A guide to buying a residential property in the UK

Aguide to buying a residential property in theUK (residential conveyancing)

b Contents 1. Finding a property 1 2. Freehold or leasehold? 2 3. Decide on how to finance and structure 5 the purchase 4. The conveyancing process 8 5. Future actions at the property 13 6. A glossary of common terms 14 This guide aims to help you navigate the process involved in buying a residential property in theUK. Given our experience and expertise in this area, we know the sorts of things newentrants to theUK residential market are likely to bewondering about and need to know. This guide addresses these points and explains the various stages of buying a UK residential property.

1 Before litigation starts 1. Finding a property There are many different reasons someone may be looking to buy a property in the UK – for a family relocation to the UK, to use as a base whilst working in or just visiting the UK, for a child whilst they are at university or as an investment to develop, or simply to rent out or sell on in due course. Whatever type of property a buyer is interested in, appointing a well-connected buying agent could be a useful first step. Buying agents will listen to your requirements, advise you of particular issues to consider and provide you with a detailed report of potential properties you may be interested in. Given their contacts, they will often know of properties for sale before they come to the open market, allowing you an opportunity to consider a property before it is more widely advertised. Once you have identified a property you are interested in they will advise you of how to approach your offer and negotiation, particularly if there are a number of interested parties. We knowmany of the prominent UK buying agents and can put you in touch with the buying agents we think best fit your requirements. If you choose not to do this, you will end up dealing direct with estate agents who act only for the seller.

2 When presented with a property of interest, it is important to ascertain whether the property title for sale is freehold or leasehold (these being the two main types of property ownership in England and Wales – different land law systems apply in Scotland and Northern Ireland). Freehold A freehold interest in land gives you absolute ownership of the land and lasts forever. Ownership of the land includes any buildings on the land. With a freehold estate, it is not necessary to obtain the consent of a superior estate holder for works and the grant of leases. Consents may still be needed fromother parties such as funders and, in the case of works, various state authorities. The owner can grant occupational leases to secure a regular income streamout of the freehold interest. Whenyoudecide tosell, therewill benosuperior owner fromwhomconsentmaybeneeded. Leasehold A lease is a contract between a landlord and a tenant for a limited period, known as the term of the lease. In return for payment of rent, a tenant is granted exclusive use and occupation of the property. In a lease, the tenant accepts certain obligations to the landlord, such as paying the rent, and certain limitations on its use of the premises. In turn, the landlord accepts certain obligations to the tenant, for example to manage and maintain the building. A leasehold interest is granted out of a freehold or superior leasehold estate. This creates tiers of ownership of the real estate. If the residential property being considered for purchase is a leasehold property, it will typically be what is known as a “ground lease”. This is a lease with a long term (a new lease is usually for 125 years or more) in return for a capital premium. A nominal rent may be payable throughout the term. Additionally, if the property forms part of a larger estate or is in a block alongside other flats, there may be service charges and insurance premiums payable to the landlord. Before litigation starts 2. Freehold or leasehold

3 It would be normal for a ground lease to include restrictions on: • Alienation– inotherwords, anychange in ownershipor occupationof theproperty. Thiswouldmean that shouldyouwish tosell, underlet or charge thepropertyyouwould need toobtain the landlord’s consent. • Alterations – landlord’s consent is usually required if a tenant wishes to carry out development or substantial refurbishment works to the property, with the exception of internal nonstructural works which tend to be permitted without consent. • Use – a lease will generally permit a specific use or a type of use for which the building enjoys planning consent (e.g., residential use as a home). The lease may require landlord consent if a change of use is desired. Although the need for landlord consent can prolong the process, it is likely that the landlord will only be allowed to withhold consent if they have good reason. Because leases are granted for a specified number of years, therewill eventually come a timewhere the value of the investment starts to decrease because the lease termhas reduced in length. As a broad general rule, the impact is unlikely to be noticed until the lease has less than 90 years to run, but the precise period and the valuation effect varies according to the type of property and its location. In certain situations, an owner of a leasehold property has the right to apply to extend the lease and sometimes to obtain an interest in the freehold. In both cases, certain conditions need to be met and a payment needs to be negotiated.


5 There are no legal restrictions on nonUK individuals buying property in the UK, whether or not they are UK tax resident. The most common ways for an individual to own a residential property are typically as follows: • a sole owner / in joint names with one or more others • through a company, or • by setting up a trust. Each has its own advantages and disadvantages. Transaction specific advice should always be sought, but set out below are some preliminary considerations. In addition to tax, how the purchase price is to be funded and succession planning can affect how to structure the acquisition. For personal occupation The usual form of ownership for personal occupation by the family who are acquiring the property is personal ownership in sole or joint names. Occasionally a trust is established. If the property is held in the sole name of an individual (or even in joint names) consideration should be given to succession in the event the owner passes away. Succession to UK real estate is governed normally by UK law. A detailed analysis of the tax treatment of residential property purchased for personal occupant is outside the scope of this note but the key points are mentioned below. As the property is not rented out there are no income tax (IT) considerations. As the property is not held through a company there is no liability for the annual tax on enveloped dwellings (ATED). The purchaser is liable to pay stamp duty land tax (SDLT) on the purchase price. The rates of SDLT vary depending on the circumstances of the individual or trust purchaser and the value of the property. Unless main residence relief applies, an individual will need to pay capital gains tax (CGT) when they sell or give away the property when it is standing at a gain. In computing the gain, the seller can deduct the purchase price, costs of purchase, costs of improvements and costs of sale from the sale consideration. Inheritance tax (IHT) can also apply if the individual gives away the property or passes awaywhilst holding an interest in it. An exemptionmay apply if the individual’s interest is inherited by their spouse. The value of the property for IHTpurposes can be reduced if there is a third partymortgage secured on the property. Some individuals hold property in joint names and this reduces the value of Before litigation starts 3. Decide on howto structure the purchase

6 their interest in it, whilst others take out an insurance policy toprovide funds tomeet all or part of the IHT liability. If a property is being acquired for the use or the purchaser’s children, trust ownership is sometimes considered. Provided the creator (settlor) of the trust and their spouse are not beneficiaries of the trust, the trust can hold the propertywithmuch the same SDLT andCGT treatment as set out above for an individual owner, provided that the trustees hold the property directly and not via a company. The trust provides for succession to the property without the creator needing a will. In addition, there is no IHT on the death of the settlor, or their spouse, or indeed the children. Instead, there is a charge to IHT at a low rate on the value of the property every 10 years. For investment The usual form of ownership of residential property for investment as a rental property is via a UK or non-UK company holding the property. The shares of the company can be held individually or via a trust. A benefit of using a company is limited liability protection when it comes to dealing with tenants. A detailed analysis of the tax treatment of residential property purchased for investment is outside the scope of this note, but the key points are mentioned below. One of the key differences is that corporation tax (CT) is payable on the UK rental income. Certain deductions are allowed in computing the amount of the rental income that is taxable. As the income has a UK source, it is within the CT regime whether or not it is received by a UK or non-UK company. If the shareholders of the non-UK company are UK tax resident, the rental income received by the company can be treated as their income for tax purposes. This is not the case if the company isUK resident. In this case, theUK resident shareholderswill only be liable to tax personallywhen the companymakes a distribution, such as by declaring a dividend. Even though the property is owned by a company, ATED need not be payable annually if the property is let commercially to an unconnected third party, SDLT is payable on the purchase. The rates of SDLT will be higher than a purchase of a property of equivalent value by an individual or a trust. CT will be payable on a disposal when the property is standing at a gain. This can also be the case if the shares of the company owning the property are sold and the company is a “property-rich” company. Main residence relief is not available even if the property had been occupied by the family before being let to third parties. The IHT treatment ismuch the same as described for property for personal occupant, depending onwhether an individual owns the shares of the company or a trust with the settlor and spouse excluded owns the shares of the company.


8 The buyer will make an offer to buy the property from the seller (with estate agents and/or buying agents often helping to set the offer at the right amount). Once the deal is agreed, the seller will remove the property from themarket and both sides will instruct solicitors. The buyer will often instruct a surveyor andmay also be in discussions with a lender. However, neither the buyer nor the seller is obliged to proceed with a sale until a written contract has been formally drawn up and signed by both parties. Whilst the contract is being drawn up, the buyer’s lawyers will conduct investigations concerning the property including organising a survey, researching title and undertaking searches of various registers and databases. When those have been undertaken to the purchaser’s satisfaction and the contract terms are agreed, the lawyers for the buyers and sellers are ready to commit their clients to closing. The seller’s lawyers hand the seller’s part to the buyer’s lawyers in return for the buyer’s part. This is known as ‘exchange of contracts’ (or simply ‘exchange’). At this stage, a deposit is normally paid by the buyer, typically 10%of the purchase price. 4. The conveyancing process After exchange of contracts the buyer is committed to buy and the seller is committed to sell, subject to very few conditions. If the buyer needs, or would prefer, third party funding to effect completion then they should have the offer of finance agreed on, or before, exchange of contracts. The transaction is completed when the buyer pays the balance of the price to the seller. At that stage the seller formally transfers ownership to the buyer. This is known as ‘completion’.

9 Arrange funding Agree heads of terms Survey and valuation Legal due diligence Exchange contracts Satisfy funding conditions precedent Pre-completion legal searches Completion Post-completion legal formalities, registrations Select a property The legal process can therefore be divided into threemain stages: pre-exchange; between exchange and completion; and post-completion. Pre-exchange Agreeing price and other terms of the sale Once a suitable residential property has been identified, discussions will take place between the parties and their agents to agree the terms of the sale and any price negotiations. The parties’ lawyersmay also be asked to comment on the proposed terms. The contract package The seller and its lawyers will prepare a “sales pack” of relevant legal information, including copies of ownership documents, information from relevant authorities, a Property Information Form (setting out replies to standard queries about the property) and a Fixtures and Fittings form (stating what items at the Property are intended to be included within the sale). This information will all be provided to the buyer along with a draft contract containing the full detailed terms of sale.

10 The buyer’s lawyer will review the sales pack andmake any amendments to the contract whichmay be needed to protect the buyer. The buyer will also carry out further investigations of the property based on the documents provided by the seller’s lawyer. Where the property is newly built or has undergone extensive refurbishment, the buyer’s lawyers will ensure that there are sufficient warranties and guarantees in place to protect the buyer if defects arise. The buyer’s investigations Generally, the buyer’s lawyer takes responsibility for investigating the legal information relating to the property and will prepare a report to client based on their findings. This is important as it is the buyer’s responsibility to find out all relevant legal information before exchange. The investigation process involves: • Thebuyer physically inspecting theproperty. • The buyer’s lawyer reviewing the title information provided to check that the seller owns the property, and to consider any third party rights affecting the land. • The buyer’s lawyer carrying out standard ‘searches’ and enquiries (taking into account the type of property). Searches are formal questions raised with appropriate authorities and will include a search of the local authority (highlighting issues in relation to planning and highways), and searches to check whether the property is in an area considered to be contaminated land or at risk of flooding. The searches will reveal a large amount of legal information about the property, which the buyer’s lawyer may need to investigate further.

11 • The seller’s lawyers providing responses to a standard list of enquiries relating to the property for the buyer’s lawyer to review, and on which the lawyers can ask further questions if necessary. • The buyer appointing a surveyor to check the condition of the property and a valuer to confirm that the property is being acquired at the correct price. If funding is needed, a bank will usually also want to appoint its own valuer. • The parties will not enter into the contract until all investigations are complete to the satisfaction of the buyer. Occasionally issues will be revealed whichmay have an impact on value and therefore lead to a renegotiation of the price. Funding If the buyer has arranged a loan from a bank to assist with its purchase, the buyer’s lawyer will need to check the financing agreement. The bank will want to use the property as security for the loan, so it will want the buyer’s lawyer to confirm that the correct due diligence has been carried out and that there are no issues that would affect the value of the property. Once all of these investigations have been completed, exchange can take place. Between exchange and completion Whilst it is possible for exchange and completion to take place on the same day, typically there is an interval of up to four weeks (or sometimes longer). This allows time to enable the buyer to put in place all of the legal formalities which are required by its funder before advancing the loan. It is essential however that the buyer and its lawyers check before exchange that these formalities can be dealt with in the time available. This is because a failure by the buyer to complete on the agreed date will enable the seller to withdraw from the transaction and keep the deposit. Completion At completion legal ownership is transferred to the buyer. Whilst the contract sets out the terms of the sale, the ‘transfer’ is the document which legally transfers the title of the property from the seller to the buyer. The formof this will usually be agreed between the parties at the pre-exchange stage and will be annexed to the contract. The seller and the buyer will need to sign the transfer prior to completion and it will be dated at completion. On completion, the buyer’s lawyer will arrange for the balance of the price to be sent to the seller’s lawyer. Post-completion The buyer will need to ensure, through its lawyers, that any Stamp Duty Land Tax (SDLT) payable on the transfer is paid to HM Revenue & Customs. Once SDLT has been paid, the transfer to the buyer can be registered at the Land Registry. If a bank has taken security over the property, this will also be registered at the Land Registry against the property.


13 Before litigation starts 5. Future actions at the property Once a buyer owns a property, there are further actions it may wish to undertake at some point during its period of ownership. This includes: Carrying out development or refurbishment works Following acquisition, a buyermaywant to carry out improvement works to the property. For example, theymaywish to reconfigure the living space or to add additional bedrooms by way of extension to the house. When undertaking any refurbishment or redevelopment, consideration should be given as to what construction and planning advice is necessary to ensure that the project has the necessary permissions and can progress smoothly. The selection of a competent teamof consultants is critical to the success of a project. We regularly work with and can help identify suitable designers, project managers, technical experts, and other advisors. Renting out the property A property owner may wish to rent out the property if they do not intend to occupy it themselves. We are able to make introductions to a number of letting agents who assist with finding tenants and managing the property whilst it is let out. A short term occupational lease would need to be put in place to accommodate this arrangement and lawyers would typically be instructed to assist with this to ensure the property owner’s rights are fully protected. Refinance of the property At a later stage an owner may wish to use the property for collateral to obtain new funding. We have good relationships with a number of lenders and are able to put property owners in touch with these contacts to discuss financing terms. We are also able to advise on the terms of the loan and proposed security arrangements and deal with the lenders’ requirements (notably they are likely to require us to provide themwith a property report and confirm that we will deal with postcompletion registrations of their security). Selling the property A property owner may wish to sell the property at any point during its ownership. We are able to assist with this by making introductions to selling agents and advising on the tax consequences of the sale. Lawyerswould also be instructed to advise on the sale process generally – for example to provide the buyer with copies of the relevant title deeds and property documents, and drafting the sale agreement and transfer deed.

14 A Alienation Disposal of an interest in leasehold property. Assignment (assign) The transfer of an interest in leasehold property (to effect the transfer). C Charge (mortgage) The creation of a security interest over land in favour of a lender. Completion (closing or financial close) When the seller formally transfers legal ownership to the buyer and the main part of the price is paid. Covenant An agreement to do something, or to refrain from doing something, which is meant to be binding on the party giving the covenant. D Dilapidations Work required to be undertaken by a tenant at the end of its lease to put the property into good condition. E Easement A right benefiting a piece of land, such as a right of way, that is enjoyed over land owned by someone else. Exchange The exchange of agreed, signed contracts – the transaction between the seller and the buyer is then legally binding. F Forfeiture A landlord’s remedy in the event of the tenant’s default – the landlord re-enters the premises and brings the lease to an end. Freehold Considered to be absolute ownership of the land that lasts forever. Before litigation starts 6. A glossary of common terms

15 L Land Registry The Government office that is responsible for maintaining the Land Register, which details all information relating to a particular piece of land, essential in passing title in that land. Landlord The person granting a lease or tenancy, to whom the rent or premiumwill be paid by the tenant. Lease A right to exclusive possession of land and/or buildings for a limited period. Leasehold A right to use and possess the land for a specified period of time (the term of the lease). Long lease (ground lease) A lease with a long term (usually 99 years or more). O Occupational lease A lease with a shorter term (usually 25 years or less). P Planning consent/planning permission Consent (usually from the local government body for the relevant district) to carry out works or to change the use of a property. S Searches Formal questions raisedwith local andother government bodiesandutilitycompaniesabout theproperty, usuallyaspart of investigations beforeapurchase, leaseor charge. Service charge An amount payable by a tenant in respect of repairs, maintenance and other services provided by the landlord in a multi-let building. T Tenancy Usually has the same meaning as ‘lease’ – see above. Tenant The person to whom a lease or tenancy is granted, and who pays the rent or premium to the landlord. Term The period for which a lease or tenancy is granted. U Underletting The grant of a lease out of a leasehold property.

17 Why choose Stephenson Harwood? Our high-value residential conveyancing team is experienced in assisting clients to purchase, mortgage, let and sell their residential properties. We enjoy working on transactions with tight deadlines and pride ourselves on giving practical and easy to understand advice to clients. “It is very rare to find an external legal team that not only provides excellent legal advice, but provides excellent practical legal advice. Too often, external firms simply recite the law, and do not apply it to the situation at hand.” The Legal 500 UK, 2023

www.shlegal.com GET IN TOUCH BD1501-A guide to buying a residential property (UK)-0323 Archie Campbell Partner, head of residential property T: +44 20 7809 2377 E: archie.campbell@shlegal.com Stephanie Sagar Associate, residential property T: +442078092179 E: stephanie.sagar@shlegal.com Fiona Li Associate, residential property T: +44 20 7809 2288 E: fiona.li@shlegal.com Anna Prebble Associate, residential property T: +442078092872 E: anna.prebble@shlegal.com Janice Yau Garton Partner, residential property T: +85225332806 E: janiceyau.garton@shlegal.com Patrick Lundie Managing associate, residential property T: +44 20 7809 2664 E: patrick.lundie@shlegal.com ©StephensonHarwoodLLP2023. Any reference toStephensonHarwood in thisdocumentmeansStephenson HarwoodLLPand/or itsaffiliatedundertakings. Any reference toapartner isused to refer toamember of StephensonHarwoodLLP. Thefibreused toproduce thispaper is sourced fromsustainableplantationwoodand iselemental chlorine free.