31 October 2017

Investing in a UK Property

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Identifying the right location and property

London is a colossal place and, like all first-rate cities has good, bad and middling localities. Overseas buyers, particularly prosperous ones, often are drawn towards what is known as Prime Central London, such as Mayfair, Kensington, Westminster and Chelsea, and even there, there are decent streets and outstanding streets. This applies to various cities in the UK. A property search is time consuming, so do think about engaging the services of our specialist agents  to find and evaluate property for you. If you get stumped contact us. Although we are solicitors, we have considerable knowledge of the property market in London and the UK and extensive contacts so that we can point you in the right direction.

Securing the deal

For the best properties there is often a lot of competitiveness. If you do agree a deal in principle there is a risk of being ‘swindled’. Until a formal contract is signed by both parties and exchanged – see below ‘understanding the buying process’ – neither party is legally obliged and, therefore, the seller can offer the property to another purchaser for a higher price.

The ways in which you can insure better chances of securing the property you want are: being a cash purchaser, showing that you have the ability to act quickly and to sign contracts within a short timeframe, and requiring the seller to take the property off the market, including being promoted on any website. More complicated ways of securing the property include entering into an exclusivity agreement with a view to giving you the exclusive right to buy it for a defined period of time. On the other hand, having what is called an attended exchange where, assuming that the offeror  has all the necessary papers to prove his title, and you have the deposit money at the ready, your lawyer goes to the offices of the owner’s solicitor, carries out the due diligence there and then reports to you so that contracts can be exchanged without further ado.

Understanding the buying process

In the UK due diligence is carried out before the parties enter a binding contract. This is unlike many other countries where contracts are entered into very quickly and due diligence occurs afterwards, and before completion. Due diligence will include

  • Inspecting the title of the property
  • Acquiring a survey
  • Investigation of public records with the local and other authorities
  • Obtaining information from the solicitor and the freeholder

If mortgage finance is to be obtained then an offer from the lender will also be required before the exchange. When the seller and the buyer are ready to proceed, each signs a separate but matching contract. The solicitors for each party agree that the contract is legally binding. On exchange of contracts the buyer pays a deposit, as per tradition this is 10% but it often can be 5%. Closure can take place on the same day as the exchange, but usually there is an intervening period which that can go between 7 and 28 days, during which time more legal and practical matters are dealt with. On completion, the title is transferred to the buyer after the balance of the price is paid and they can obtain possession.

Funding the purchase

Loans to buy property will be secured by the lender taking a mortgage against it, and registered at the land registry. Mortgages. Mortgages in the UK are ‘recourse’, which means that the borrower makes default and the lender forecloses, the borrower or the guarantor is liable for any deficit if the sale price is not enough to pay the loan costs and interests. When lending to overseas buyers a specialist bank or lender is usually required, especially when it’s an offshore company. Normally a up-to-the-minute investor will employ a private bank or the private banking arm of a major one. Bearing in mind current issues it is not generally advisable to be too copiously geared. However, where the property is owned in individual names or through a trust it is a benefit to have as much of the equity as viable covered by debt secured on the property to reduce the potential exposure to Inheritance Tax. This needs to be structured meticulously and cautiously.

Ownership Structure

The main issues here are tax and confidentiality. Tax is convoluted depending on your specific circumstances. For most higher value properties it is ill-advised for a property to be in your own name. This is both from a tax point of view, and also to keep your identity private and secure. It should be noted that the United Kingdom, Land Registry is open to the wide public and so the name of the owner and the price paid can be found by anyone through the Land Registry’s internet portal. A common structure would be an offshore company with shares held in an EPT (Excluded Property Trust).

Understanding Taxation

One of the heaviest costs to take into consideration is Stamp Duty which a tax on a property paid by the buyers on the property’s purchase price. The exact amount depends on different tax thresholds that that property exceeds

The tax bands start at £125,000, any purchase price lower than this requires no stamp duty tax payment.

£125,001 to £250,000 : 2% of purchase price

£250,001 to £925,000 : 5%;

£925,001 to £1.5m : 10%

Above £1.5m : 12 %

You need to compute the tax due on each bracket separately and add them.

For example, someone buying a home for £1.2m will not have to pay anything on the first £125,000, then 2% on the next £125,000, 5% on £675,000 and 10% on the final £275,000. and add them together.

A recent change in the regulations means that non-UK residents may now have to pay capital gains tax when a residential property is sold. The rules are pretty convoluted and very intricate. Essentially, a tax charge of 18% for basic-rate taxpayers or 28% for higher and top-rate taxpayers.

Various conditions, alleviations and allowances could affect the amount of Capital Gain Tax you will owe.You only need to pay this tax on your total taxable gains that are beyond your annual allowance, which stands at £11,100 for the moment

Another tax you should be aware of is the Annual Tax on Enveloped Dwellings. However, it is only applicable to residential properties owned by a company or corporate partnership and does not apply to those held by individual persons.

The bands of this tax start when the property value is above £1m

£500,000 to £1m :  £3,500.

£1m to £2m : £7,000

£2m-£5m : £23,350

> £20m : £218,200

For more information or help from one of our property and real estate specialists, please contact us by phone 0203 909 8399 or using our enquiry form

About the Author

Nauman Javid has established himself as a solicitor representing high net worth individuals and families. Clients have chosen him to handle their private and commercial interests, knowing that he understands the passion that drives them.

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