British people are known for buying property in other European countries like Spain and France for a plethora of reasons. Some want to be as close as possible to a selection of the world’s finest wines in Bordeaux or Alsace. Others are happy to trade the often-dreadful British weather for the rocky backdrop and nightlife that Ibiza is famous for.
The process of foreigners buying property across Europe was made simple thanks to arrangements under the European Union. But now that Brexit is signed into law and became official in January 2020, many people are unsure if the foreign real estate environment will be as friendly to invest in.
Travel Changes In 2021
British holiday-goers will see zero near-term change to how they travel across Europe due to a pre-agreed transition period prior to Brexit becoming official. However, this will expire at the end of 2020 at which point there will likely be changes to how British people travel.
As part of some of the pre-Brexit negotiations, all parties agreed British people won’t need to acquire a visa to enter Europe, and vice-versa. The most likely outcome will consist of British people requiring a European Travel Information and Authorisation Scheme (ETIAS). The good news: this will likely cost a mere seven euros for a pre-travel authorization period of three years and this documentation can be applied for online.
Now that it is abundantly clear British people will be able to freely travel across Europe, let’s explore if a holiday home represents a suitable investment.
How To Exchange Pounds To Buy A Home
British residents who earn their living in pounds will need to transfer their money to euros if they are buying a holiday home inside the Eurozone. Most foreign sellers would be happy to accept pounds for a real estate transaction but at a hefty premium.
Online platforms like XE.com specialises in property purchases and can handle the first step of buying a home: exchanging British pounds for euros. These types of platforms are also known for offering competitive exchange rates, especially on six- or seven-digit transactions. Consumers who exchange pounds for euros through online money transfer services could often do so below the interbank rate. The ability to save even a fraction of a pound can add up to a lot of money in a multi-million-pound transaction.
Online money exchange platforms surged in popularity in the early 2010s as consumers grew tired of the old and outdated traditional banking system known for adding extra fees. XE.com alone handles more than $75 billion in transactions throughout the world.
The process of transferring 1 million pounds to euros is as simple and straightforward as transferring 100 pounds. A client can set up an online account with one or several money transfer services and have it linked to a bank account of their choice. The client also needs to establish an end destination for the euros. If they have a bank account in their own name in France or elsewhere, the funds can end up there. Alternatively, the client can instruct the money transfer service to send euros to a notary or directly to the seller of a home.
The entire process from start to finish can be completed in around four business days. But the ultimate length could be delayed a few days if an intermediary bank is involved in the process behind the scenes.
The opposite side of the transaction remains the same. Suppose a holiday homeowner decides to rent their property when it is not in use and collects revenue in euros. Online money transfer services can just as easily accept euros to be converted to pounds so it can be deposited directly to a British bank, also at a rate that is likely more competitive than traditional banks.
Importance Of Money Transfer Services
As such, the money transfer companies thrive off thousands of real estate transactions occurring each year. From April 2017 to April 2018, British people bought 8,500 units in Spain alone. One out of five prime real estate purchases in France is conducted by British people. Nearly every single one of these transactions requires the use of money transfer services with the rare exception occurring when a British person already derives their income in euros.
In the event that foreign real estate deals involving British people slow down in the post-Brexit world, the financial impact on the money transfer industry could be large. Since money transfer services earn themselves a commission on each exchange, the industry could stand to lose millions of pounds. The opposite holds true that if vacation buying activity increases, money transfer services would see more business and can potentially pass along incremental savings to customers.
Regulatory Changes Unlikely
Spain and most European countries have minimal restrictions on foreign ownership as it represents a form of outside investment in the country. But what happens in 2021 and beyond remains a giant question mark.
If the British government and its European counterparts sign a tax treaty it will likely signal the current status quo will remain unchanged. The U.K. and Spain already have tax treaties that cover income tax, but there is no tax treaty-related to inheritance tax,according to Keystone Law.However, the U.K. government will factor into account any inheritance taxes paid to Spain when it comes time to filing with HMRC, the U.K. department responsible for the collection of taxes.
If there is no signed tax treaty on the books, British citizens may be subject to identical taxes other non-EU nationals pay, including income tax. This would need to be factored into any and every investment decision made ahead of any sort of confirmation a treaty will be enacted.
How To Make A Profit
Generally speaking, a British investor who bought a home in Europe can realize a profit in one of two ways. First, and perhaps most obvious, the value of real estate appreciates over time.
France, in particular, is known for soaring real estate prices as demand for homes far outpaces the available supply. Data fromParis’ association of notariesshows the average selling price in the most sought after region, the Sixth Arrondissement, rose from 11,300 euros a square meter in 2015 to 14,000 euros by January 2019. Similar data from what is considered to be the most affordable region, the 19th Arrondissement, the average sale price jumped from 6,500 euros a square meter to 8,350 euros a square meter over the same time period.
Investors can also walk away from a real estate transaction with a profit if the British pound appreciated in value, or the euro depreciates. This is based on simple math: suppose a British investor paid 1 million pounds (1.203 million euro) for a house in France. If the same house is sold for the exact same 1.203 million euro but the British pound appreciates by 10%, well, their 1.203 million euros will be worth 1.1 million pounds.
The Bottom Line
Investing in foreign real estate or buying foreign property has an intangible value attached to it. Families will make long-lasting memories in some of the most beautiful regions of the world. And the best part is they can claim to do so in their own home — not a hotel or someone else’s property that was borrowed for a weekend.
So while Brexit does bring some uncertainty in 2021 and beyond, the current worst-case scenario consists of British people having to sign up for a few forms and wait in a non-EU passport line. But this can all change rapidly and anyone buying an investment home will need to pay close attention to any new developments.