Property Transactions Flashcards
When a buyer is purchasing a property, their deposit goes to the seller on exchange on contracts. This is classed as client money and it is held jointly for the buyer and seller by the seller’s solicitor as stakeholder.
Explain how the deposit will be recorded in the firm’s accounts up to completion
(1a) Can have the money in the seller’s client ledger alone, if it is identified clearly as being stakeholder money for buyer and seller
- DR cash account – client section
- CR seller’s ledger account, noting money held as stakeholder – client section
(1b) Firms could have a separate stakeholder ledger account in the joint names of the client and buyer and credit the money to that account
- DR cash account – client section
- CR joint stakeholder ledger account – client section
(2) On completion, firm held for seller alone, so an inter-client transfer takes place
- DR joint stakeholder ledger account – client section
- CR seller’s ledger account – client section
Deposit received as agent for the seller belongs to the seller alone and is credited to the seller’s ledger account
DR cash account – client section
CR seller’s ledger account – client section
If the deposit is received by the seller’s solicitor as agent for the seller, how is this recorded in the firm’s accounts?
Deposit received as agent for the seller belongs to the seller alone and is credited to the seller’s ledger account
- DR cash account – client section
- CR seller’s ledger account – client section
What is bridging finance?
A seller who is purchasing a replacement property, but who cannot access their stakeholder held deposit until completion (SCs) or if this deposit is insufficient, they can take a bridging loan from a bank to cover from exchange to completion of the sale, when their cash will become available
Personal loan to the borrower, so when a solicitor receives it, it must be credited to borrower’s ledger account
On completion, it is repaid to the bank
Mortgage will need to be redeemed/repaid on completion of sale and where the solicitor acts for borrower and lender, they are 2 separate clients + the solicitor must be clear for which client money is being held.
How are mortgage advances recorded in the firm’s accounts, where the solicitor acts for the buyer and the lender?
Money received from a lender as a mortgage advance is held for the lender until completion, but firms are allowed to credit it to the borrower’s ledger account, if it is clearly labelled
Therefore, firms acting for lenders and borrowers as 2 separate clients can:
Method 1) Credit the mortgage advance to the borrower’s ledger account, with the detail column including the name of the lender + ‘mortgage advance’
- CR client ledger – client section
Method 2) Credit the mortgage advance to a separate ledger account in the name of the lender on receipt. On completion, make an inter-client transfer to the borrower’s ledger account
- (1) CR lender ledger client section – on receipt of advance
- (2) On completion, DR lender ledger + CR client ledger – client section for both
How are professional charges in relation to mortgage advances dealt with, in overview?
Firm can charge lender + buyer for work done in connection with the purchase/mortgage advance
Buyer usually agrees to pay lender fees
Must charge costs + VAT to both, but can then transfer debt from lender ledger account to buyer ledger account, to signify that the buyer is paying both lots of fees/VAT
How are the DR and CR entries for professional charges in relation to mortgage advances recorded?
Charge buyer
- DR buyer’s ledger account (business section) with fees charged on purchase and VAT
- CR profit costs account and HMRC account with fees and VAT respectively
Charge lender
- DR lender’s ledger account (business section) with fees charged on the mortgage and VAT
- CR profit costs account and HMRC account with fees and VAT respectively
Transfer debt from lender to buyer
- CR lender’s ledger account (business section) with fees charged on the mortgage and VAT (as one figure)
- DR buyer’s ledger account (business section) with fees charged on the purchase and VAT (as one figure)
If there is no separate ledger for the lender, it will all appear in the buyer’s ledger as:
- DR x2 for buyer
- DR x2 for lender (stating lender’s name and mortgage advance in detail column)
How are mortgage redemptions recorded in the firm’s accounts, where the solicitor acts for the lender and seller?
Balance of mortgage must be paid off from the proceeds of sale
Uncommon to act for lender and seller, but if this happens, the seller will get some of the sale proceeds and so will the lender
The whole amount of the proceeds is client money, into the client account
Clearest way:
(1) Credit all the proceeds to seller’s ledger account
- CR seller’s ledger account – client section
- DR cash account – client section
(2) Inter-client transfer of amount required to redeem – moved into lender’s ledger account
- DR seller’s ledger account – client section
- CR lender’s ledger account – client section
(3) Mortgage redemption money paid out from client account to lender
- DR lender’s ledger account – client section
- CR cash account – client section
What is an alternative way of recording mortgage redemption in the accounts, where a solicitor acts for lender and seller?
CR seller’s ledger account – client section for what they are owed
CR lender’s ledger – client section for what is required to redeem mortgage
DR x 2 cash account – client section, to show firm holding money for clients
How are professional charges in relation to mortgage redemptions dealt with, in overview?
Seller may agree to pay lender’s legal fees
Must charge costs + VAT to both, but can then transfer debt from lender ledger account to seller ledger account, to signify that the seller is paying both lots of fees/VAT
How are the DR and CR entries for professional charges in relation to mortgage redemption recorded?
(1) Charge seller
- DR seller’s ledger account (business section) with fees charged on sale and VAT
- CR profit costs account and HMRC account with fees and VAT respectively
(2) Charge lender
- DR lender’s ledger account (business section) with fees charged on the mortgage and VAT
- CR profit costs account and HMRC account with fees and VAT respectively
(3) Transfer debt from lender to seller
- CR lender’s ledger account (business section) with fees charged on the mortgage and VAT (as one figure)
- DR seller’s ledger account (business section) with fees charged on the mortgage and VAT (as one figure)
