Purchase procedures

This page is to give you the general information on step-by-step procedure of puirchasing property in the UK. 

Ownership

Property in the United Kingdom is either freehold where you own both the property and the land it stands on or leasehold. For residential property leaseholds usually apply to flats. This means that the landlord owns the ground on which the property stands and the owner pays "ground rent". This is usually a nominal sum of between GBP50-200 per year. This is not a market price but simply a reflection of the fact that the property is standing on someone else`s land. In more recent times the freehold (the ownership of the land) has often been transferred to management companies in which people with leaseholds have a share of the freehold (often described in agent`s particulars as "share of freehold"). These management companies will manage the estate, maintain the communal parts (staircases, lifts, gardens etc) and in older Victorian blocks will supply hot water and central heating from a central boiler. The management company charges a service charge for this which is variable. In many central London blocks the service charge could  be up to as much as GBP2,500 - 3000 per annum.

Making an Offer

Once the property has been identified, an offer can be made for it. Depending on the market this may be at the full market price, the asking price of an estate agent, or it may be at a lesser price. If the price is accepted in principal, the matter will then be referred to solicitors for the conveyancing procedure to be conducted.

The Contract

The solicitor will receive the contract, usually in standard form, from the seller`s solicitors and once this is received various steps have to be undertaken. For example, searches need to be done with the local authority and other authorities if development is proposed. For example, if you wish to extend the house or do other work to it, it is sensible to obtain details of where the drains and electricity cables are located. Searches are submitted to the Local Authority to ask questions as to whether the road is public, whether there are any major developments proposed  in the area, whether the property complies with all of the relevant planning and building regulations rules and so on. These searches can cost up to GBP200 or more.
In addition, your solicitors will either request, or be provided with, information about the property from the seller. This refers to boundaries, whether it is connected to the main services, whether there have been any disputes and other similar matters. These replies are confirmed by a solicitor and can be relied on for the purposes of future action if false replies were given and loss is suffered as a result. There will also be a list of fixtures and fittings included with the property or in some instances agreement may be reached with the seller to buy things separately i.e. washing machine, furniture etc.

Structural survey

It is sensible for a structural survey or a homebuyers report (a briefer type of survey) to be prepared. This will tell you whether there is anything obviously wrong with the property and what work needs to be done to get it into good condition. The price of such reports vary depending on the size of the property and for residential properties you are usually looking at a fee of between GBP 600 and 1,500. This type of report is a requirement from any bank to ensure that the price being paid for the property is not excessive. It is however recommended for cash buyers as it gives some comfort that there are no major defects.

Exchange of Contracts

If everything in respect of the property is satisfactory, all searches and inquiries have been completed  (and in the case of a lease this will include confirmation that service charges and ground rent are paid up to date), your solicitor will then move forward to the exchange of contracts. Upon exchange, the buyer usually pays 10% of the purchase price, occasionally lower figures (5%) can be agreed. The solicitors agree a time and date for exchange and the buyer`s solicitors will send the deposit money to the seller`s solicitor together with his signed copy of the contract and the seller`s solicitors will send his signed copy of the contract to the buyer`s solicitor. At this stage there is a legally binding contract in force.
On exchange of contracts a completion date will be included in the contract. The sale should complete on that date, otherwise there are financial penalties payable,  not the least of which is interest upon monies outstanding and the increase of  the deposit required  to 10% if less was paid. Upon exchange it is also usual for the buyer to insure the property, unless there will be a long delay between exchange and completion when it is often agreed that the buyer will be noted as an interested party on the sellers insurance policy. The insurance of course relates to the structure of the building and not the contents, for which separate insurance would eventually be needed.

Between exchange and completion

In this period, further enquiries will be sent out by the buyers’ solicitors together with a draft transfer document, it is this transfer document (TR1) that provides evidence of the transfer of the property and it is this that is sent to the Land Registry for the ownership recorded therein to be changed. Completion occurs when the executed TR1 and other relevant documentation are sent by the sellers’ solicitor having received the completion monies by telegraphic transfer from the buyers’ solicitor. This is sent between solicitors client accounts. The Client Account is an account where client`s money is held. If there is a mortgage on the property, the seller`s solicitor will give an undertaking that the mortgage will be discharged. Once the mortgage is discharged the bank will issue a form DS1 as evidence of the discharge.

Registration of Transfer

All titles are registered at HM Land Registry. The stamp duty of between 1 - 15% needs to be paid on the TR1 to the Inland Revenue and the document is then stamped to show tax has been paid. It is this stamped document that is sent together with other supporting documentation to the Land Registry for registration.

In his Autumn Statement 3rd of December 2014 George Osborne made the following announcements: -

He has scrapped the single flat rate system on stamp duty for residential property and moved to a simple progressive system. Under the current rules each rate only applies to the part of the property price that falls within that band. These bands are:

  • no tax on first £125k
  • 2% on portion up to £250k
  • 5% up to £925K
  • 10% up to 1.5m
  • 12% on everything over that

The Chancellor says the changes benefit 98% of homebuyers. However anybody purchasing a high value property in excess of £925,000 is worse off under the new scheme so may wish to look at the Law Firm Limited stamp duty mitigation scheme.

There are transitional rules that you can apply if for example you exchanged contracts before the 4th December 2014 and complete after that date. In this case you can chose under which set of rules you are taxed.

In addition clients who are using companies to purchase properties: From 5th April 2015 buyers of typically high-end properties who choose to own them through a company - a process known as "enveloped" transactions - faced a further steep increase in tax, as the rate was increased by the rate of inflation plus a further 50% of the rate of inflation.

There are two examples of calculations by old and new rules:

1. The SDLT due on the purchase of a residential property for £750,000 is calculated as follows:

a. Under the new rules the SDLT is calculated as follows:

  • 0% on the first £125,000 = £0
  • 2% on the next £125,000 = £2,500
  • 5% on the final £500,000 = £25,000

Total SDLT due = £27,500

b. Under the old rules SDLT is calculated as follows: 

  • 4% of £750,000 = £30,000

Total SDLT payable = £30,000

2. The SDLT due on the purchase of residential property for £2,000,001 is calculated as follows:

a. Under the new rules the SDLT is calculated as follows:

  • 0% on the first £125,000 = £0
  • 2% on the next £125,000 = £2,500
  • 5% on the next £675,000 = £33,750
  • 10% on the next £575,000 = £57,500
  • 12% on the final £500,000 = £60,000

Total SDLT due = £153,750

b. Under the old rules SDLT is calculated as follows: 

  • 7% of £2,000,001 = £140,000

Total SDLT payable = £140,000

Capital gains tax on sale of property

On the sale of a property if a capital gain Is made it is normally liable to Capital gains tax however if an individual owns a property and lives in it as his main residence throughout the period of ownership this gain is exempt from tax.  There are periods where this exemption will still apply if the property is not used as a main residence, but this a complex area and advice should be sought if this situation is likely to arise. 

Should further information be required please call our office in London +44 (0) 207 907 1460 or email us and we would be happy to assist. We carry out the conveyancing procedure and help with the mortgage.

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