This article will examine some of the key initial considerations as well as provide an overview in relation to the conveyancing process when buying a residential property in England and Wales.
The term ‘conveyancing’ is the legal process of transferring the ownership of a property from one party to another. In the UK there are two types of legal ownership of a property; freehold and leasehold. An owner of a freehold property will own that property in perpetuity whereas an owner of a leasehold property will own the property for a period of time (i.e. the term of the lease).
Some important aspects to consider in relation to the acquisition of a UK residential property are set out below:
Anti-Money Laundering (AML) Legislation
Under the new AML regulations which came into effect on 1 April 2018, estate agents are now required to carry out due diligence on their customers, and the beneficial owners of their customers if the client is a company, before entering into a ‘business relationship’. A ‘business relationship’ includes putting forward any offer made by a buyer to a seller. Therefore, it is important to be prepared and have the documents ready to be able to comply with the regulations at the outset.
The acquisition of UK residential property will give rise to tax liabilities and these potentially include stamp duty land tax (SDLT), an annual tax on enveloped dwellings (ATED), income tax and ultimately capital gains tax (CGT) and inheritance tax (IHT).
There have been a number of critical changes to the tax land scape in England and Wales over the past few years and these relate to the following:
- CGT is now payable by non UK residents on gains accruing post 6 April 2015;
- The introduction on 1 April 2016 of the 3% SDLT surcharge levy for buyers of second homes which includes buyers who own residential properties abroad; and
- If the buyer is a company, a change to the law on 6 April 2017, mean the value of the shares are subject to IHT.
Tax considerations are likely to be one of the most important factors in relation to determining the most optimum acquisition structure. However, and in conjunction with tax planning, there are a number of other factors to consider in relation to the most efficient structure such as:
- Who will buy the property whether it will be a special purpose vehicle (SPV), a trust or an individual;
- If the buyer is a SPV or a trust will this be incorporated off-shore and, if so, in which jurisdiction?;
- Will the property be an investment?;
- Will financing be required?; and
- Any other factors such as family requirements/succession planning, confidentiality, intended level of occupation and Shari’ah issues.
The pre-exchange stage is probably the most important part of the conveyancing process. It is the buyer’s responsibility to ensure that the property is suitable for their needs and that there isn’t anything which would adversely affect their enjoyment of it.
To assist the buyer in reaching this decision, the buyer’s solicitor will analyse the title documentation, carry out searches with the relevant authorities, raise enquiries with the seller’s solicitor and then provide the buyer with a detailed report, flagging any issues arising from such due diligence.
Once the buyer is happy with the due diligence, both parties have approved the contract and the buyer has paid the deposit, which is usually 10% of the purchase price, the parties will be in a position to exchange contracts. Exchange means that a legally binding agreement has been created between the seller and the buyer. Neither party can withdraw after exchange without incurring penalties.
Following exchange, it is necessary to finalise all the legal documentation such as (but not limited to) the transfer deed, mortgage deed and lease/licence to assign (if applicable) and arrange for execution of these documents. At the same time, and if applicable, a request will be made to the lender to drawdown the funds. A completion statement will be issued to the parties confirming the amount required to complete and pre-completion searches will be undertaken.
To ensure that there is no delay in completion, it is recommended that the balance to complete is transferred to the buyer’s solicitor’s client account one day before completion. This will allow time to rectify any potential shortfall.
Completion takes place when the seller’s solicitor confirms receipt of the funds in their client account. The buyer will then collect the keys from the property agent.
It should be noted that as a consequence of ‘solicitor’s undertakings’ and the use of, for example, the Law Society Conveyancing Protocol the conveyancing process in England and Wales is comprehensive and secure.
Following completion, the buyer’s solicitor will submit for payment any SDLT, apply to register the transfer of ownership of the property with the land registry and ensure that any financing is registered against the property by way of a first ranking charge. Post completion formalities are largely administrative but are also a very important part of the conveyancing process.
If you are planning on buying a residential property in England and Wales, it is essential that you appoint a specialist residential property lawyer as not only is the process complex (as a number of additional factors need to be considered), but also an experienced conveyancer will ensure the process is as efficient as possible whilst at the same time protecting their client’s interests.