Open for business A brief legal guide for investing in UK residential property
Contents Introduction
3
Interest and ownership
5
Structuring your investment
9
SPV vs buying direct
11
Tax considerations
14
Finance and funding
15
Understanding new builds
17
Zainab Dakhil Partner, Residential Property team
zainab.dakhil@roydswithyking.com
Introduction This guide focuses on key legal issues that property investors should consider when investing in the UK property market. Starting a property investment business can be an exciting time but purchasing property can be daunting, especially in the case of overseas investors. This simple guide aims to focus on the key legal issues that investors should consider when investing in the UK property market. Despite the uncertainties surrounding Brexit, UK real estate continues to present attractive opportunities for overseas and domestic investors. The UK property market has always been a dependable, certain and developed market for investors to expand into. Overseas investors typically target central London for the most dependable growth. However, as demand for London property outstrips availability, we are often seeing investors turning their attention to hubs outside the capital, including the M4 corridor, Bristol, Thames Valley and gateway, Cardiff, Leeds, Manchester and Liverpool. Often investment in these areas provides investors with greater yields. Our residential property teams are accredited under the Law Society’s Conveyancing Quality Scheme. There are various ways to structure and hold investment property in the UK. The Royds Withy King team have expertise in this area and provide bespoke advice to help guide you through the process. Our team are widely recognised for property, commercial and real estate work, including notable team and partner rankings in the independent Chambers and Partners and The Legal 500 directories. Our specialist lawyers advise buyers and sellers whether they are corporate organisations, trusts, individuals or overseas investors. We advise on a range of property and company transactions, always putting partner led, outstanding client service at the centre of what we do.
Our expert residential property and commercial teams can advise you on all aspects of property investment in the UK.
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Interest and ownership While the historic principles and background surrounding the legal systems of the UK may be daunting to overseas investors, Royds Withy King have a strong track record of providing clear and effective advice on the acquisition of UK property. Freehold ownership Having a freehold interest in property means having an outright ownership in the property which is unlimited in time. The absolute ownership extends to the property and land it stands on, providing the owner with full control over the land and property. It is generally the preferred option but it is not always available, particularly in some central London areas.
Leasehold ownership
Direct purchase of property
Public auctions
Ownership of the leasehold interest is a fixed period of ownership. The property will have a reversionary owner and the property will be returned to this owner at the end of the leasehold period. Leasehold interest can run for hundreds of years or for shorter term occupational interests. Long leasehold interests are generally held for between 125 and 999 years. Leaseholds often depend on a complex set of obligations and terms between the leasehold owner and the reversionary owner (landlord).
A person or company can purchase a freehold or leasehold interest. In the UK there is no restriction on overseas investors acquiring real estate. The purchase and sale of land in England and Wales is usually, a two step process: exchanging of contracts for the transaction and then completion of the transfer deed. The land is then transferred and the title passes to the buyer. This transfer is then registered at the Land Registry and the buyer will be listed as the title holder. The flow chart on the next page sets out the basic steps.
Properties may be sold at auction if they have been repossessed or the seller (or personal representatives) wishes to make a quick sale. This method has a higher risk for the buyer, who is committed to buy as soon as the hammer falls. Usually there is a legal pack prepared prior to the auction for the buyer’s lawyers to review, so that the buyer may make an informed decision. It is important for this pack to be reviewed by a qualified conveyancer before the auction.
Share sale Another way of acquiring real estate is to purchase the legal entity (e.g. a company) which owns the underlying property asset. The process is more complex than a direct purchase of the property and can cause greater risk to a buyer. The process will require more due diligence because the buyer will not only be purchasing the asset of the company (being the property) but also all the liabilities, including any tax liabilities of the company itself. Therefore, the purchase contract will need careful drafting and negotiating. Our corporate team have expertise in dealing with company sales and purchases. This is explored in detail in the Special Purpose Vehicle vs buying direct section on page 9.
STAGES INVOLVED
The basic steps of a sale / purchase
SALE
PURCHASE
Acceptance of offer
Acceptance of offer
• agree price from the buyer
• price agreed by the seller
Seller to:
Buyer to:
• • • •
appoint solicitors hand over deeds or give lender’s details complete forms list items included in sale and return to solicitors • deal with enquiries
• • • •
Seller’s solicitors to:
Buyer’s solicitors to:
• receive approved the contract from the buyer • send the same contract to the seller
• • • •
Seller to:
Buyer’s solicitors to:
• sign and return contract to the buyer’s solicitor • agree with the buyer and the other parties in the chain on a completion date
• sign the contract and the mortgage deed • provide the seller’s solicitor with the deposit • agree on a completion date with the seller and the other parties in the chain (if any)
appoint solicitors apply for mortgage pay solicitors’ search fees arrange for independent survey (optional)
receive contract bundle apply for searches investigate title and supporting documents approve and return the contract to the seller’s solicitors with any enquiries on the title
EXCHANGE CONTRACTS Seller’s solicitors to:
Buyer’s solicitor to:
• collate the figures • prepare a completion statement • send a completed document (transfer) to the seller for signature
• pass on the deposit to the seller’s solicitor
Seller to:
Buyer to:
• sign and return the transfer to the buyer’s solicitor • make arrangements to move
• sign the transfer and return to the seller’s solicitor
• apply for funds from the lender (if any) • prepare the pre-completion work including a completion statement
• make arrangements to move • place the building insurance on risk • arrange to pay the balance of funds
COMPLETION Seller to:
Buyer to:
• hand the keys over to the selling agents • read the meters
• collect the keys from the seller’s agents • read the meters
Structuring your investment
business owners.
There are a number of different investment structures which can be used to acquire and hold real estate investment in the UK. Which structure you opt for will depend on a number of factors including tax, management, funding and exit route.
Each year, companies must submit their accounts and a statement of company information (called a confirmation statement) to Companies House. The Articles of Association (governing document) is also available for the public to see. A limited company can have many shareholders. From a legal perspective, the financial liability of the shareholders is limited to the original amount invested and any unpaid shares they own.
Business may be run either in unincorporated or incorporated form. Unincorporated businesses require few – or even no - steps taken to be formed under law. By contrast, incorporated businesses must undergo a formal registration process before they can legally exist. Incorporated businesses are legal entities which have an existence separate from their owners. An unincorporated business such as a sole trader or partnership is usually treated as being the same as the owners with no separate legal status. Different types of investment structures are set out below. Individual ownership You can purchase the property in your individual name. You do not have to register with Companies House and submit company accounts each year. Buying property as a sole trader is much the same as buying as an individual. Advantages: Less regulation and less start up costs (other than the acquisition cost). Disadvantages: You would be personally liable for debts (unlimited liability)’and therefore it may be difficult to raise finance and obtain funding. Tax: Any rental income from the property will be subject to income tax and you will need to prepare and file a self assessment tax return annually to account for the income and pay any tax due to HMRC within the relevant deadlines. Partnership If you plan to purchase a property with one or more other people, this will create a legal partnership. The partners will generally have unlimited liability and will be jointly liable for any issues or debts. We would always recommend putting in place a written partnership agreement. Advantages: less regulation than a Limited Liability Partnership as can be seen below and flexibility to choose management structure. Partnerships are not required to disclose financial information. Disadvantages: You will be joint and severally liable for debts of the partnership and claims made against it. There is also the burden of having to file individual tax returns. Tax: Each partner must prepare and file a separate self assessment tax return annually and pay any taxes due to HMRC within the relevant deadlines. On the sale of the property, each partner will be subject to tax on any gains made on the sale. Private company (limited by shares) You could opt to establish a ‘Special Purchase Vehicle’ (SPV) by setting up a company to hold the property. This company will exist in its own right and have its own legal personality separate from the
You will need to incorporate your company which will be listed at Companies House (for companies in England or Wales). On registration, the company must have at least one director (dayto-day manager) and shareholder (owner). Even though the director and shareholder have different roles, they can be the same person.
This vehicle offers a range of methods for raising finance by grants, loans and equity. It also provides a mechanism for tax planning. Advantages: As a business owner (shareholder), you will have limited liability and transparency which makes it easier to raise finance. Limited liability is also viewed as being more credible and professional than a sole investor or partnership by banks and funders. Disadvantages: There is more bureaucracy and regulation to comply with. Directors must comply with certain duties, which can be onerous and a high level of public disclosure is required. Tax: The tax regime for companies is more favourable than for example to a partnership. Limited companies pay corporation tax on their net profits. Having said this, there are two layers of tax as any dividend paid by the company to the shareholders would be subject to income tax. On the sale of the company, if certain circumstances are met, the sellers may be able to apply for entrepreneurs relief to reduce the capital gains tax liability from 20% to 10%. Limited Liability Partnership (LLP) An LLP is a hybrid of a partnership and a company. Like a company, an LLP is a separate legal entity and has the same bureaucracy and regulations to comply with, which will include filing requirements at Companies House. The liabilities of the members are limited to the amount of money they have invested into the LLP. There is also no corporation tax to pay; tax is paid by the members on their earnings, like a partnership. LLPs are typically popular in the professional services sector (such as lawyers, accountants and surveyors). The main advantage of an LLP over a limited company is that the governing document (the LLP agreement) remains private. An LLP doesn’t have shareholders and directors; the day-to-day running of the LLP is managed by the members in accordance with the LLP agreement.
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Advantages: There is limited liability for business owners for all debts and as well as business owners being more likely to be able to raise finance. More likely to be able to raise finance. LLPs benefit from flexibility of management as they can decide how to operate under their LLP agreement (which remains private). Disadvantages: There is some bureaucracy and regulation to comply with. Tax: Members of the LLP pay income tax on their share of the profits of the LLP (the same as in an unincorporated partnership) so they have the advantage of being self-employed however, lose the benefits of any salaries or dividends that may come with a limited company.
Claus Andersen Partner, Corporate & Commercial team
claus.andersen@roydswithyking.com
Special Purpose Vehicle (SPV) vs buying direct Changes to the UK tax regime, especially the increases in Stamp Duty Land Tax (SDLT), has led to an increased number of buyers electing to purchase a holding company who owns the underlying property asset. Tax When buying a SPV, stamp duty on paper shares is payable instead of SDLT. The stamp duty rate is 0.5% for companies registered in England and Wales, while no stamp duty is payable on the purchase of shares in a foreign company. The stamp duty payable for shares can be considerably less that SDLT on a direct purchase of a property. For this reason, buying a holding company has become an attractive way to save money. Procedure for a corporate transaction Buying a company is a very different procedure than buying a property directly. When purchasing shares in a company, the buyer shall purchase all the assets and liabilities of the company. Therefore, the company will need to be investigated to identify its assets and liabilities; this is to check for financial, legal or commercial irregularities. This ‘due diligence’ process is conducted by professional advisors involving accountants, tax advisors and solicitors. The transaction may take more time and be more complicated than a usual property purchase. Detailed due diligence will need to be carried out on all aspects of the company including but not limited to the property, such as commercial aspects, financial accounts, employees etc. Financing the purchase of a company will often throw up extra hurdles to negotiate and add another layer of complexity. As lawyers, we thoroughly investigate the company, understanding its nature and structure, ownership and control position. We make sure the ‘true picture’ is clear, enabling you to make an informed decision to purchase. Buyer protections As well as the ‘due diligence’ process, there are a number of other buyer protections and mechanisms we can put in place to provide further comfort to the buyer. In an SPV transaction it is usual practice for the seller to provide warranties and indemnities in connection with the company. A warranty is a statement provided by the seller concerning (among other things) the business, property, other assets, employees, financial and tax position of the company. Warranties serve the dual purpose of providing the buyer with a remedy for breach of contract if a warranty is breached, therefore allowing adjustment post completion. Warranties also promote the flow of information regarding the affairs of the company from the seller to the buyer. Tax covenants are also included to provide the buyer with protection against an unexpected tax liability. The tax covenant will apportion the liability between the buyer and the seller of the company’s pre-completion tax liabilities.
John North Partner, Corporate & Commercial team
john.north@roydswithyking.com
Tax considerations Below is a general summary of the tax considerations when buying and disposing of property in the UK. Careful thought and expert tax advice should be sought when considering how to buy and hold UK property. There are a number of taxes to consider. SPV/corporate vehicles no longer have the same tax treatment they once had, so they might not be as favourable as before but it can still be a good structure in the right circumstances. It is important to understand the range of tax issues on purchase, sale or when passing on property portfolios to the next generation. Our Private Client team can provide advice in relation to individual taxation and we work with tax specialists on the corporate tax issues. Stamp Duty Land Tax (SDLT): SDLT is charged on a progressive basis on the transfer of UK property and on most lease premiums. Companies can expect to pay up to 15% (on £500k+ property value) for residential properties. While an individual can expect to pay up to (depending on the transaction value) 12% on residential property value. Tax on corporates owning UK residential property: The Annual Tax on Enveloped Dwellings is payable by companies or collective investment vehicles (and partnerships where a partner is also a company) on high value residential property. The annual charge (for the current tax year) increases on a sliding scale from £3,650 per annum for properties worth £500k-£1m up to £232,350 per annum for properties worth over £20m. Taxation of capital gains on UK land: A company that disposes of UK land (residential or commercial property) will be subject to tax on any gains it makes on the sale of the property. Individuals subject to capital gains tax and corporate entities will also be subject to corporation tax. It is important to note that indirect disposals i.e. disposals of a significant interest (usually shares) in a company which ultimately derives substantial value from UK land will also trigger a tax liability in relation to the underlying gains. There are various reliefs available provided the criteria are met – please contact the Real Estate team for more details.
Zainab Dakhil Partner, Residential Property team
zainab.dakhil@roydswithyking.com
Finance and funding A buyer will need to consider how it will finance the purchase of the property. The points below highlight some key considerations when obtaining finance. The easiest way to finance a property is in cash. If external funding is required, the most common way to raise finance in the UK is to borrow money from a bank or other funder. We work with a number of banks and brokers who can provide buyers with the necessary contacts to get funding in place. Our Financial Services sector is made up of finance specialists familiar with the many different types of debt and equity funding arrangements. We can be part of your trusted team, on hand to provide expert and practical advice when you need it. Security The lender will almost always require security; they can request a range of security but the most common way is by legal mortgage over the property. This is to protect the loan amount and all sums due under the loan agreement including interest, enforcement costs and the lender’s costs. The lender may be able to take control of the property if the borrower defaults. The lender will also usually require a first ranking security over the property and/or the SPV, some security arrangements must be registered with the Land Registry and
Companies House within the prescribed period. Interest rate risks
The actual acquisition cost
When borrowing a substantial amount of money it is important to bear in mind interest rate changes. Rates are usually agreed by reference to a percentage above a floating central base rate such as LIBOR or EURIBOR. It is possible to protect against these risks by agreeing fixed interest periods.
As well as a the property price, there are several other costs that may be incurred when purchasing property in the UK:
Other security arrangements In addition to the mortgage above, the lender may require further security by way of a floating charge, share pledge, corporate guarantee, personal guarantee or inter-creditor deed. Our banking team have experience in dealing with various security documents and are always willing to talk through the terms of the relevant security documents when financing or refinancing a property. Taxation on security creation No SDLT or stamp duty is payable on the creation of a security. The mortgage ‘charge’ created, against a company, must be registered at Companies House within 21 days. There is no requirement for security against non-UK companies to be registered in the UK, however, we would liaise with local lawyers to check whether the registration requirements in the company’s local jurisdiction is required.
• search fees - this is part of the legal due diligence and can highlight any potential problems with the property at an early stage • Land Registry fees - registration of the transfer between the buyer and the seller • building surveyor fees - while not mandatory it is advisable to appoint a surveyor to establish the condition and state of the property • legal fees - each party will usually be responsible for its own costs. If obtaining finance, also expect to pay the banks legal fees • valuation fee - for professional valuation of the property’s worth • bank fees - if the property is acquired with the benefit of finance • Companies House fees - if applicable and, • SDLT / stamp duty – see tax section on page 10.
Bharti Moore Senior Associate, Corporate & Commercial team bharti.moore@roydswithyking.com
Understanding new builds Buying a newly built property from a house builder or housing association is often seen as an advantageous way of avoiding those ‘second hand’ property problems. We have a successful track record of acting for purchasers of new property; we know what questions to ask to discover any potential problems. We have experience of negotiating retentions and agreeing practical solutions to make sure you move when you have planned to do so.
Advantages of new builds • Low running costs as newly built homes are often better insulated and have modern efficient boilers. • Security and safety conscious homes mean they often include modern fire alarms, fire doors, fire retardant materials as well as security locks, security lighting and burglar alarms as standard. • Specifications are usually high, house builders often include high-spec appliances and white goods such as fridgefreezers, washing machines and ovens in the asking price. • Sometimes there are financial incentives with some builders offering to pay your stamp duty or cash back after you purchase (these should be disclosed to your mortgage lender as this could effect your mortgage offer). • You may avoid a property chain meaning you don’t have to wait for the seller to secure the purchase of their onward property. Many builders also consider taking any other property you may have in part-exchange (although it is unlikely you will receive the full market value but you do avoid delays). • Benefit from a 10 year new home guarantee.
It’s not all good news – be wary of the following: • New properties often have much smaller gardens than second-hand properties because the builder tries to fit as many properties as possible on one piece of land. • Modern building materials can be cheaper and quicker options for builders. For example plasterboard is not as effective as a solid wall at preventing sound travelling through from next door. • The quality of soil in new gardens is often poor, you may need to invest time and money in the future to rectify ‘new look’ lawns. • The quality of the finish in new homes is sometimes spoilt by the building being rushed to complete the new property, particularly at the end of the financial year, resulting in defects. However, many will be covered by the 10 year guarantee (see below).
National House Building Council (NHBC) and other insurance cover When buying a new property, always ask about additional insurance cover being offered by the builder. Most lenders will require this as a condition of your mortgage. This is a scheme of insurance whereby certain defects after completion will be insured should the builder fail to put them right, or go into liquidation. Please remember that the builder is not responsible for items such as normal shrinkage or normal condensation due to the property ‘drying out’, general wear and tear or damage arising from failure to maintain the property. The type of cover can vary between insurers but the cover currently provided by NHBC falls into three areas; before completion, the first two years and year three to ten.
Cover before completion If, due to insolvency or fraud, the builder does not start building or converting your home, or fails to finish it, the insurer will reimburse money you have paid the builder for the home where the money cannot be recovered from them. If the property is not finished, the insurer can arrange for the property to be finished in accordance with their policy standards. The maximum amount the insurer will usually pay is 10% of the original purchase price or £100,000 (whichever is less).
Cover during the first 2 years If you discover any defects or damage in the first two years from the date of your insurance certificate, you must report these to the builder. The builder must put right any defect or damage to your home, caused by not building to NHBC standards, within a reasonable timescale. If the builder is notified of defects or damage within this period of cover, they remain responsible to put the problem right, even after this period of cover has expired.
NHBC resolution service If the builder fails to put right the problems, NHBC will usually offer a resolution service, which aims to resolve disputes between you and the builder. Under the Resolution Service, the NHBC can also help arrange the work needed to put things right if the builder fails to do so. If the builder is insolvent, then the NHBC insure his obligations. The NHBC can only help with disputes about defects or damage to your home. They will not be able to help you if you have a dispute about financial or contractual matters.
Cover in years three to ten During years three to ten, NHBC provides direct insurance cover, and you should contact the NHBC rather than the builder if you need to make a claim. Generally, the insurance cover NHBC or other insurers provide will depend on the type of policy you have. It is therefore important that you read your own documents for specific information.
Andrew Chalk Partner, Residential Property team
andrew.chalk@roydswithyking.com
roydswithyking.com @RWK_PWealth
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