1. What are the main types of property ownership in England and how do they work?
There are two main forms of property ownership in England: freehold and leasehold. Freehold ownership is more typically associated with houses and leasehold ownership more typically associated with apartments. There are also tenancies, which are also often associated with apartments.
With freehold ownership the owner has complete ownership of the property for as long as they wish without any conditions (although they are subject to any relevant legislation if they wish to make alterations to the property).
Leasehold ownership is not ownership in the same sense – it is not complete and unconditional ownership. A leaseholder only has the right to live in a property for a stated period of time. Typically a leasehold property has a freehold owner (who may be an individual or an organisation) and the freehold owner (often referred to as the landlord) has an agreement with the leaseholder that allows the leaseholder to live in the property for a specified number of years. So the leaseholder fully owns the lease (ie the agreement) but only temporarily owns the property itself.
The leaseholder will pay the freeholder an agreed sum of money to buy the lease from them, and they will also have to pay a regular service charge for the maintenance of the property. They will also typically have to pay a ground rent payment to the freeholder, but this may be a very small amount.
A lease could originally be granted by a freeholder to a leaseholder for, say, 99 years and, as the years go by, the remaining period of the lease becomes shorter and shorter. But, very importantly, leases can be bought and sold, and when a lease is sold to a new leaseholder the lease will only be for the remaining period. So the value of a lease is not only dependent on the property itself but also on the length of lease remaining because, obviously, a longer lease is more valuable than a shorter one.
However, leaseholders are entitled, if the relevant conditions are met, to buy an extension of the lease from the freeholder before their lease runs out. And, in other cases, they may even be entitled to buy the freehold from the freeholder, if the majority of leaseholders in an apartment building wish to do so.
A tenancy is a different kind of arrangement whereby a tenant agrees with a landlord (who will often be a freeholder) to live in a property and pay them rent on a regular basis, typically monthly or quarterly. One might say that a tenancy is rather similar to a leasehold except that a leaseholder pays the money up front in one lump sum rather than by regular payments, and a lease will often be for a longer period than a tenancy, which might only be for a few months or years. In addition, tenancies typically have less security of tenure than leaseholds.
If you wish to buy an apartment you will probably have to buy the leasehold because in most cases the freehold will not be for sale. If you wish to buy a house you will in most cases have to buy the freehold (although there are exceptions to this; for example, the house might be on one of the old London estates and it might not be possible to buy the freehold). So although freehold is the “best” kind of ownership, because it is permanent and unconditional, in some cases it is not possible to buy it.
2. Is it possible for a leaseholder to extend a lease?
There are conditions to be met for it to be possible for a leaseholder to extend a lease, but if the conditions are met then the leaseholder is entitled to have the lease extended, and the right can be enforced in law if necessary.
The two basic conditions are that the lease was originally granted for a period of at least 21 years (which will usually be the case) and that the leaseholder has owned the property for at least two years (whether or not they have lived there for two years).
It is possible for a leaseholder to extend a lease before the current lease expires and it is financially advantageous for a leaseholder to extend the lease significantly before then. The lease can be extended for 90 years, and this 90 years is additional to the remaining period of the lease. So, for example, if a lease still has 80 years to run the leaseholder can, if they meet the requirements, extend the lease for 90 years and this 90 years starts after the current lease has expired in 80 years time.
3. What documents are required in order to purchase property in the UK?
You must provide proof of identity, such as a passport or driver’s licence. You must also have proof of your current address, such as a bank statement or utility bill. If it is not in English it should be translated into English by a professional translator.
If the property is being purchased by a company, documents showing the addresses of the company and of the directors must be provided.
4. Are there any advantages to purchasing a property in the name of a legal entity?
Some people may prefer to purchase a property in the name of a legal entity (for example a UK limited company or an offshore company) rather than in their personal name. There are different reasons why this might be advantageous. There may be strong tax advantages; it may be possible to avoid inheritance tax if the property is eventually to be inherited and there may also be advantages with capital gains tax if this should become relevant. And it may be cheaper and administratively easier to transfer a property that is owned by a legal entity rather than by an individual person.
Another benefit of doing this is that it may provide anonymity for the buyer. An individual buyer who buys a property in their own name will have their name recorded on HM Land Registry, which is the official government register of property ownership in the UK and is easily accessible to the public. Even if the buyer controls a UK limited company, and the property is bought in the name of the company, the name of the company will appear on the Land Registry and it may be possible to find out the name of the buyer through the Companies House website, as all UK limited companies have to be registered with Companies House.
But if an individual controls an offshore company a different situation may exist. If the offshore company buys a property, the name of the offshore company will appear on the Land Registry. However, it will not necessarily be possible to identify the name of the buyer because offshore companies do not have to be registered with Companies House. So by purchasing a property through an offshore company a buyer may be able to protect their identity.
5. What are the costs involved in purchasing a property in England?
Apart from the cost of the property itself there are various other costs you may be liable to pay:
Stamp Duty
If the property you buy (whether it is freehold or leasehold) costs more than £125,000 (or £250,000 if you are a first-time buyer) you will be liable to pay stamp duty on the purchase. Stamp duty is taxed at a rising rate of between 1 and 5% of the cost of the property. Properties costing over £1 million are liable for the top rate of 5%.
Property Survey
A property survey is an inspection made of a property to assess its condition and perhaps also its value. Property surveys vary considerably in their degree of thoroughness and, correspondingly, in their price.
If you apply to take out a mortgage on a property you intend to buy the mortgage lender will require you to have at least a very basic survey carried out before they agree to lend you the money. This type of very brief survey is called a basic mortgage valuation.
But this type of basic survey might not reveal problems or potential problems with the property and will not provide you with a detailed picture of the condition of the property. It may well be advisable for you to have a more detailed survey carried out, because if there is a problem with the property that is not immediately evident (for example a structural problem) and you go ahead and buy the property you may have to spend large sums of money in the future to deal with the problem. On similar lines, if a detailed survey does reveal a problem you may be able to renegotiate the price downwards or, in an extreme case, you might decide to withdraw from the sale altogether.
There are two types of more detailed survey: a Homebuyer’s Report and a Building Survey. A Building Survey (previously known more descriptively as a Full Structural Survey) is the most detailed kind of survey and may take several days to complete. A survey is likely to cost hundreds of pounds (depending on the kind of property you intend to buy) and a Building Survey could cost £1,000 or more. It will be necessary to make a decision as to what level of survey you want and how much you want to spend on this.
Legal Fees
If you find a property you are interested in buying it is advisable to instruct an experienced conveyancing solicitors or licensed conveyancers. These practitioners should carry out any necessary searches for you to identify any legal or other problems connected with the property or its land and, if nothing adverse is shown, they will organise the purchase of the property. The fees they charge may be dependent on the complexity of the work that has to be carried out and the amount of time it takes.
Aston Reed can assist you in finding a suitable practitioner.
Mortgage Fees
If you take out a mortgage on the property you buy there may be extra “mortgage fees” to pay, which are itemised separately from the repayments you will have to make under the mortgage scheme. Such fees may be described as, for example, valuation fee, arrangement fee, early repayment fee etc.
There is a great variety of types of mortgage scheme available; some include many of these extra fees and others do not. The important thing is to look at a mortgage scheme as a whole and decide if it is appropriate for you. If a mortgage scheme has various extra fees but the level of repayments is suitable for you the scheme as a whole may be suitable for you. One the other hand a scheme that has no extra fees but has a higher level of repayments may not be. You should look at the overall financial package. But it is of course very important that, if there are extra fees, you understand exactly how they work.
6. What taxes will I have to pay if I sell a property?
If you sell a property you may, depending on the circumstances, be liable to pay Capital Gains Tax. This is a tax that may have to be paid when, for example, someone buys something and subsequently sells it and makes a financial gain on the sale. The tax is levied on the amount of financial gain that is made, not on the figure that the thing is sold for.
But if the property that you are selling is your main home you will not in most cases have to pay Capital Gains Tax. On the other hand, if the property that you are selling is a second home or a property that has been rented out by you, you may be liable to pay it.
If you are liable to pay Capital Gains Tax on a transaction the amount you pay will depend on whether you are a basic rate taxpayer or a higher rate taxpayer. A basic rate taxpayer pays 18% and a higher rate taxpayer pays 28%. As explained above, the tax is levied on the amount of financial gain made, not on the figure that the property is sold for.
And if you make a gift of a property to someone who is not a spouse/civil partner it is possible, depending on the circumstances, that you may be liable to Capital Gains Tax.
It may therefore be very important to take expert advice before selling or giving away a property.