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Frequently Asked Questions
- What are the types of property ownership in the UK?
- What is the main difference for the property owners between the 2 types of ownership?
- What are the guarantees of extending the lease period?
- Are there alternatives to the 2 types of property ownership?
- What documents will I be required to provide when purchasing property?
- What are the taxes and other fees payable upon purchasing real estate?
- What taxes will I be required to pay upon the sale of the property?
1. What are the types of property ownership in the UK?
There are two types of property ownership in the UK: freehold (including share of freehold) and leasehold.
Freehold ownership means absolute right to own property. Freehold gives the purchaser complete ownership of the land and all the buildings on it. A freehold gives the buyer the right to do as they like with their home, subject to the law and planning controls. As a general rule the properties sold under freehold ownership are houses, villas and estates.
Share of Freehold
It is possible to buy a flat that comes with a share of the freehold. These properties are usually in small apartment blocks or converted houses, with a maximum of five separate flats in the building.
It means that all flat-owners collectively own the freehold as trustees on a “tenants in common” basis and each of them owns a share in the freehold.
The advantage of owning a share in the freehold is that there is no landlord or managing agent to answer to. As freeholds are expensive to buy and are traded among investors, a share of it can boost the value of the property.
On the other side, decisions regarding the communal areas, structure of the building and even insurance are all made collectively. If personal disagreements emerge with the small group of other freeholders, the situations can become difficult.
Leasehold ownership means ownership of the building, located on the land which is being leased. Therefore, upon the completion of the purchase, you are purchasing only the building. As for the land, the owner gives the right to use the land for a certain period of time – ranging from 1 to 999 years. The lease period affects the value of the property, in particular, the shorter the period of lease left, the less valuable the property itself would be. This is due to the fact that the procedure of lease extension can be quite expensive and cumbersome. When you are purchasing a property in the UK you should ensure that you have checked the amount of time left on the leasehold of the property. When buying a flat, your solicitor will investigate the adequacy of the existing lease term. As a general rule, only flats are owned as leaseholds in the UK with an exception of some houses in Mayfair, Regent’s Park, Chelsea and Knightsbridge which are situated on the land historically owned by Royal Family.
As time goes on, the lease gets shorter. Under normal circumstances, a freeholder is legally obliged to extend it for a further 90 years at a «reasonable» cost to the leaseholder. However, this cost is based on the value of the property and can run into thousands of pounds. Such extension takes place upon the payment of a set sum to the owner of the freehold of the land. Many purchasers, who are not familiar with the property laws in the United Kingdom, are concerned that when they purchase the property under leasehold ownership they are not owners of the property in fact. However, that is not the case. Purchasing the property under leasehold ownership the owner has full right to own the property. However, the owner also has additional obligations as outlined below.
2. What is the main difference for the property owners between the 2 types of ownership?
There are three main differences:
- The owner of the leasehold should be mindful of the need to extend the right to use the land.
- When the property is owned under leasehold form of ownership, that leads to certain additional expenses in connection with the property. An owner of the leasehold has to pay annual “ground rent,” which is basically an amount payable for the rent of the land on which the property is located. Ground rent usually varies from £10 to £500 a year.
- A leasehold owner is also responsible for the payment of the “service charge”. This is a fee payable for the maintenance of the land on which the property is located or maintenance of the common areas in case when the property purchased is in the apartment block.
3. What are the guarantees of extending the lease period?
Under the law of the United Kingdom each owner of the leasehold property has the right to extend the lease for a period of 90 years upon its expiration. Should you required more detailed information with respect to this matter we suggest that you contact an attorney specialising in lease renewals or you can visit the website of Leasehold Advisory Service at www.lease-advice.org.uk
4. Are there alternatives to the 2 types of property ownership?
Certain flats may be sold under ownership known as share of freehold. When purchasing the flat under such ownership, the property owner receives leasehold on the specific flat as well as part ownership of the freehold (a share in the ownership of the land). Therefore, all the owners of the flats in a particular development have control over the management of the common areas, thereby, they have the ability to minimize the service charges payable.
5. What documents will I be required to provide when purchasing property?
Under the laws of the United Kingdom you would have to provide your identification documents, as well as proof of your address. As a proof of address you may use either your utility bills or a bank statement, which would contain your full name and address. All documents shall be translated into English, if they are in another language. If you are not able to provide any of the above-mentioned documents, please consult one of our advisors, and they will be able to advise you what documents you may provide based on your individual circumstances.
There may be instances when the purchase price for the property is payable by a third party, in such instance you would need to provide certain documentation with respect to such person making the payment. If the payment is made by a physical person, then such physical person would be required to provide identification documents (such as passport, driver’s license or any other form of identification issued by government), and also proof of address — the documents which may be used as proof of address were outlined above.
In the event where a legal entity is buying a property we would be required to receive a number of documents with respect to such legal entity: all organizational documents of such legal entity, identification documents of all directors of such legal entity and proofs of address of such directors. We would, further, require identification documents and proofs of addresses of all the beneficial owners of such legal entity. Without receiving such documents regarding the legal entity, under the laws of the United Kingdom, no solicitor would have the ability to accept the moneys for the purchase of the property.
6. What are the taxes and other fees payable upon purchasing real estate?
Upon completion of the purchase of every property in the UK, the buyer of the property is required to pay to the government tax, known as Stamp Duty Land Tax. The amount of tax payable depends on the purchase price of the property and a number of other factors. However, in most cases it is calculated as follows:
|PURCHASE PRICE||STAMP DUTY RATE — ON THAT PORTION OF THE PURCHASE PRICE|
|Up to £125,000||0%|
|£125,000.01 — £250,000||2%|
|£250,000.01 — £925,000||5%|
|£925,000.01 — £1,500,000||10%|
Stamp Duty Land Tax is payable upon the completion of the purchase transaction. As a general rule, the solicitors which are involved in the process of the purchase of the property, they will take care of all the required formalities connected with the payment of this tax. Please note that tax law is a very specific and complicated area of law and therefore, you should seek the advice of a tax attorney prior to proceeding with any of transaction relating to property.
In some instances, the property being sold is owned by an offshore company. In this case the purchaser may acquire 100% equity interest (shares) in such offshore company, instead of purchasing the property itself. As a result of such purchase, the purchaser de facto acquires all properties owned by such offshore company, including the property in the UK. When you are completing such share purchase, and de facto property purchase, you will not be required to pay Stamp Duty Land Tax, since the de facto owner of the property remains the same. However, if the owner of the property is a UK company, then tax will be payable.
Fees in connection with the purchase
(1) In addition to any taxes, we recommend that you employ the services of an attorney when dealing with property as it is a very specialized area. You are free to choose any law firm or attorney, as the actual choice of an attorney is unlikely to affect the outcome of the purchase transaction. However, we have developed a large network of contacts among attorneys in the leading law firms specializing on property transactions, thereby you will be sure to receive better pricing should you chose to work with any of them.
The price charged by the solicitors depends on the purchase price of the property, form of ownership of the property. In general, the fee shall constitute – 0.3% – 0.5% of the purchase price.
(2) Furthermore, when purchasing the property it is necessary to conduct a number of surveys on the property, for example, it is necessary to check whether there are any third party rights over the property. As a general rule the costs of such surveys are approximately £1,000, however, should you desire to conduct further inspections of the property (including property condition) we would be able to recommend property valuers to you.
(3) In case where you are seeking mortgage in connection with the purchase of the property you will be subject to other expenses. In this case you would have to cover the bank fees of the bank providing the mortgage, as well as the expenses of any mortgage brokers or consultants, the services of which you will be engaging. The bank fees vary greatly depending on the bank, the mortgage brokerage fees constitute around 1% from the total amount of the mortgage.
7. What taxes will I be required to pay upon the sale of the property?
You should also keep in mind that in the future upon the sale by you of the property you may be required to pay certain taxes. In particular Capital Gains Tax, charged on the difference between the price upon which you purchased the property and upon which you have sold it. Such tax is payable not only upon the sale of property, but upon the sale of the shares of the company. The rate of this tax changes annually. However, it is necessary to keep in mind that if you have not been and have not become a UK tax resident then Capital Gains Tax is not payable. Please consult an immigration solicitor to receive information of when you become a resident of the UK for tax purposes.