New report gives insight into tax costs for expats investing in real estate

by Ray Clancy on March 29, 2016

Expats investing in property around the world need to consider real estate taxes as well as currency exchange and the shifting fiscal environment, according to a new report.

It analyses the costs for foreign individuals buying a property in 15 key cities around the world as well as the holding and selling costs over a five year period from 2015 to 2020.

The global tax report from independent global property consultancy Knight Frank and Ernst & Young also explains how changes in policies aimed at slowing certain markets, particularly in Asia Pacific, can impact the decision on where to invest.

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“Policymakers in many markets have used tax as a macro-prudential measure to slow down booming markets and address domestic issues of affordability. As an important strand of the so called cooling measures, the resulting shifting fiscal environment has had implications for investors,” said Nicholas Holt, head of research at Knight Frank Asia Pacific.

“Not only have we seen additional taxes on purchase, but also changes in capital gains and sellers stamp duties, all of which can have a significant impact on total returns. When looking across borders, investors should therefore not only consider market, currency, management and liquidity costs, and risks, but also the tax implications over the lifetime of their investment,” he pointed out.

Currency shifts, wealth flows, tax changes and fluctuating levels of supply and demand have all had a bearing on the performance of prime residential markets worldwide. As the rate of price growth slows in many global city markets, transaction costs and taxation are becoming increasingly important considerations for investors.

London sits neatly in the middle of the 15 cities when analysing both property costs and tax costs. Foreign investors are charged 7.8% and 5.4% respectively in property costs when buying at the US$1 million and US$10 million level. Looking at the tax costs, including stamp duty land tax, investors buying in their own name expect to pay 9.7% for $1 million investment and 20.7% for $10 million.

Sydney follows closely behind London’s statistics in property costs with foreign investors being charged 9.2% and 5.2% respectively in property costs when buying at the $1 million and $10 million level. With tax costs however investors expect to pay 18% for $1 million investment and 26% for $10 million.

When analysing those cities where property costs are highest, Knight Frank and EY have determined Paris at 15.3%, Berlin at 13.3% and Geneva at 12.6% to impact foreign investors with the highest property costs at the $1 million mark. Geneva replaces Paris when considering property costs at the $10 million level, charging investors 13.2% of the five year sales price, followed by Berlin at 11.3% and Monaco at 10.8%.

Considering the tax costs across the 15 cities, it is a different story. Taxation is highest in Sao Paulo both at the $1 million and $10 million level, costing investors 31.5% over the five year period. It is followed by Hong Kong. Investors here are charged 22.4% of the $1 million property cost over a five year period but Sydney replaces Hong Kong at the $10 million mark charging foreign buyers 26% in tax.

The report explains that policymakers are increasingly using tax and property costs as a means of regulating housing demand, controlling affordability and generating revenue and suggests that it will be interesting to see how the current situation in each of the 15 cities will change in the coming years.

“As more of our investors become global citizens, the importance of understanding true property costs becomes even greater. The traditional hubs of the UK and Australia have remained the clear favoured residential investment destinations for our Malaysian investors,” said Dominic Heaton-Watson, senior manager for international project marketing at Knight Frank Malaysia.

“Main drivers include education, security, lifestyle and capital appreciation. Despite some recent alterations to the UK’s taxation policy, London very much remains in the middle of the pack on a global taxation scale and offers a safe haven destination from global fluctuations,” he explained.

“We expect Malaysian investment appetite for good grade, well located international property to continue and Knight Frank will be well placed to offer the best in class developments,” he added.

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