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INTRODUCTION
Buying in England and Wales can appear to be a complicated process. To simplify things, IP Global has produced a guide to investing in 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, accountant or tax advisor.
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 indefinite 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 predominantly 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 and a management charge.
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 Premier 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 http://www.nhbc.co.uk or http://www.premierguarantee.co.uk.
Once the purchase has been agreed in principle, you will need to instruct a solicitor to begin the conveyancing process.
The solicitor will prepare a legal report on the property, agree on 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 the 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 levied at different rates depending on the value of the land or property and its use.
From December 2014 the method for calculating SDLT for the purchase of residential property changed to a progressive system. This means that the rate only applies to the amount of the purchase price that falls within a particular band.
From 1 April 2016 a further 3% surcharge, on top of the existing progressive rate, was introduced for the purchase of additional residential properties, such as buy-to-let properties and second homes. Even if you own a property outside of the UK then this will count as your first residence and subsequent purchases in the UK will attract the surcharge.
Those exempt include those persons purchasing their first property or homeowners moving from one main residence to another. This 3% levy applies to relevant purchases that exchanged after 25 November 2015 and complete on or after 1 April 2016.
The table below outlines how the current SLDT regime impacts UK investors:
| Rate on band for | Rate on band for buy-to-let | |
| Purchase price | first-time-buyers | or second property investors |
| (progressive rate only) | (including additional 3% levy) | |
| Up to GBP40,000 | 0% | 0% |
| GBP40,0001 – GBP125,000 | 0% | 3% |
| GBP125,001 – GBP250,000 | 2% | 5% |
| GBP250,001 – GBP925,000 | 5% | 8% |
| GBP925,001 – GBP1.5 million | 10% | 13% |
| Above GBP1.5 million | 12% | 15% |
f you purchase the property directly into a company and it is not caught under the ATED legislation then the same rates of tax will apply. We recommend that you speak with a tax advisor or lawyer to understand more about exemptions.
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 with a mortgage, 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 dependent on the size of the property, however, it is likely to be between GBP250 and GBP1,000 (plus VAT).
Home Report
Regarding second-hand sales, you are legally obliged to provide a “home report”. The report is a seller-funded evaluation of the marketed property which details the valuation figure and the general condition of the property. A lender may accept the home report for valuation purposes.
Furniture Pack
In order to maximise rental income, it is recommended that you furnish your apartment. The cost of furnishing depends on the size of the apartment and the quality of the furniture, but can be estimated at between GBP5,500 and GBP6,000 (plus VAT) for a one-bed apartment and over GBP7,500 (plus VAT) for a two-bed apartment. If you are targeting your apartment at the corporate lettings market, the cost of furnishing may be higher.
OPERATING COSTS
Council Tax
Council tax is paid by the occupier. However, if the property is vacant then the owner is responsible and liable to pay council 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.
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.
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 nominal amount to several thousand pounds per year.
Repairs and Maintenance
Repairs and maintenance of a property are the responsibility of the owner. However, tenants may be liable for damage 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.
Management Fees
These fees are charged by a lettings and management agency for their services, including locating a tenant and contract renewal.
Annual Tax on Enveloped Dwellings
As a consequence of owning UK residential property through a company, there may be an obligation to pay the Annual Tax on Enveloped Dwellings (ATED). From 1 April 2016 a further new band came into effect for properties valued above GBP500,000 but below GBP1 million. For future years these charges will be indexed in line with the previous September’s Consumer Price Index.
The table below outlines the ATED levy amounts for 2017 and 2018.
| Property Value | Annual Levy | |||
| For the year ended | For the tax year ended | |||
| 5 April 2017 | 5 April 2018 | |||
| Up to GBP500,000 | NIL | NIL | ||
| GBP500,001 to GBP1,000,000 | GBP3,500 | GBP3,500 | ||
| GBP1,000,001 to GBP2,000,000 | GBP7,000 | GBP7,050 | ||
| GBP2,000,001 to GBP5,000,000 | GBP23,350 | GBP23,550 | ||
| GBP5,000001 to GBP10,000,000 | GBP54,450 | GBP54,950 | ||
| GBP10,000,001 to GBP20,000,000 | GBP109,050 | GBP110,150 | ||
| GBP20,000,001 and over | GBP218,200 | GBP220,350 | ||
There are a number of reliefs from the ATED available, which can be claimed by completing a tax return. You are advised to seek professional advice when completing any tax returns as an incorrect or late filing will incur penalties.
TAX
Income Tax
Income tax is a tax on income. However not all income is taxable and some people will qualify for the UK Personal Allowance, which allows them to earn some income tax-free. To find out if you are eligible for the UK Personal Allowance check with HM Revenue and Customs or speak with an accountant.
As a non-UK resident, you will be liable to pay income tax on UK earnings from rental income.
Mortgage interest relief restrictions
Previously, buy-to-let investors were able to claim tax relief on their mortgage interest payments. In other words, they could offset the cost of the mortgage interest from their rental income when they calculated their profits. They would then pay tax on their profits according to their income tax band.
From 6 April 2017, this relief will begin to be phased out and by 2020 (see table), landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
The Government will allow a tax credit equivalent to basic rate tax (currently 20%) on the interest, which will slightly offset the increased cost.
Capital Gains Tax (CGT) is a levy on the profit made on an asset, payable upon disposal of that asset.
From April 2015, non-residents are taxed at the same rate as domestic investors. The tax applies to all individuals and companies (except those falling under the ATED structure), and will only be levied on gains made after April 2015.
The rate for individuals will be 18% or 28% depending on the person’s total UK income and chargeable gains for the year. As with domestic investors, there is a GBP11,500 tax-free allowance for individual investors from overseas.
There are a number of exemptions, for example, if a non-resident spends less than 90 nights in a property in one year and it is not their Principle Private Residence (PPR). An accountant or tax advisor will be able to clarify further details.
Inheritance Tax
Inheritance tax (IHT) is paid on an estate when somebody passes away. The threshold for an estate to be subject to IHT is a value of GBP325,000. For a married couple, the threshold is GBP650,000.
Tax will be levied on any estate valued above this point at a rate of 40%, or 36% if the estate qualifies for a reduced rate as a result of a charitable donation. The reduced rate is applicable if 10% of the net value of the estate is given to charity. The net value is minus the ‘nil-rate band’ and any other reliefs and exemptions applicable.
There have been a number of changes to IHT relating to non-domiciled British citizens, with the government now taking into consideration properties owned in foreign countries as well as any UK estate. IP Global recommends speaking to a lawyer regarding how the changes could affect your estate.
LETTINGS AND MANAGEMENT
Once you have chosen a lettings and management agent, they will collect the keys and hand over documents, and inspect the property to ensure that everything is in working order. This is known as snagging and is generally only completed on new-build properties.
As an overseas investor, it is recommended that you fill in a non-resident landlord form for tax purposes. More information on taxation can be found at https://www.gov.uk/tax-uk-income-live-abroad/rent. Your lettings and management agency will also be able to advise you on legal requirements and compliance matters before letting your property.
It is common to furnish properties in England and Wales before letting, and this is something your agent will be able to help you arrange, with many offering furniture packages.
The agent is then responsible for marketing the unit to prospective tenants, conducting viewings and handling negotiations.
Once an offer is approved, the agent will conduct the necessary background checks on the tenant(s), including credit referencing, previous landlord and employment checks.
If all of this information is acceptable to the landlord, the tenancy agreement is sent to the landlord and tenant to sign. Once the contract is signed the agent will organise check-
in and arrange an inventory of the unit. At this point, the investor is obliged to make an account with the UK Tenancy Deposit Protection Scheme (TDPS) to protect the tenant’s deposit and minimise disputes at the end of the tenancy period. The agent will be able to handle this on your behalf.
The agent will help collect the rent every month and pass it onto the investor. If the investor does not have a UK bank account, then they will be liable to pay international bank transfer charges. Some agents collect their fees on a monthly basis and deduct it directly from the rent.
The agent can also pay other bills such as service charges on your behalf. When a tenancy agreement is terminated or not renewed, the agent will begin to remarket the unit for either re-letting or sale. When the tenant leaves, the agent will organise a property inspection and arrange for any repairs to be carried out. The agent will also advise whether there need to be any deductions from the tenant’s deposit for loss or damage.
Most agencies are also able to arrange contents, public liability and rental guarantee insurance on the landlord’s behalf.
ARRANGING A MORTGAGE
If you are buying a completed property it is advised that you arrange your mortgage before you exchange contracts so that completion can take place promptly, based on the current and applicable mortgage offer.
For off-plan purchases, however, where there may be several months or even years until completion takes place, the earliest time you can apply for a mortgage is six months prior to physical completion.
At this point, you are advised to contact a qualified mortgage advisor, who will be able to recommend suitable lenders and the most competitive products to apply for based on your personal situation, budget and investment strategy. They will then apply for an Agreement in Principle (sometimes called a Decision in Principle) from your preferred lender.
Once Approval in Principle is granted, your mortgage advisor will begin the process of submitting a full mortgage application. They will request certain documents from you, including but not limited to the following:
- proof of ID and residential address
- proof of current income
- property details – for example the size, location and completion date
- proof of deposit and declaration of existing liabilities.
Upon receiving the full application, the lender will review and then underwrite the application and a surveyor will be instructed by the lender to ensure that the property is suitable for lending security and to determine the value of the property.
Once the application is approved then a formal mortgage offer is issued. This confirms the lender’s agreed terms and rates and stipulates any conditions in the mortgage offer. It outlines the mortgage term, the maximum loan available and the interest rate, and any variations thereof.
The lender then sends a copy of the formal mortgage offer to your chosen solicitor and instructs its solicitors to begin the conveyancing process, following which the property owner’s/developer’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 will then request the funds from the bank on the basis of the formal mortgage offer that has been issued.
The investor will then pay any remaining completion funds as well as 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 investor will receive the keys.
Options For Sale:
Wellington Quarter, London
Woolwich has already experienced extensive regeneration investment, with more planned in the future. A popular area for young professionals commuting into the city, Crossrail’s arrival will further boost Woolwich’s popularity, with reduced journey times to Canary Wharf and the West End. In fact, Woolwich Common is projected to see 48% population growth by 2041 from 2011’s figures, while Woolwich’s Riverside regeneration is driving a population boom of 123%, forming a combined average growth of 87% for the two wards in which the project lies.
Boutique luxury development Wellington Quarter offers the best of both worlds, located within the commercial heart of vibrant Wellington Street for comfortable and convenient living.
Located in Woolwich’s bustling town centre, Wellington Quarter is situated in an area that will see predicted house price growth of 39% and rental growth of 35% between 2016 and 2020.
Wellington Quarter Essentials
- Premium Town Centre residence with 1/2/3-bed apartments
- Four-minute walk to Woolwich Arsenal rail station
- Seven-minute walk to future Woolwich CrossRail station: Eight minutes to Canary Wharf, 14 minutes to London Liverpool Street, 21minutes to Bond Street; 50 minutes to Heathrow Airport
- Apartment sizes from 566 to 997 square feet
- Leasehold 250 years
- Estimated completion Q3 2019
- Starting from GBP392,000
For Sale
Quay Central Liverpool
This will be one of the first developments to be completed within the Liverpool Waters regeneration project. The GBP5 billion masterplan is set to revamp the city’s northern docks into a 150-hectare waterfront quarter of residential, commercial and leisure space and a wider 30-year strategy to enable and redevelop Liverpool’s waterfront. Driven by the Peel Group, who were responsible for the incredibly successful Media City regeneration in Manchester, the project looks set for success. Liverpool Waters will change the face of Liverpool’s northern waterfront, aiming to recreate the established regeneration success seen in the city’s south, namely Albert Dock.
Payment Plan
- GBP2,500 IP Global Client fee on Reservation
- 10% on the exchange, and a further 10% 6 weeks later
- Completion Q2 2019
Two Bedroom apartments from £195,000, 5.38% net return.
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