The Key Elements and Structure of a Freehold Property Transaction Flashcards
What are the two key milestones in a conveyancing transaction?
1) Exchange of contracts
- The contract records the agreed terms and can relied on if things go wrong between exchange and completion
- Parties not bound until contracts are exchanged, meaning they have no legal rights against one another and cannot recover wasted conveyancing costs if things fall through
2) Completion
- Bulk of purchase money paid to seller and the transfer deed is completed to transfer the property to the buyer
What conflicts of interest should a solicitor be aware of for property transactions?
- Shouldn’t act for both seller and buyer, because there is no ‘substantially common interest’ exception for property purchases and the ‘competing for same objective’ exception only works for two buyers
- Usually acceptable to act for joint buyers
- Acting for a borrower and lender is likely to be OK for residential property, as mortgage will be on standard terms
- Acting for a borrower and commercial lender may give rise to significant risk of COI
What are the Etridge guidelines?
Usually acceptable to act for joint borrowers, but there are ‘Etridge guidelines’ that apply where a business loan is secured on a jointly owned matrimonial home. Here, a lender should, with the borrower’s consent, provide the solicitor with the following information:
(a) the purpose for which the loan is being made available;
(b) the current amount of the borrower’s indebtedness;
(c) the amount of the current overdraft facility;
(d) the amount and terms of the new loan; and
(e) a copy of any written application made by the borrower for the loan.
The solicitor should, at a F2F meeting without the borrower:
(i) explain to the spouse the purpose for which the solicitor has become involved;
(ii) explain that the lender will rely on the solicitor’s involvement to counter any suggestion that the spouse has been unduly influenced or has not fully understood the nature of the
transaction; and
(iii) obtain confirmation from the spouse that they wish the solicitor to act for them in the transaction, and to advise them on the legal and practical implications of the transaction.
What is a contract race?
A contract race occurs where a seller sends multiple buyers a pre-contract package who ready to exchange contracts first
OK if they know it’s a race, but if seller declines to disclose this to the buyers, seller’s solicitor should cease acting
What should solicitors bear in mind when they are asked to advise on funding a property purchase?
Providing advice on regulated mortgages is a regulated activity, for which they need FCA authorisation or exclusion/exemption
They should give generic advice only and only advise when they have sufficient expertise to ensure their service is competent
What are the two main types of mortgage that a buyer might consider?
1) Repayment mortgage
- Borrower makes monthly payments to the lender, comprised of instalments of the original amount borrowed and partly of interest chargeable on the loan
- Interest could be fixed for a set period, at a ‘tracker’ rate above the UK base rate set by Bank of England or at lender’s standard variable rate
2) Interest-only mortgage
- Borrower makes monthly payments to the lender, comprised only of interest chargeable on the loan
- Borrower will need an alternative way to pay off the loan, if they want to be free of mortgage at the end of the term
What taxes might be relevant in a residential and commercial property transaction? Give an overview
1) Residential
- Buyer may have to pay Stamp Duty Land Tax (SDLT) in England or Land Transaction Tax (LTT) in Wales
- Seller will probably not have to pay CGT on a gain if they used the property as their main or only residence
2) Commercial
- Buyer will pay SDLT or LTT, but rates different and no first-time buyer concession; buyer may have to pay VAT on purchase
- Seller, if a company, will pay Corporation Tax on gains if the property is sold for more than its purchase price; property rented by landlord will pay Corporation Tax on the rent
What specifically is SDLT paid on?
It is paid on the total purchase price, including deposit + VAT (if any)
What are the rates of SDLT for residential properties?
1) First time buyers can claim relief from SDLT if they intend to occupy the property as main residence and purchase price is no more than £625,000
- They pay nothing below £425,000 and 5% on portion between £425,001 to £625,000
2) For residential, non-first-time buyers:
- So much as does not exceed £250,000 - 0%
- So much as exceeds £250,000 but does not exceed £925,000 - 5%
- So much as exceeds £925,000 but does not exceed £1,500,000 - 10%
- The remainder - 12%
3) If a sale involves valuable chattels, it may be possible to apportion some of the purchase price to the chattels to reduce payable SDLT
- Apportionment must be for a fair value or could be a fraud on HMRC
What are the rates of SDLT for non-residential properties?
For non-residential or mixed-use freehold:
- So much as does not exceed £150,000 - 0%
- So much as exceeds £150,000 but does not exceed £250,000 - 2%
- So much as exceeds £250,000 - 5%
When must SDLT be paid?
Within 14 days of completion to HMRC with form SDLT1
What are the rates of LTT for residential properties?
1) LTT has no relief for first time buyers
2) LTT Rates for residential freehold:
- So much as does not exceed £225,000 - 0%
- So much as exceeds £225,000 but does not exceed £400,000 - 6%
- So much as exceeds £400,000 but does not exceed £750,000 - 7.5%
- So much as exceeds £750,000 but does not exceed £1,500,000 - 10%
- The remainder - 12%
What are the rates for LLT for non-residential properties?
Rates for non-residential or mixed-use freehold:
So much as does not exceed £225,000 - 0%
So much as exceeds £225,000 but does not exceed £250,000 - 1%
So much as exceeds £250,000 but does not exceed £1m - 5%
So much as exceeds £1m - 6%
When must LTT be paid?
Within 30 days of completion to Welsh Revenue Authority with land transaction return submitted
What is capital gains tax and when will private residence relief apply?
1) CGT is charged on gains made on chargeable assets, which includes freehold and leasehold property
- Gain on property sale = sale price - purchase price
2) To qualify for private residence relief, seller must have occupied the dwelling house as their only or main residence throughout the period of ownership
- If they own multiple, they can elect which one qualifies for PRR
- If a garden is more than 0.5 hectares, the gain on the excess is chargeable to CGT unless it can be proven the extra garden was necessary for reasonable enjoyment of the house
- Relief may be lost on a part of the house if a part of the house was used exclusively for business use
Give a summary of VAT
(i) Most real estate transactions are exempt from VAT.
(ii) VAT is not usually paid on residential transactions.
(iii) VAT is only compulsory on ‘new’ commercial properties (less than 3 years old)
(iv) VAT is not always charged on ‘old’ commercial properties.
(v) The seller has an option to tax the supply of ‘old’ commercial properties.
(vi) The seller needs to opt to tax only if it has paid VAT that it wants to recover.
(vii) If the seller opts to tax, the buyer will usually be able to recover the VAT paid.
(viii) If the buyer makes only exempt supplies, such as insurance or financial supplies, it may be unable to recover fully VAT it has to pay.
(ix) So, a buyer that makes exempt supplies will resist the seller’s option to tax or seek a compensatory reduction in the purchase price.
