A guide to buying residential property in England
From the number of transactions we worked on in 2021, the level of interest for UK residential property from Hong Kong and Asia based investors continues unabated despite the best efforts of the pandemic and changes in the tax landscape – such as the introduction of the non-UK resident SDLT surcharge. We provide an overview of the conveyancing process when acquiring residential property as well as some key points to consider.
What is conveyancing?
The term ‘conveyancing’ refers to the legal process of transferring the ownership of a property from one party to another. There are two common forms of ownership of property in England: freehold and leasehold.
Most houses in the UK are freehold. This means your ownership is not limited in time and you will usually be buying the physical structure, walls, the roof and foundations of the house, the site on which the house is built and any garden.
Most flats or apartments are leasehold, which means:
- You will be buying the right to live in the property for a period of years (often 125, 250 or 999 years). You will own the property for this period of time only but you will usually be able to apply for a new lease in the future (subject to a lump sum payment for the new lease).
- During your period of ownership, you must comply with the terms of the lease of the property.
- You are ‘the tenant’ or ‘the lessee’ under the lease. You will have a ‘landlord’ or ‘lessor’ who owns the freehold title in the land or the head leasehold title.
- The lease will set out the responsibilities of you and the landlord respectively. Usually, you will be responsible for the repair, maintenance and decoration of the interior of the flat and the Landlord will be responsible for the repairing, maintaining, decorating and insuring the structure and communal areas of the building. You will be required to reimburse the landlord by way of service charge for your share of the costs incurred by the landlord in carrying out its responsibilities.
- You will also pay the landlord an annual ground rent. Most leases will include an obligation by you to pay the ground rent. The government has announced that it intends to ban ground rents in future new leases and a draft bill has been published in Parliament in relation to this. However, the legislation is not yet in force. It is therefore still legal to include ground rents in the leases of more than a nominal value. When you purchase a leasehold property you should first check with your mortgage lender that it is happy with the level of ground rent contained in the lease and ensure that a surveyor has valued the flat on the basis of the ground rent contained in the lease.
Two stage process of buying a property
The purchase of UK property, whether freehold or leasehold, involves:
Stage 1: Exchange of Contracts
- When you have found a property you wish to buy, you should make an offer to the seller (usually through an estate agent), instruct a solicitor to act for you in the purchase and ensure that your funding arrangements are in order.
- You will be required to provide source of funds information to your solicitor as well as proof of identity and proof of address as part of the Anti-Money Laundering checks.
- After your offer has been accepted by the seller, the seller’s solicitors will send your solicitors the contract, a copy of the documents evidencing the seller’s title, and replies to enquiries about the property. If the property is a flat, the title will be a leasehold title, so the seller’s solicitors will also provide a copy of the lease and information about service charge and buildings insurance.
- The pre-exchange stage is probably the most important part of the conveyancing process. In England, the principle of ‘caveat emptor’ i.e. ‘buyers beware’ applies. It is the buyer’s responsibility to investigate the property they are buying to ensure it is suitable for their needs and that enjoyment of the property is not adversely affected. It is usually advisable for you to arrange for a survey to be carried out on the property to check the physical condition, which will reveal if there are any structural defects or other issues at the property.
- To assist you with your decision on whether or not to buy a property, your solicitor will review the title documentation, raise enquiries with the seller’s solicitors, and carry out searches with various authorities to discover information about the property. This information will enable your solicitor to prepare a report on title to highlight any issues relating to the property arising from such due diligence.
- The searches will reveal whether the property is connected to mains water and public sewers, the ownership of the road giving access to the property, any environmental or planning issues affecting the property, and other matters.
- Once you are happy with the due diligence on the property and both parties have approved the contract, you may instruct your solicitor to proceed to exchange of contracts.
- Exchange of contracts takes place when both parties are ready. You and the seller will each sign one part of the contract which is then exchanged by the two firms of solicitors. At the same time you will pay a deposit to the seller, which is usually 10% of the purchase price.
- Until the exchange of contracts, you or the seller can change your mind and withdraw from the transaction, with each party bearing his or her own costs. If you withdraw from the purchase at this stage, the buyer is likely to lose any reservation fee paid. Once exchange of contracts has taken place, a legally binding agreement is created. Both you and the seller must complete the transaction on the agreed completion date. If you fail to complete the purchase, you may lose your 10% deposit.
- Before you instruct your solicitor to proceed to exchange, you should ensure that your finances are in order for completion. If you are obtaining a mortgage, you must ensure that the mortgage funds are available for completion, or you have alternative funds available to enable you to complete on the agreed completion date.
Stage 2: Completion
- The completion date is agreed as part of the process of exchange of contracts and the agreed date is inserted in the contract. The completion date is usually two weeks after exchange of contracts, but the period can be longer or shorter. It is also possible for exchange of contracts and completion to take place simultaneously.
- On the completion date you must pay the seller the balance of the purchase price and you must provide your solicitors with sufficient funds to pay Stamp Duty Land Tax (SDLT) and Land Registry fees. Completion will take place when the seller’s solicitors confirm receipt of the completion funds and they will arrange for the keys of the property to be released to you.
- Following completion, the seller’s solicitors will send the seller’s signed transfer deed to your solicitor. Your solicitor will submit any SDLT return and pay any SDLT due to Her Majesty’s Revenue and Customs (HMRC) on your behalf, apply to register the transfer deed at the Land Registry, and ensure any mortgage is registered against the title of the property.
Stamp Duty Land Tax (SDLT)
In England, every property transaction completed before 8 July 2020 or completed after 30 September 2021 in excess of £125,000 is liable to pay SDLT. An SDLT return and the SDLT must be sent to HMRC within 14 days of completion.
On completion, you will be liable to pay an additional 3% SDLT surcharge if you or your spouse already own another residential property or an interest in another property anywhere in the world (which is worth more than £40,000).
Subject to satisfying the requisite conditions, if you sell your previous main home within 3 years of buying your new home, you may be able to receive a refund of the additional 3% SDLT you have paid.
From 1 April 2021, an additional 2% surcharge is imposed on non-UK resident purchasers. The 2% surcharge applies on top of all other residential SDLT rates including the higher rates charged for owning additional dwellings. Individual buyers are considered to be non-UK residents in relation to the transaction if they are not present in the UK for at least 183 days the 12 months before their purchase. You will also be able to receive a refund of the 2% surcharge if you are present in the UK for more than 182 days in the 12 months after the purchase.
If you are planning on buying or selling a residential property in England and Wales, it is important that you appoint a specialist residential property lawyer to act for you to ensure that the process is efficient whilst protecting your interests at the same time.
The International Residential Team at Charles Russell Speechlys LLP has a wealth of experience in acting for buyers, sellers, companies, lenders, and developers. While the focus of this note is on UK residential property, our Firm also advises on commercial property and rural and urban estates, including forestry, which requires specialist advice.