Property is a popular asset class separate and distinct from fixed income and equities, and therefore, can be used to diversify a client’s portfolio.
US expats face several obstacles when taking out a mortgage in the UK; if they are eligible, they are faced with different rules than in the US, and so there are several financial considerations clients must be aware of before buying property.
But that is not to say it is either difficult or straightforward to obtain a mortgage for these individuals, it simply depends on their circumstances, says Tim Scorer, partner and mortgage and protection consultant at Austin Friars.
One of the first considerations is establishing a client’s eligibility, or their right to reside in the UK.
Eligibility
But the approach taken by UK lenders towards US expats varies significantly, says Mr Scorer.
Some lenders will decline US clients altogether, some may be able to lend subject to certain criteria being met, while others will require that the client has resided in the UK for a certain period of time – say up to three years – but their doors will remain open, he explains.
Culturally US expats have a good level of knowledge and understanding and are very receptive to advice.Tim Scorer“US expats with indefinite leave are generally able to obtain a mortgage with high street lenders quite easily, in the same way as an EU passport holder resident in the UK," he says.
“If, on the other hand, the client does not have indefinite leave and they reside in the UK on a visa of some kind, the pool of lenders reduces significantly.”
But, the pool of lenders reduces even further if the client is paid in a foreign currency, making it even more challenging to find a willing mortgage lender.
And clients in this scenario will generally need to seek the assistance of a private bank, which typically have more appetite for such business, notes Mr Scorer.
If US expats do not have indefinite leave to remain in the UK, although the pool of lenders significantly reduces, they can potentially still obtain a mortgage but their eligibility is subject to specific lending criteria being met, and again these criteria will vary from lender to lender.
Such variation in lending practice highlights the importance of good advice, he adds.
But another important consideration is whether the US expat already owns property outside of the UK.
Mr Scorer explains that, depending on the nature of the property they own, the costs of this property may be factored into the affordability calculation by the UK lender.
He says: “Culturally US expats have a good level of knowledge and understanding and are very receptive to advice.
“Austin Friars would strongly recommend US expats always seek advice regarding their obligations, both in the UK and particularly in the US, to avoid incurring unnecessary financial penalties.”
Major differences
Daniel Freedman, managing director and co-founder of London & Capital, agrees that mortgage planning is very important for an American living in the UK, as there are several key differences in the rules for property ownership for US citizens.
He says: “In the UK, your principal private residence is not taxable – when you sell it – on any gains you make, but in the US, only the first $250,000 (£191,637) worth of gain is free of tax.”
Another key difference is that, in a mixed marriage, if the couple makes a profit, the US spouse would have to pay tax on it, whereas the British spouse would not.
Mr Freedman explains: “We deal with a lot of Americans that are married to British people – we call them mixed marriages – and in the case of a mixed marriage where you have a British spouse and an American spouse, it would be silly to put the house in joint names.
“So one way of planning would be to put the house in the name of the British spouse – that way there would be no tax on the gains when they sell it.”
Another way around it would be, at a later date, the wife or husband could gift their share to the other person, a year or two before they plan on selling the property.
Similarly, Andrea Solana, head of advanced planning at Maseco Private Wealth, says that as with other financial decisions, Americans often have additional areas of consideration to people living in the UK.
One of these is the source of capital for the down payment and stamp duty land tax.
She explains: “If funds are brought onshore from outside of the UK, one needs to understand whether those assets are considered ‘clean’ from a remittance standpoint or whether there will be a tax charge in the UK upon bringing that money in.
“It is also important to understand any tax charges that might be applicable – no one wants to be surprised to find out that a chunk of the assets available to put towards a deposit is actually going to go towards paying a UK tax bill.”
Currency fluctuations
Finally, it is important to not forget that the fluctuation of foreign currency exchange rates can have a large impact on the recognition of gains upon disposal of real property, notes Ms Solana.
This is because the exchange rate on the date of purchase and the date of sale are used to determine the taxable gain in local currency. She explains: “So when a non-US dollar denominated mortgage is paid off on foreign property, the owner also must calculate whether there has been a gain or loss on the disposition of the mortgage due to exchange rate fluctuations.
“But if a mortgage costs less at settlement due to the exchange rate at sale and the date the mortgage was obtained, the portion of gain recognised on the mortgage repayment is taxed at ordinary income tax rates.”
She adds: “Without careful consideration of the currency fluctuation over the period of ownership, a taxpayer can sometimes unknowingly create large gains in local currency.
“Planning well ahead of a property purchase will help ensure that an individual is not adversely surprised as they embark on a very large financial purchase.”
victoria.ticha@ft.com
