Hedging the UK property market while non-resident

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
glorat
Posts: 678
Joined: Thu Apr 18, 2019 2:17 am

Hedging the UK property market while non-resident

Post by glorat »

Hi all,

I left the UK a long time ago but kept a property out there in case I moved back. As it turns out, I will never move into that property again (too small) and am thinking of selling before UK capital gains taxes get me - and so that I have liquid assets with which to buy if and when I move back to UK.

So if I sell, where to put the funds knowing I may need it to buy UK property in the future (e.g. 3-5 years time)? I'm worried that by then Brexit will sort itself out and property prices will rise relatively higher so I want to use the funds to hedge against this rise in property prices. The equity markets are attractive because I incur no global capital gains in my current residence. My options seem to be
  • Hang on to my existing property and sell it later and hope I can both sell it as fast as I need to and not be stiffed on capital gains
  • Sell and use the cash to just dump in VWRL
  • Sell and use the cash to just dump into some UK FTSE low cost fund
  • Sell and put it into UK REITS (but they don't seem to correlate so well with retail property)
To reiterate, my aim here is roughly track the UK housing market in a low cost manner.

Any other ideas?
Valuethinker
Posts: 41155
Joined: Fri May 11, 2007 11:07 am

Re: Hedging the UK property market while non-resident

Post by Valuethinker »

glorat wrote: Mon May 13, 2019 10:48 pm Hi all,

I left the UK a long time ago but kept a property out there in case I moved back. As it turns out, I will never move into that property again (too small) and am thinking of selling before UK capital gains taxes get me - and so that I have liquid assets with which to buy if and when I move back to UK.

So if I sell, where to put the funds knowing I may need it to buy UK property in the future (e.g. 3-5 years time)? I'm worried that by then Brexit will sort itself out and property prices will rise relatively higher so I want to use the funds to hedge against this rise in property prices. The equity markets are attractive because I incur no global capital gains in my current residence. My options seem to be
  • Hang on to my existing property and sell it later and hope I can both sell it as fast as I need to and not be stiffed on capital gains
  • Sell and use the cash to just dump in VWRL
  • Sell and use the cash to just dump into some UK FTSE low cost fund
  • Sell and put it into UK REITS (but they don't seem to correlate so well with retail property)
To reiterate, my aim here is roughly track the UK housing market in a low cost manner.

Any other ideas?
There's no proxy that really works, other than owning a property.

I would sell to avoid the capital gains, which could be much higher under a new government, post Brexit. (My base case is that we both Brexit and have a new government, and possibly a coalition or minority one).

Best hedge is then to buy another flat in an attractive area (one with good transport links).

I would invest in the global equity index fund. FTSE100 is composed of international companies, does not hedge the UK (84% of All-Share). FTSE 250 does a bit more but it's only 12% of the All-Share.

A portfolio of UK housebuilders is a leveraged play on the UK housing market. However they have made incredible money since "Help to Buy" came in - eventually some of that will be reversed.
danielbird193
Posts: 36
Joined: Thu Mar 21, 2019 2:15 pm

Re: Hedging the UK property market while non-resident

Post by danielbird193 »

You may be eligible for full or partial relief from CGT depending on your exact circumstances. I assume you lived in the house before you went abroad? If it's your only UK property and you have been away for work for less than four years, you will be eligible to full relief. Even if you have been away for less than that time you may still be eligible for partial relief.

There's some more detail here: https://www.gov.uk/tax-sell-home/absence-from-home

However, CGT rules are complex and this is an area where it would pay to get some personalised advice as any mistakes could be costly.

As for whether to hold or sell, it very much depends on the specific circumstances, and even then there's likely to be no single right answer. A few questions that would run through my mind:

1. Is there a mortgage on the property? If so, selling it will release the equity and reinvesting in equity markets will be an unleveraged return which will affect the relative returns between the two options.

2. Is it empty or tenanted? If you have sitting tenants then you have the security of a monthly rent cheque and they are covering liabilities such as council tax. In those circumstances I'd be inclined to hold on to the "bird in the hand" rather than chuck them out and move on.

3. Is the property located in a part of the country you might want to move back to in future? We all talk about UK property prices but in fact there are hundreds of different local markets moving up and down at different rates. London property is doing relatively less well at the moment, regional cities like Manchester and Birmingham much better. If the property you own is in an area that is different than the one you may want to move back to, it will not be a perfect hedge in any case.

4. As has already been pointed out, neither the FTSE 100 nor the 250 are particularly correlated to residential property markets. There are some individual stocks which are (housebuilders, "build to rent" landlords like Grainger plc) but even these face different risks and will not necessarily follow the property market exactly.

5. Selling up this property and moving to another (as suggested by the previous poster) would leave you paying a fair whack in Stamp Duty Land Tax. That doesn't necessarily make it the wrong thing to do, but it's a huge transaction cost you need to be aware of.


It's impossible to give any sort of advice without knowing the answers to some of these questions but I hope that's food for thought. In general though, if it's rented out to decent tenants and isn't causing you any hassle, I would be tempted to stick with it. If it's empty and you're struggling to maintain it from overseas then an equity investment of one sort or another would probably reduce the hassle factor and be easier to track and monitor.
Topic Author
glorat
Posts: 678
Joined: Thu Apr 18, 2019 2:17 am

Re: Hedging the UK property market while non-resident

Post by glorat »

Thanks both for the replies! It seems there is little I can do to replicate if I sell, so if/when I do it, I'll just have to figure out how to invest as best as I can depending on circumstances.

As for CGT, you're totally right it is a personal circumstance issue and I've received professional advice on the topic and researched it thoroughly so I know where I stand. The result is simple - I'll definitely sell one day because it is too small to live in and I'll "likely" want to buy a place for my family if/when I return to the UK.

In case anyone is in a remotely similar situation, the CGT is such that there are 3 ways to calculate it and you get to choose the most favourable but the most important point is that although today there are several ways to get CGT tax relief, there is a government trend to take those reliefs away. For example, 2016 hit CGT on non-residents with a rule change and from 2020 the government removes Private Lettings relief that will add some 40k GBP to my taxable gain. I don't begrudge the government doing this because I think it is good policy even if it hits me personally. But it does put downwards pressure on house prices as it means people like me are more likely to sell now.

In the short term, property prices are doing so badly that my rental yield has gone up to a level where at a risk-adjusted level, it is as good as any other investment I have so I'll keep it for now. Let's hope Brexit clears up or else!
Post Reply