to set a time limit, typically three months, after which they are free to sell the property to someone else.
If you’re buying an off-plan property, make sure the purchase price is TTC – toutes taxes comprises – which means that all taxes are included. This is important; if VAT is not included in the purchase price, you will have to stump up a further 20 per cent.
Spanish acquisition
In Spain, the total cost of buying a villa could be more than 10 per cent above the purchase price when the attendant costs are added in. The estate agency fee (usually 5 per cent, but less in some cases) should be included in the purchase price, but all land and property purchases attract a 10 per cent transfer tax that is paid to the Spanish treasury. On top of this come notary fees and a registration fee, the latter based on the purchase price. Solicitors usually charge 1 per cent of the purchase price and then slap VAT at 21 per cent on top. And watch out: while taking a 25 per cent tax-free lump sum in the UK is fine, if you become a tax resident in Spain your 25 per cent drawdown is taxable. In other words, take it before you move to Spain.
Beyond this, there are a lot of grey areas in Spanish tax law. The type of annuity that you have, as well as other pension income, will determine how much tax you pay. Various regions apply different criteria to this. In the best-case scenario, you could pay 5 per cent tax on annuity income; in the worst case, this could be taxed as savings income, attracting taxation of up to 27 per cent. Other pension income is taxed as general income, taxable at between 24.75 per cent and 52 per cent.
Further afield
Looking further afield, regular pension income in Cyprus is usually taxed at 5 per cent, while pension lump sums can be tax-free. Additionally, Cyprus is the only country where UK public sector pensions are taxed locally, making it attractive for retiring public sector workers. (In other non-UK countries, public sector pensions almost always remain taxable at UK rates.) For those located in Cyprus for tax purposes, UK pension income over approximately £2,500 is taxed at a rate of just 5 per cent. Alternatively, pensioners can choose a higher tax-free band and a tiered rate of tax of up to 30 per cent on the income above the chosen threshold. The choice can be made each year when filling out a tax return.
Legal aid
Finding a suitable property in the right area couldn’t be easier, with UK-based agents such as Rightmoveoverseas.co.uk providing a wealth of different locations and countries. Bur remember that, when it comes to handling the transaction, a notary is only there to make sure all the paperwork stacks up neatly and the government gets its 10 per cent. So, working without a solicitor is not an option.
It’s best to settle on the right solicitor before you go property hunting, because it can take time to find the best person to handle all your requirements. There are specialists in the UK well versed in Spanish law and house purchases, and they can act as an intermediary between you and your solicitor. Also, make sure your representative is truly independent and not in any way connected with the estate agent. That way there is no conflict of interest.
This may all sound rather daunting and time-consuming, but it’s worth it – it’s essential to avoid putting yourself in the position of seeking legal redress. You may have a just complaint, but the legal process can swallow up years and cost a fortune.
Selling up
Moving house is one of life’s greatest stresses, and adding a foreign country to the mix is likely to make it even more trying. Without the cash up front, you might want to consider selling your UK home first. This way, you avoid all the juggling with timing associated with making the exchange of contracts at the right time.
Some purchasers take the sensible step of renting a house in the area they are most interested in. This way you can familiarise yourself with the way the system works. Ideally, you would find someone who has already gone through the whole process; have a few glasses of wine and let them point you in the right direction to engage a solicitor and set up a power of attorney (so you don’t have to be there all the time while the process is completed).
Our advice? Get advice
This is only intended as a guide, and in no way covers all the virtues or pitfalls that could be encountered when moving from the UK to set up in mainland Europe. You will need to take advice to decide whether this is the right move for you, and the best way of going about it. Crucially, in all transactions, you are strongly advised to take the advice of a solicitor well versed in such deals.
