Investing in the US

When the USA pops up in conversation, there is a high likelihood it will be in relation to one of the two hot topics of the moment: the ongoing property meltdown or the strength of the pound against the dollar

Brits are well known for their love affair with Floridian homes, whether as a retirement option or simply as an investment property which doubles as a holiday home. Keen investors should bear in mind though that however attractive this may seem, property prices are continuing to suffer across the whole of the United States with no sign of letting up just yet.

Across the pond, property prices are currently languishing at the worst levels for the past 40 years as supply continues to outstrip demand. Today’s promising exchange rates might fool you into thinking that you will be able to get more for your money, but experts are advising people to carry on treading carefully whilst the current climate still promotes negative growth on any property investment.

Expats looking to remortgage should also be warned that US home loans aren’t faring any better. In the months after 9/11, interest rates were reduced to 1 per cent but then increased for a consecutive 17 times to hit their current level – prompting announcements that repossession proceedings had begun against more than one in every 200 borrowers.
David Austin Managing Director of Property for Life, a UK-based investment consultancy says, “Despite recent government statistics suggesting that the market may have finished its freefall, investors should not be hasty. Government figures, released on 26 April, report a 2.6% rise in sales of new homes in March, but experts insist this rise cannot be seen as the end of continuous months of falling sales.”

“At Property for Life we are advising investors to continue to treat the US market very carefully. Long-term investors, who got in before the crash, should try to sit tight on their investment and ride out the storm - after all this crash is not a symptom of too much supply, as in the Spanish market, but of a reckless availability of cheap credit.

If this wasn’t enough, overseas investors also need to watch out for the tax implications incurred from their US investments. Income tax and Capital Gains Tax (CGT) might indeed be elevated for non-residents, but the amounts are far less than those you are looking to pay in Inheritance Tax (IHT).

Even though rental yields in Florida can hit £150 per day in peak season, the income is in line for a standard withholding rate of tax at around 30 per cent. In addition, you will be liable to pay between 8-15 per cent CGT when selling up, dependant on the gain. The catch with this is that a sum is withheld by purchaser or agent at the point of sale, which they then pay the US Inland Revenue. However, homeowners can make a claim against this if the amount withheld exceeds the total tax payable.

It is where IHT comes into play that taxation becomes even trickier. There is a generous exemption for US citizens, but when it comes to those domiciled overseas the lower limit only reaches as far as $60,000 before the property becomes taxable. Some might see a clever way around this by gifting their property, but this actually throws up more problems by way of a wholly separate gift tax.

Seeking specialist advice concerning offshore planning is the best way forward for expats who already own property and are concerned about the implications it could have upon their heirs.

Dollar vs Pound

Earlier this month, the pound topped the $2.01 dollar mark in trading, hitting a 26 year high. But as the old saying goes, what goes up must inevitable come back down again.

The last time the pound traded consistently above this $2 mark was in 1975, and the last time it hit a level this high was in June 1981. When the pound broke through the $2 barrier, it was the first time it had done so since 8 September 1992. This came about thanks to the pound's link with the Deutsche Mark after the Exchange Rate Mechanism (ERM) was established in 1990.

However this was short lived and eight days later on Black Wednesday the heavy selling of the pound for foreign currencies saw the value drop and the pound crash out of the ERM – by Christmas the value had fallen to a mere $1.50. Since that point, it has moved close to the $2 mark, but always dropped off before it topped it.

Austin said: “We suggest investors look towards those economies whose currency is pegged to the dollar. A good example is the Bahamas – the property market there is faring much better, and as the Bahamas Dollar is linked to the US Dollar, the pound now goes twice as far there. The exchange rate has effectively reduced the price by more than 30 per cent, so it is easy to see why there’s so much interest in them.”

The US is the biggest market for British exports, the third largest supplier of imports and the largest foreign investor. On the flipside, the US is the most popular destination for Britons to invest and our third most popular travel destination.

Michael Gordon, chief investment officer at Fidelity International, said: “There appears to be very little chance of recession in the UK this year or next. Inflation is much lower than in the 1970s or late 1980s when it was out of control. The price of oil, a significant driver of inflation, has fallen sharply since last summer.

Inflation has taken its toll though, Gordon continues: “If the exchange rates since June 1981 are adjusted to take account of the relative differences in the two countries’ rate of inflation, then sterling really is worth only 1.60 dollars in terms of purchasing power. Twenty six years ago, your pound would have bought you $2 of goods; today your pound would buy only $1.60 of those same goods, adjusted for inflation.”