Property investment: UK transaction fees, taxes stack up very well against SA

LONDON — London-based property investment facilitator Arran Kerkvliet has been fielding a lot of calls lately from his compatriots back in South Africa. With the Rand having bounced to relative strength and unabated political turbulence, SA demand for offshore safe havens has rarely been higher. Kerkvliet specialises in high yielding niches which fit snugly into the SA R1m a year “no questions asked” exchange control allowance. In this special podcast he takes a closer look at two areas investors ask about most – tax and transaction fees – and concludes that in this respect the UK compares rather favourably with SA. – Alec Hogg

I’m here with Arran Kerkvliet who is the CEO of One Touch Property. We’re in the middle of London Arran, and since our last discussion, there’s been plenty of interest from South Africans and investing in UK property but also, some questions about the real costs of it. Let’s just start off with somebody sitting with South African Rands. How can they get into the UK market or buy property in the UK?

The property classes that we have are mainly commercial property investments and they start from around £53,000, which is around R890,000 and ranges up to about £85,000 so since the annual travel allowance for South Africans is around one-million per year and the majority of the properties are under that threshold (and they’re off-plan investments – over six months), it’s quite easy for investors to access that. A number of our clients actually, purchase multiple units in different family members names, as long as they’re over the age of 18, and that way make the most use of this annual allowance.

Arran Kerkvliet

Let’s just unpack that again. So, it’s R1m a year that you can invest without having to ask anybody any questions and you can do that for different members of the family?

Yes, that’s right. R1m a year. A lot of the investors would come over for a holiday and just deposit some of the money into the accounts but you can actually set up the transfers via a foreign exchange company and we’ve got some partners that can assist with that.

What about the currency risk though?

Well, the exchange rates have been very volatile. If you look over the last 2 years the ZAR has been as weak as R24.50 to the Pound and as strong as R15.50 to the Pound. That’s from both sides and obviously, we’ve got enough challenges there, which you people are all too familiar with but in the UK, there’s been a degree of uncertainty with regards to Brexit. In real terms, if people are trying to secure assets to pay for their child, for instance, studying overseas. They’d want to have the income fixed in a Pound amount so, that they know that they can cover the costs.

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What we’re finding is that a lot of people are asking if they’re going to secure a property off-plan how they can make stage payments so, we do have some partners who could assist with that. In terms of currency hedging whereby, you could agree a forward purchase price, (a spot price) at an agreed exchange rate and that any time in the future, which is for an unlimited period, you’d be able to secure that rate. That’s something that mitigates the risk and the volatility in the currency market.

That’s pretty attractive particularly, with the Pound now round about R16.75 and, as you said earlier, it’s gone as R24.00 to the Pound. Do you find that this is something that your clients are taking more advantage of?

Yes, certainly. At the moment, it’s not just our clients, which are mainly retail individual buyers but if you looked at most of the assets that have been snapped up in the UK, it’s been Italian pension funds and the Chinese bought the Walkie-Talkie Building, so from that perspective, a lot of the countries are looking at the temporary weakness of the Pound to be a buying opportunity and buying real assets, such as property investments. It secures the immediate discount in relative terms.

So, the benefit is that although most of our investments are offering an 8% net return up to through to about a 10% return. If you consider the currency valuation where the Rand could potentially, lose up to 5% per annum, according to currency experts. In real terms that would mean a much higher return for you, whether you’re deciding to keep your money for your retirement nest-egg in SA or whether you’re going to be paying for your children’s studies of if you move abroad.

It’s an interesting concept. I was talking to a top asset manager recently, a South African who works here, out of the UK. He says that South Africans get the value concept. They understand long-term investments. They can see, for instance that the Pound is particularly weak at the moment, relative to their currency. Has that given a kicker, we’ll leave politics aside for the moment, but just the value aspect from the UK perspective. Has that given a kicker to investing here by South Africans?

Yes, certainly and over the last 4 years there’s been a real increase in the amount of people that have been investing and I think where it was about 5 years ago, where it was R12.00 to the Pound. People were thinking, I don’t know if I really want to invest but as they’ve seen the currency fluctuate up to R24.00, they’ve realised it really is a buying opportunity now and really moving forward with a great level of interest. I’d say that over the last year we’ve sold about 200 properties to South Africans and they’re looking to just make benefit of the currency fluctuation.

So, what about the costs involved in acquiring those properties? How does that compare with buying property in SA?

Well, I suppose one of the things you’ve got is the stamp duty, which is like the transfer duty in SA. But the good news is that we source commercial property investments, like student property and care home investments, such as luxury retirement homes, and these don’t attract the residential stamp duties. So, seeing as they’re under £150,000 that you won’t pay any of the stamp duty and if it is a residential property, where we also source high capital growth properties in Manchester and so forth. Those would typically have 1% stamp duty, over £125,000 and then after £250,000 it would go to 2%. Most of the South African investors tend to still operate within that price range so, it’s really not as dear, as compared to SA. Then you’d have your normal acquisition costs, which are your solicitor’s fees, which are typically between £750 to £1,000.

That’s all the legal fees taken care of?

Yes, that’s right. That’s all the legal fees so, it’s quite a straightforward acquisition and that would normally take within about 28 days and the processes, because a lot of the properties are off plan, people reserve a property with £2,500 reservation fee. Then they receive their documentation, which they’d have to go through the FICA documentation, which we call Anti Money Laundering over here. Once they’ve passed the Anti Money Laundering process they’d receive the full contract packs. They could ask the solicitors any questions that they have and then they’d transfer the balance. Well, the initial deposit, which is around 30 – 40% of the purchase price. Then they’d make staged payments throughout the 6 – 12 months build cycle.

It sounds to me like the R1m is actually going to go quite far in that kind of investment?

Yes, certainly because you only have to put a smaller deposit down. With that R1m you could pay the initial deposit on 2 properties and in that way, when the next year’s annual travel allowance kicks in, you’ve got a further R1m per person. There are obviously, additional costs that people are looking to structure their investments on a tax efficient manner but we’re finding that a lot of people just want to purchase one or two properties. In that instance, if they purchase them in their individual names they will still be under the tax threshold, which is a personal allowance, which each investor gets (even if they’re an overseas investor) which is £11,500, where that income is tax free.

Sorry, just explain that so, even if you’re a South African investing in a property in the UK the first £11,500 is tax free, you don’t pay tax on it?

That’s correct.

That’s on the income that you receive?

Yes, that’s right. Obviously, if the money is being brought back to SA, I’m not sure what people’s’ personal situation is over there. They’d have to pay tax in SA if they’re bringing it back but the first £11,500, particularly if they’re keeping it here for their kids to study and everything like that that isn’t going to be taxable at all. So, that £11,500 is called a personal tax threshold so, just like myself living in the UK. The first £11,500 I don’t pay income tax on and they’re not discriminatory so, everyone has their access to that, that £11,500 income threshold.

Do you have to register here, as a taxpayer to get it?

No, you simply would fill in a NRL1 form, which is downloadable from the government website but all of that is taken care of by One Touch Property. We’ll put you in contact with the correct management agents, who really facilitate that hands-off investment for you. A lot of people just simply want to invest. It’s kind of like a box that makes them money and that’s why the commercial properties, where everything is taken care of, of if there’s a lease in place and they’ve just received their income. All they’d need to do is fill in the NRL form and then simply download and fill in an annual tax return, which is not a complicated document. It can be done online.

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So, from your perspective, what you’re doing is you’re offering that full service but not doing it necessarily yourself, you’re not a tax expert of a foreign exchange expert but you will find the right people that you’ve worked with in the past, that you bring in to help?

Yes, that’s correct. One Touch Property are a property sourcing agency. We provide property advice and resource high yielding projects from reliable developers that we’ve worked with in the past. We won Student Property Broker of the Year in 2017, and what we try and do is make the choices easy for people, in terms of us being a single point of contact. For sure, you’ll have other management companies, who actually take care of the day-to-day activities at the property. Ensuring that you have tenants, the cleaning of the properties, where it’s serviced apartments. Then obviously, the developers but the good news is, is that you’ll have an investment consultant, who you can contact at any time and they’ll either point you in the right direction or contact the agency themselves. And because people like to work with us and we help them to build a property portfolio over time whereby, we could help them. If we’re helping them over a 5-year period, we get quite close relationships and we do come to SA every 3 months to meet with people. So, from that perspective we can also help you with when is the right time to sell and to help you have a creative, more diversified portfolio and part of that is lending a helping where we can.

So, I take my R1m a year that I’m allowed to invest offshore without going through exchange control approval. I come to your website, I decide that I want to get involved in a new care home that you’re putting together. I give you the £2,500 commitment fee. I pay the lawyer £750. Once that comes from there, what is the process?

Once you’re happy with all the legal documentation you would exchange contracts, which is almost as comparable to taking transfer (in SA). So, at that point, even though the development or your property is still being refurbished, where we’ve got buildings that are still busy getting converted or if it’s an off-plan project. You actually, own that property and the developer has got a legal obligation to complete it to the standard that was in the contract. So, you’d receive an interest coupon on that money that you’ve paid down, which is typically 5% during construction and we know that South Africans normally like ones that are shorter term to completion so 3 – 6 months. Then once the property is completed a surveyor would go in and inspect the property and the architect would sign it off and you would receive a New Home Builder’s Certificate, similar to you would have in SA. At that point, you would then pay the balance of the fees to the solicitor. They would then transfer and, at that point, as you say in SA, take occupation. The world for it over is completion and 3 months thereafter, in most instances, you receive your quarterly income payment. Some of our other investments have monthly payments but with the foreign exchange it’s sometimes better just to take a quarterly payment, to reduce costs.

So, the tax issue is you’d declare it in your normal tax return in SA but there’s no withholding tax in the UK?

Yes, that’s correct. As long as it is under the £11,500 but, as an example, if it was £15,000 you would only pay 20% on the difference, so £11,500, you’re looking at £3,500 so, you basically pay £700 on that basis. Most of the investors we have, when they purchase two of their properties, they’re under that threshold so, there’s no additional tax that they need to pay.

And there’s no stamp duty, in other words no transfer duty so, you avoid that little complication as well. When you do want to sell the property eventually, how does that work?

You’d advise us that you want to sell and of course, you have the option to sell through local estate agents as well but we’re geared towards selling investment property. We’re not an estate agent. We’re an investment property broker so, we’ve got 26 thousand investors on our database and ongoing marketing so, if you chose to sell you’d let us know. We’d take your instruction and then start advertising it and we normally find a buyer within a 3 – 4 week period. Then you’d have to go through the normal legal process, which can take between 6 weeks and 2 months. At that stage, you’d receive your property capital value plus the upside, and in most cases, we find that with the student property we’re getting about a 5% capital growth per annum because as the income payments are going up, (as the yield is going up) the new buyer would purchase it back from you at a slightly lower yield than what you’re actually receiving. Say for instance, I’ve got a student property I purchased in 2012, with an 8% yield, and it’s now yielding 11%. So, I could then go and sell it off at the market rate to another investor at 8% or even 7%, if they like that location. Then on that basis, you’d share in that upside like the capitalisation pricing model.

What about capital gains tax? That’s the one part of tax we haven’t touched on?

I’m not an expert but obviously, through our transactions we have come across this quite regularly. If it’s an individual they have an income tax threshold on capital gain at £11,000 per annum but that’s increasing each year as well. How to explain that is on a £50,000 property if you made 20% growth on that there would only be £10,000 capital gain. So, you’d still be underneath that threshold and the beauty is that most people, because they’re individual assets, you could sell them off in different years so, that each year you can make use of the capital gains threshold so, it is quite attractive. There are some people who get involved on a bigger basis, whereby they might go and purchase a number of properties. Then in that way we can actually, introduce them to companies like First National Bank’s trustees, who can structure an offshore facility. This works quite well with people who are wanting to live in SA because if you’re bringing the money back to SA, you might need to consider the tax implications there. The way that they’d stagger it, in that instance, is that they would have a loan from SA to the trust company and that way that the money that’s being paid back is actually capital being repaid rather than the interest to income. For that way, if you purchase a property, and you’re thinking about retiring, and you say to yourself, well, here’s a R1m – that R1m that’s being paid back is not profit. Only when you start, 5 years’ down the line, after that capital has been repaid, or even longer. Then only at that stage would you really need to start paying income tax on it so, they’re very clever in the way they structure it and I understand they could charge a slight coupon as well so, if you’re loaning money to the trust and the yield is 8%, but then you charge an interest fee of 4%, you’re actually making 12%. Then, going back to what we said about the currency, you can have a 20% shift that way. Then all of a sudden, you’re making 15% in real terms. That’s quite a convincing reason to invest (in UK property).

Arran so, when are you going to be in SA next?

We’re going out on the 18th September – we’re going to be in Durban and Pietermaritzburg for a couple of a days, and then down to Cape Town and Johannesburg so, we’ll be there until the 29th September. We’re going to be holding one-to-one consultations and a couple of presentations. If people come onto our website Onetouchinvestments.co.uk – they could book a consultation or potentially, attend one of our conferences there.

Arran Kerkvliet is the chief executive of One Touch Investment and this special podcast was brought to you by One Touch Investment.

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