purchasing property in england and wales
CONTENTS Introduction The Buying Process Legal Building Warranties Exchange and Completion Process Acquisition Costs Operating Costs Arranging Mortgage Finance
Introduction Buying in England and Wales can appear to be a complicated process. In an effort to simplify things, the Southard Group has produced a guide to purchasing property in these markets. We hope this guide will answer the majority of your questions, however it is not meant to replace professional advice from a solicitor or accountant.
email@yourbusiness.com
the buying process: uk vs us Buyer Representation Unlike the United States, buyers are not represented in a transaction unless they instruct (hire) an agent to act as their Buying Agent. Agents do not share comission fees with other agents, and are thus inclined to only show you their own inventory.
No professional licensing Every US state requires a real estate license in order to become a real estate agent. In the UK, there is no licensing required for estate agents. and creates some interesting challenges (e.g. the level of professionalism can be quite low because there is no barrier to entry).
The Property Search In the US, the Multiple Listing Service (MLS) provides a single source of information for property listings, to include the property address and listing agent information. It is easy to do a search and see all the properties for sale in a designated area. Here in the UK, there is no common source for listings. There are several large online portals, and countless smaller ones. Unfortunately, addresses are not listed, and one must approach each agent company individually to learn about the property and whether it is still available. It is common for many properties that are listed to already be sold or under offer but still advertised in an effort to “lure” buyers to the agency.
No RESPA There is nothing similar to RESPA in the UK. We at Keller Williams believe we have a responsibility to our clients to explain how our professional relationships work. We are not legally required to disclose any joint ventures or marketing agreements, but we will. Transparency is a big part of our duty to our clients and does not exist on a large scale in the UK right now.
London has extremely active “Off Market” networkwhich relies on the buying agent’s active network to learn of and provide opportunities to view these unlisted but available properties.
The Closing Process In the US, your agents oversees the paperworkfrom contract to closing. Here in the UK, solicitors (lawyers) are heavily involved in every transaction. They are responsible for the paper work and closing process. Your agent here will oversee and effectively project manage the process.
LEGAL Title of a Property In England and Wales the title of a property refers to the legal rights that an owner has in a property. The two most common titles in England and Wales are freehold and leasehold titles, as defined by the Land Registration Act 2002. Freehold Title Freehold title is the ownership of land and all immovable objects attached to the land, for an inderinite term. This is typical of landed houses Leasehold Title Leasehold title is the ownership of temporary rights to a property, typically apartments. Generally leases are sold for 99, 125, 250 or 999 years. Properties are sold with leasehold title predominately for estate management reasons, but leaseholders are protected by law, and have the right to extend their leases, although this does involve costs. Owners of a leasehold property usually pay an annual ground rent to their landlord.
Building warranties If you are purchasing a new build property it is likely to have a ten-year building warranty covering structural defects from a provider such as the NHBC or Premiere guarantee. During the first two years, the builder is responsible for putting right any defects or damage caused by their failure to adhere to NHBC standards, and during years three to ten, the warranty provides insurance to cover the cost of putting right any damage caused by defects in specified parts of the home (usually the structural and weatherproofing parts) If you purchase a property off-plan, the building warranty may also include deposit protection, meaning your exchange deposit is protected should the developer become insolvent prior to completion. For more information please visit www.nhbc.co.uk or www.premierguarantee.co.uk
exchange and completion process Once the exchange has been agreed in principle, you will need to instruct a solicitor that conveyancing process. The solicitor will prepare a legal report on the property, agree the form of the contract and undertake full due diligence. This will include but is not limited to: ;; Ensuring that there are no issues with the title of the property ;; Checking the access to the property and that there are no issues with rights of way ;; Conducting local searches to determine whether there are conditions attached to the property such as tree preservation orders ;; Ensuring the property has the relevant planning consents
Once your solicitor is satisfied that the due diligence is complete, the exchange deposit (usually 10% of the purchase price) will be paid to the vendor’s solicitor. Your solicitor will exchange contracts with the seller’s solicitor, at which point you are legally committed to the purchase. Completion will take place on an agreed date after exchange, and you will pay the balance of the purchase price at this time. If you have exchanged contracts on a property that is still under construction, you will not complete the purchase until the property is ready for occupation.
ACQUISITION COSTS Acquisition costs are incurred at the point you purchase a property, in addition to the purchase price Stamp Duty Land Tax Stamp Duty Land Tax (SDLT) is a tax charged on land and property transactions in England and Wales. This tax is levied at different rates depending on the value of the land or property and its use. It is payable whether the property is freehold or leasehold, or for residential or non residential use. December 2014 witnessed an overhaul of the SDLT regulations. All property sales that exchanged after 4th December 2014 will become liable for charges levied at the new progressive SDLT rate. The new rates are progressive, which means that a stamp duty rate will only apply to the amount of the purchase price that falls within a particular SDLT Rate. This makes the tax similar to income tax. Purchase price/lease premium/transfer value
Rate paid on part of price within each band
Up to £ 125,000
0%
£125,001 - £250,000
2%
£250,000 - 925,000
5%
£925000 - £1.5M
10%
Over £1.5M
12%
hmrc.gov
*The existing GBP £2M threshold continues to apply, subject to exceptions, where contracts were entered into before the above date
Properties over £500,000 bought through a corporate body will be subject to a 15% SDLT rate. There are a number of exceptions but we do recommend you speak with a tax advisor or lawyer to see if you qualify.
Legal Fees Legal Fees cover the cost of hiring a solicitor to conduct the conveyancing on the purchase of your property. Each solicitor sets their own rates so there is no standard industry fee. If you are financing the purchase of your property you will also have to pay your lender’s legal fees. Mortgage Costs The mortgage costs include the arrangement fee charged by your lender and the cost of using a mortgage broker to source the best deal for you. Valuation Fee If you are financing the purchase of your property with a mortgage, your lender will require a bank valuation to be undertaken. The fee for this is depend ifent on the size of the property, however it is likely to be between £250 and £1,000 (plus VAT).
operating costs Council Tax Council tax is paid by the occupier. If the property is vacant (i.e. no tenant) if, you are still liable to pay the tax. The rate of council tax payable is dependent on the value of the property and the tax rate set by the Local Authority. In some instances, reductions may be available
Ground Rent Ground rent is payable by the owner if the property is owned under a leasehold title, and the amount payable will be specified in the lease. The cost of ground rent varies, but could be anywhere from a “peppercorn� (effectively nil) to several thousand pounds per year.
Service Charge If your property is an apartment, or it shares communal facilities with other properties, a service charge will be payable. The service charge is a monthly cost that pays for the upkeep of the building, maintenance of any communal facilities and building insurance. If it is a large apartment block, this may include the cost of paying an agent to manage the building. The details of what can and cannot be charged by the landlord will be specified in the lease. This is a cost that is paid by the owner of the property
Repairs and Maintenance Repairs and maintenance of a property are the responsibility of the owner. However, tenants may be liable for damages caused, barring normal wear and tear. Between tenants, the owner will need to ensure that the property is in a good condition for it to be relet, which will include repairs and regular redecoration
Annual Tax on Enveloped Dwellings The government introduced an annual levy on properties valued over £2,000,000 as of 30 April 2013. It is known as the Annual Tax on Enveloped Dwellings (ATED), previously the Annual Residential Property Tax. The ATED is payable on properties owned by British and offshore companies, as a property is said to be “enveloped” when it sits within a corporate wrapper. The property can be solely residential or a mixture of residential and commercial. The table below outlines the ATED levy amounts for 2014/2015 Property Value
Annual Levy
£ 2,000,001 - £5,000,000
£15,400
£5,000,001- £10,000,000
£35,000
£10,000,001 - £20,000,000
£71,850
Oer £20,000,000
£143,750
The 2014 UK Budget announced a reduction in the lower threshold of the ATED, from £2,000,001 to £500,001, to be introduced over two years as follows: From 1 April 2015 a new band will come into effect for properties with a value greater than £1M but not more than £2M. This new band will be subject to an annual charge of £7,000. For those persons who fall into this new threshold, there is a transitional rule whereby returns will be due by 1 Oct 2015 and payment by 31 Oct 2015. From 1 Apr 2016, a further new band will come into effect for properties with a value greater than £500,000 but not more than £1M. This new band will be subject to an annual charge of £3,500 For future years, these charges will be indexed in line with the previous September’s Consumer Price Index.
Arranging mortgage finance If you are buying a completed property it is advised that you contact a mortgage broker before you exchange contracts so that completion can take place promptly. As there is more time before completion with off-plan properties, you can apply for your mortgage after agreeing an offer to purchase, although this is typically done up to six months prior to completion. When you contact your mortgage broker they will request certain documents from you, including but not limited to the following: •proof of ID (passport, driving license) •proof of address (utility bill) •proof of income •historical income (tax returns) •property details - for example, size, location, and time to completion •estimation of loan value Using these details, the broker will be able to determine the best mortage for your needs.
Once the application is completed, the details are passed on to an underwriter who will assess the risk to the bank. A surveyor will also be instructed to determine the value of the property. If the application is approved, then a mortgage offer is issued. This is the set of terms at which the bank will lend. It outlines the mortgage term, maximum loan available, and the interest rate, and any variations thereof.
The bank then instructs its solicitors to begin the conveyancing process, following which the property owner’s solicitor issues the mortgage deed and legal charge, along with the lease for leasehold title properties. They then conduct lease-restriction and bankruptcy searches and ensure ground rent and service charges are correct. If everything is in order they request the funds from the bank. The purchaser will then pay the remaining completion funds as well as the stamp duty, with the solicitor taking responsibility for distributing the funds among the various closing parties. Post completion, the solicitor will register the property with the Land Registry. On the day of completion the new owner will receive the keys
End to End Property Service