Reacting to an increase in property prices in Toronto over the past year, the Ontario government is reconsidering a tax it rejected only a year ago. New South Wales imposed a 4% foreign investor stamp duty charge last year, with further increases expected this year as more and more foreigners are investing in property - to the extent that there are more foreign than first-time local buyers.
Vancouver, Hong Kong and Singapore have all introduced higher taxes in recent years. Portugal, which has attracted huge inflows of foreign investment on its “golden visa” scheme, is now proposing higher taxes and duties on property.
These are just some examples of tax changes which apply to foreign buyers and which could affect your investment decisions, says global property investment firm IP Global’s director of Africa George Radford.
There are a number of property taxes to take into account, including stamp duty (relating to transfers), property tax (ongoing taxes or rates based on the value of your property), capital gains tax and inheritance tax.
“A number of governments are considering the imposition of higher taxes on foreign buyers,” says Radford. “With the rand being relatively strong, this is a perfect time to invest in property offshore, but investors must be aware of any additional taxes that could be imposed.”
“This should not, however, be a deterrent to investment as the proposed taxes are a reaction to booming property markets which in turn, mean a greater potential for growth in the value of your property asset,” he says.
“Taxation on foreign or buy-to-let investors reflects governments’ expectations of continued growth in their property market. Government regulation and taxation can also play a role in creating a more sustainable, locally driven property market which is good news for investors looking for steady capital gains and yield growth.”
“Proposed taxes also indicate you can expect good rental income, firstly because the demand by foreign investors which has driven the tax changes has led to supply shortages in some areas, forcing more people to rent and secondly, because some potential buyers are opting to rent to avoid taxes, thereby pushing up rental demand.”
However, Radford says it is important to know exactly which taxes apply to your investment. For example, if you buy a property in the UK via a trust or offshore company, where there is already a stamp duty of 12% on properties valued over £1.5m, you have been previously been exempt from inheritance tax. But next month this will change, and a tax of 40% will be imposed on your death.
“Company structures and trust structures, which have been targeted in some countries for increased taxes, are becoming less and less effective and this requires careful consideration from purchasers before proceeding with the sale,” says Radford.
“For people looking for a short term profit, these taxes may be a deterrent”, says Radford, “but in our experience they make little difference in the longer term and property is without doubt a long term investment.”
“It is also worth mentioning that in South Africa there are relatively onerous capital gains taxes on second homes and our transfer duties and municipal rates are not low. If one looks at Germany, for example, there is zero capital gains tax after 10 years, illustrating how important it is to make sure you are aware of tax rates in areas in which you are planning to invest, he adds.
Radford says that global diversification can often help you limit your tax exposure in any one country.
Greater London, Birmingham, Manchester, Liverpool and Birmingham in the UK, Chicago in the US and Berlin in Germany offer some of the best property investment opportunities at the moment, irrespective of their tax charges.
“Tax is a very important consideration for any investment. Therefore, it is important that one needs to ensure that they are working with a partner with a proven track record and global expertise in navigating foreign markets,” concludes Radford.
