4. Contract Stage Flashcards
What is capital gains tax?
Tax charged on gains made on ‘chargeable assets’ within the meaning of Taxation of Chargeable Gains Act 92. Includes freehold and leasehold property, and interests of co-owners in jointly-owned property.
How are gains calculated?
Purchase price-current sale price
What is private residence relief?
a tax relief that allows you to avoid paying CGT on any gain you make when selling your main home (your primary residence), as long as you lived there the whole time you owned it.
Rule for private residence relief
Occupancy must be for primary residence for the duration of ownership[
Which absences does s223 Taxation of Chargeable Gains Act permit
- Last 18 months of ownership to facilitate purchase of another property
- First 12 months of ownership for any repairs or redecoration
- Any period not exceeding 3 years (does not have to be consecutive)
- Any period while owner was working outside the UK (not self employed persons)
- Any period where owner was prevented from living in their house
Is letting a residence exempt from CGT
No, as it ceases to be individuals main residence
What is VAT
Tax chargeable in respect of a supply of goods or services made in the course of a business.
Input tax
- VAT a business pays when it buys goods or services for its operations.
- Can be recovered from HMRC
Output tax
- The VAT a business charges when it sells goods or services.
- Business must pay this to HMRC
VAT rule in residential transaction
- Sale of a green field site - E with option
- Construction and civil engineering- 0
- Legal and other prof - standard
- Sale or lease of a new house -0
VAT in commercial transactions
- Sale of a green field site -E with option=
- Construction and civil engineering- S
- Legal and other prof- S
- Sale of a new (one completed within 3 years prior to sale) freehold- S
- Sale of an old freehold (property more than 3 years) - E with option
- Grant or assignment of lease - E with option
What does option to tax mean?
Exempt tax can be converted to taxable one to recover any input tax incurred
What is stamp duty land tax
- Charged on property transactions
- Rates dependent on type of property, and value of transaction
- Payable to HMRC within 14 days of completion
What do corporate bodies pay
15% on residential of over 500k
Tax on purchases of 6 or more in one transaction
Subject to rates for non residential
Tax on purchase of additional properties
Extra 3%
Are chattels subject to tax?
No- 0 SDLT
What is the purpose of the contract
- Defines the land to be sold
- Terms on which the seller is prepared to sell
- Day of completion
- Terms of transfer deed
(s2 LPMPA 1989) elements of a contract
Must be in writing, signed by all parties & contain all the terms
What does a contract for land comprise of
- Particulars of sales
- Standard conditions of sales
- Special conditions
Particulars
- Describe the estate in land being sold (whether freehold or leasehold) and physical extent of that land
- References to easements or covenants benefiting the land
- Plan
Part 1 standard set of conditions
general application and applies entirely to any contract
part 2 standard set of conditions
VAT, capital allowance and reversionary interest (specific to transactions, incorporated by special condition)
What are special conditions for?
Particular circumstances of the transaction
SC 3.1.1, SCPC 4.1.1
Seller sells property free from incumbrances other than that listed in SC 3.1.2 and SCPC 4.1.2
What if incumbrance is not covered by 3.12
buyer may have the right to rescind contract/claim damages
3.1.2b
matter discoverable by inspection pre contract
3.1.2C
matter seller does not/reasonably could not know about
3.1.2d
matters other than mortgages which the buyer knows about
3.1.2e
- entries made pre contract in public register except those by LR, LCR, CH
- Any incumbrances at CH/entered on the register are not deemed to be disclosed and must be on contract
3.1.2f Public requirements
- Notice, order or proposal given or made by body acting on statutory authority
- Likely revealed by LA enquiries
Matters not requiring disclosure
- Interests of BIUT overreached
- Physical defects
- Restrictive covenant indemnity insurance
- Who obtains/pays is for negotiation between buyer and seller
- If buyers intended use breaches covenant it will be for buyer to arrange and pay for insurance
- If sellers is in breach, usually for seller to assume this
- Special condition inserted detailing sum insured, approving terms of policy
SC4.1/ SCPC 7.1
sets out doc evidence of title seller will provide
What is an implied covenant
Possible to give buyer benefit of implied covenants under LPMA 1944
Inclusion of seller sells with full title guarantee
Land disposed of is free from incumbrances other than those seller does not know about/could reasoably know
- Seller has right to dispose of land
- Seller will do all they reasonably can to transfer title
- If leasehold, lease subsists and there is not covenant making lease liable to forfeiture`
No reference to title guarantee =
seller sells with full title (SC 4.6.2/SCPC 7.6.2)
Seller needs to specify by special condition whether the property being sold is vacant/subject to occupational leases
- Necessary to ensure occupier vacates on completion
- Occupier must have no legal/equitable interest
- Confirmed in writing
when is actual date for completion entered
in contract, on exchange
What if no completion date on exchange
SC 6.1.1/SCPC 9.1.1 sees completion as 20 working days after contract date
Compensation for delayed completion
- SC 6.1.2/SCPC 9.1.2
- If completion monies are received after 2pm, completion deemed to have occurred on next working day
- Buyer to pay if they default
How is amount of default payment calculated
- at contract rate
- Defined as being the law societys rate from time to time n force (SC 1.1.1)
Why would someone purchase indemnity covenant
- If seller entered into a covenant when they purchased property, they are liable even after disposing of property (unless contract states otherwise)
- Whilst seller is bound, if buyer breaches covenant seller may be liable of being sued
- Seller to take indemnity covenant from buyer
- Indemnity may be included in transfer (SC 4.6.4/7.6.5)
Fixture/fittings terms
- Fixtures pass automatically with land, unless special condition gives seller right to remove
- Chattels to be specifically identified by special condition or by using printed special conditions
- ‘Contents’ - itemised list attacked to contract
How much deposit is customary
10% is customary (SC 2.2/3/2)- acts as part payment
If seller is asked to accept reduced deposit amount, what must the solicitor consider
- Risk of sale going off
- Amount of buyers mortgage offer
- Loss seller would suffer if buyer defaulted
- Sellers solicitor must explain risks of accepting reduced deposit and obtain express authority before agreeing to accept Morris v Duke Cohan & Co (prof negligence to accept without authority)
What is bridging finance
- For linked transactions
- Undertaking to repay bridging loan from sale proceeds
- High interest rate for bridging finance
- May be preferable to take advantage of lower interest overdraft facility
Deposit guarantee
- Insurance policy bought by buyer and tendered to seller in place of money deposit
- Seller’s consent must be obtained
- Sellers consent must be obtained, contract amended
Rule in relation to clearing funds
Buyers solicitor must ensure they receive deposit in sufficient time for cheque to be cleared through solicitor cl account
Permitted - Method of payment under sc2.2.4/3.2.2
- Must be paid via electronic means from solicitor’s account with clearing bank to seller’s solicitors account
- Permissible to use cheque drawn on solicitors cl bank account
- If cheque bounces, this is a fundamental breach of contract
- Seller can keep contract alive/discharge and sue for damages Millichamp v Jones
- Seller to inform buyer of contract discharge within 7 working days of being informed of the cheque being dishonoured
Interest on deposit SC 2.2.6/3.2.2
- Where deposit is held in capacity of stakeholder, interest payable to seller on completion
- If buyer is to be credited, special condition to that effect must be inserted
Why might a buyer purchase insurance from exchange
- Risk of accidental damage passes to buyer from contract exchange
(except where seller lacked proper care Clarke v Ramuz; Phillips v Lamdin)
What if solicitor fails to advise cl on insurance
May be liable for negligence
Insurance is effected via
- Noting property on block policy held by buyers solicitor, covering all properties handled by firm
- Lender insures on being requested to do so by buyers solicitor
Lenders instructions to solicitor to ensure that
- Amount of cover is adequate (property value and risks covered)
- Property is on cover from time of exchange
- Lenders insurance requirement does not conflict with terms of contract/lease to which property is subject
To advise on insurance contracts, you must
- Be authorised by FCA or;
- Rely on professional services exemption
Insurance for property in the course of construction
- Seller liable for damages until completion
- Buyer need not take out their own policy
- Exclude S47 LPA 1925 (otherwise gives buyer the right to claim off sellers policy in event of damage)
What if insurance amount to buyer reduces due to sellers insurance policy
SC 5.1.5/8.2.4(b) where there is a reduction in payment to buyer due to seller’s policy, purchase price is to be reduced
Other relevant types of insurance
- Contents insurance
- When buyer moves fittings into property
- Life assurance
- Proceeds available to buyers PR in the event of death pre completion
- If buyer dies, PR could be forced to complete sale without proceeds would not have the funds to do so as mortgage offer would be revoked
Once searches and enquiries have been completed, and draft contract agreed
- Report to cl in writing , explaining investigation results
- Terms of contract
- Mortgage offer
- Buyers report to cl
Both parties must sign to satisfy s2 LPMPA 1989
- Signature need not be witnessed
- Solicitor needs express authority to sign on behalf of cl Suleman v Shahsavari
- Unless solicitor holds valid power of attorney, recommended to obtain consent via writing
- Cl to be informed of consequences of giving authoirty (creates a binding contract)
Is physical exchange of contracts required
no
Once contracts are exchanged, is it possible to withdraw
no
Formulae for exchange
- Solicitor holds both parts of the contract before exchange is initiated
- At the time of telephone exchange, each party’s solicitor is in possession of their own client’s signed contract
- Designed to be used in chain transactions
Postal exchange
- Buyers solicitor sends cl signed contract & deposit cheque to seller’s solicitor who posts cl’s signed contract back to buyer.
- Follows the postal rule- contract is formed when seller posts part of their contract to the seller irrespective of whether it gets lost in the post
can contract be effected by email
Contracts for sale of land must be in writing, cannot be done electronically via email
Effects of exchange
- Binding contract exists whereby neither party can withdraw without incurring liability
- Beneficial ownership passes to the buyer
- They are entitled to increase in value & bears risk of loss or damage → effective insurance from date of exchange
- Seller retains legal title until completion
- Seller is entitled to remain in possession and any rental income until completion & must pay outgoings
- Seller owes duty of care to buyer & is liable for damages if loss is caused via neglect Clarke v Ramuz
- Continues whilst seller is in possession
Can buyer possess property until completion
Seller will be in physical occupation of property until completion and is entitle to retain possession until completion (unless it has been agreed otherwise)
Buyers occupation before completion is as a licensee, not a tenant sc5.2 governs this
Does death affect contract validity
- Death does not affect contract validity
- Benefit/burden pass to deceased’s personal representatives who are bound to complete
What if completion does not pass on contractual completion date
- If completion does not pass on the contractual completion date, breach of contract occurs → remedies for innocent party (compensation, damages)
- If time is not of the essence, notice to complete sent to deceased address & executor named in the seller’s will
- Copy to be sent to public trustee (same if they died intestate)
Death by one co seller
If there are at least 2 trustees, transaction can proceed to completion, otherwise another trustee is appointed so the min number of 2 can be achieved
Death of buyer
- personal reps bound to complete
- Transfer deed is redrafted to reflect change in parties and cannot be completed until PR receive grant of representation
- Death revokes a mortgage offer where revelant and PR may have insufficient funds
Pre-completion steps
- Preparation of transfer deed
- Dealing with redemption of sellers mortgage and creation of buyers mortgage
- Pre completion searches
- Ensuring financial aspects of transaction are in order
- interval between exchange and completion used to be 4 weeks, now cl will want faster completion (14 days)
- Pre completion searches to be made as close to the date of actual completion because of the protection period given to buyer as a result
