United Kingdom: Overview

RENTAL YIELDS

Lower yields in London

New yields information for flats in London show average gross rental earnings of 4.86%. Based on Global Property Guide figures, the highest yields can be generated from 100 to 150-square metre flats, reaching up to 5.36%.

Gross rental yields for the rest of London are around 4.45% to 5.17%. This is lower than previous research results showing moderate London yields at an average of 6%, to as high as 8.5% for a 50-sq. m. flat. A 50-sq. m. flat in London now yields around 4.86%.

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TAXES AND COSTS

Effective tax rates are moderate in the UK

Effective Tax Rate on Rental Income
Monthly Income	€1,500	€6,000	€12,000
Tax Rate	nil	9.2%	12.0%
Click here to see a worked example
Source: Disclaimer

Rental Income: Unless non-residents take specific steps, they will be taxed on net rental income sourced from the UK at a flat rate of 22%, which must be withheld by the tenant or letting agent. However, effective tax rates can be brought down to around 9% with all the allowable deductions.

Capital Gains: Individuals who are not resident in the UK are not liable to capital gains tax on the sale of UK property unless they have been resident in the UK within the past five years. Then, they are liable to taxation if their property gains exceed £8,800 (€12,920). Income tax rates apply.

Inheritance: Estates or assets exceeding the current tax threshold of £285,000 (€418,446) are subject to inheritance tax at 40%.

Residents: UK residents are taxed on their worldwide income and on capital gains from disposal of their UK assets, and most likely on their overseas properties too.

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BUYING GUIDE

Roundtrip transaction costs are generally very low in the UK

Total roundtrip transaction costs range from 2.9% to 9.3%. Almost all buyers, UK-based or not, employ lawyers as well as real estate agents. Legal fees are around 0.5% to 1% while agent's fees are around 2% - 3.5%, plus 17.5% VAT. Buyers must pay stamp duty on a sliding scale, rising sharply to 4%, on properties worth over £500,000 (approx €736,000).

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LANDLORD AND TENANT

UK law is pro-landlord

Rents: Landlords and tenants can freely agree on rent levels. They can freely agree any mechanism of increasing rent levels. Deposits are lawful.

Tenant Security: Contracts naturally revert to a standard monthly contract which, after an initial six month's period of security of tenure, allows the tenant to be evicted at two months' notice. However in practice the eviction process can disadvantage the landlord.

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ECONOMIC GROWTH

Economic growth is likely to weaken

The UK (formally, The United Kingdom of Great Britain and Northern Ireland) has one of the largest economies in the world, a permanent seat in the UN Security Council, and substantial influence on its former colonies in all continents in the world.

Although it has been a member of the European Economic Community since 1973, the UK refused to adopt the euro as official currency. The UK has a population of 60 million and had a GDP per capita of US$36,875 in 2006.

The UK economy is unlikely in future to experience economic growth comparable to the past decade, when the incoming Labour government benefited from the reforms instituted by the Conservatives under Margaret Thatcher and John Major.

The government’s tax take as a proportion of GDP is now at an all-time high. The government also has a large structural deficit. Gordon Brown’s tenure at the treasury has been notable for a doubling in volume of tax legislation, and for the introduction of punitive retrospective taxation of those who have chosen (legally) to be clever about minimizing their tax obligations.

Meanwhile public anxiety over the (already high) level of immigration is rising, and the government is being forced to be more restrictive, which is likely to impact the housing market.

House prices were at an all-time high by many yardsticks at the beginning of the year, but are now softening, particularly in the Midlands and in London. The recent weakness in the credit markets has had a substantial impact. London market is strongly influenced by what happens in the world’s financial markets. Interest rates have been moving up continuously over the last two years in response to rising inflation, but in April 2007, the Bank of England reduced base lending rates by 0.25% to 5.25%, in a recognition of the potential damage that weakening housing markets could do to the economy.