The UK has a flexible, secure and transparent property market offering a wide range of investment structures. In recent years international purchasers have increasingly been investing in UK property, attracted by the lack of restrictions on overseas companies buying or renting property, the excellent returns available and the stability of the market. Unsurprisingly, Britain is now among the top ten nations in the world for outbound Chinese investment.
Here is an overview of the legal procedure and tax considerations for overseas investors looking to purchase or rent property in England.
Acquisition of land
Investors in the UK property market can acquire either a 'freehold' or 'leasehold' interest in land. The key differences between these two main types of legal interest are summarised below:
- Unlimited - until freeholder sells/transfers his freehold interest.
- Upon the death of the freeholder (where it is an individual), the interest will be transferred in accordance with the deceased's will or the rules of intestacy.
- Fixed period - usually determined by a contractual term in a loan agreement.
- Can usually be extended or terminated (by notice of the freehold/superior leasehold owner).
- It is possible to purchase a long term lease (typically lasting between 99 and 150 years) for residential property. Such a lease is similar to a Land Use Right in China.
- Full ownership and control of property and the land it stands on - limited by the existence of any third party rights, such as covenants, easements or rights of way.
- During the term of the lease the tenant has exclusive possession of the property.
- The property reverts to the freeholder (or in some cases a superior leaseholder) at the end of the term.
- The respective rights and responsibilities of landlord and tenant are usually set out in the lease agreement and will relate to maintenance and upkeep of the property, rights of assignment, renewal, rent etc.
- Usually a one-off payment of full capital value (commonly by way of finance).
- Typically, regular rent payments (note that an additional premium may also be payable e.g. at the start of the term).
- For long residential leases, a one - off premium at the start of the term and regular payment of 'ground rent' (small annual/bi-annual payment).
- Regarded as providing the buyer with the greatest degree of control over the property, and provides a capital value which generally increases with time.
- The freeholder has the ability to grant leases which can be a source of regular income.
- The freeholder is ultimately responsible for the condition of the property (subject to the terms of the lease).
- In the short term, rental payments may be better for cash flow - capital is not 'tied up' in the same way as it is with freehold property.
- The freeholder bears the risk of any depreciation in the property's capital value.
The Land Registry
Nearly all land in England and Wales is registered at a governmental department known as the Land Registry. The Land Registry keeps a 'title register' for every parcel of registered land, which records the name and the address of the land owner, and details of any third party rights affecting the land. All registered land is also given a unique title number, by which it can be identified.
How is land transferred?
A typical transaction comprises the following three stages:
- due diligence and contract negotiation;
- signing the agreed contract and payment of deposit; and
Due diligence and contract negotiation
The due diligence process and contract negotiation make up the bulk of the legal work on a property transaction. As UK land transactions are based on the principle of 'caveat emptor' (let the buyer beware), responsibility for investigating the property lies with the buyer. The seller is under no obligation to offer information about the property voluntarily, but may not provide information which is untrue.
Typically, the buyer's solicitors will carry out a suite of pre-contract searches, either directly or through one of a number of companies providing consolidated property search services. The following searches are among the most common:
- title investigation: to confirm the seller's ownership and establish whether there are any charges, covenants or other restrictions affecting the land, such as third party rights of way;
- physical inspection of both the property and the land it stands on;
- pre-contract enquiries of seller: these will typically concern boundaries, disputes, utilities and details of any persons occupying the property; and
- Local Authority search: enquiries regarding planning permissions, planning proposals, road schemes and planning infringement notices affecting the property;
- drainage, water and utilities searches; and
- environmental survey: to reveal the property's past uses and identify any risk of flooding or contamination.
The property investigation process will vary from transaction to transaction, and the above list of searches is by no means exhaustive. Our property team is experienced in co-ordinating due-diligence exercises, and would be happy to advise on your specific search requirements.
Alongside the process of carrying out searches, the seller's solicitor will produce a first draft of a sale purchase contract which will form the basis of negotiation.
Signing the agreed contract and payment of deposit
Once the sale purchase contract has been agreed, the buyer and seller will sign a written contract and the buyer will pay a deposit (this is normally 10% of the purchase price but is subject to negotiation). The signing of the contract is known as 'exchange' and is the point at which the parties become legally bound to complete the transaction.
Completion of the sale purchase contract usually takes place on an agreed date following exchange. In the absence of a contractually agreed date, completion will take place 20 working days after exchange. Between exchange and completion the buyer will conduct final due diligence checks and obtain funding if required, while the seller will prepare and sign the transfer deeds.
On the day of completion the buyer will usually pay the entire purchase price to the seller (less any deposit already paid) and the seller will transfer the legal title of the property to the buyer. Following completion, the parties will need to apply to the Land Registry to update the relevant title registers. If the land in question is not yet registered, an application for first registration will need to be made.
Planning and development
Any investor intending to build something new, or to make a significant change to an existing building (including an extension or a change of use) must obtain "planning permission" from the relevant Local Planning Authority (LPA).
Before approving an application for planning permission, an LPA will consider, among other things, the intended use of the development and the impact it is likely to have on the local area. A decision is usually made between eight and 13 weeks after the initial application, depending on the scale of the proposed development.
Unsuccessful applicants have a right of appeal.
There are several taxes a non-UK resident must bear in mind when purchasing property in the UK. Although detailed analysis of these tax considerations is beyond the scope of this note, we have outlined some key points below. Should you require more information on the tax implications of your proposed transaction, please contact our tax experts who will be happy to assist you.
Value Added Tax (VAT)
In most cases, and particularly on transactions involving residential property, VAT will not be a concern although some developers may exercise an option to charge VAT at the standard rate of 20% on the supply of commercial property.
Stamp Duty Land Tax (SDLT)
SDLT is generally payable on both the purchase of a freehold interest and the grant or purchase of a leasehold interest. In both cases the SDLT is paid by the buyer unless any exceptions apply. The current SDLT rates are as follows:
|Purchase price/lease premium or transfer value
|Up to £125,000
|Over £125,000 to £250,000
|Over £250,000 to £500,000
|Over £500,000 to £1 million
|Over £1 million to £2 million
|Over £2 million
|Over £2 million (purchased by "non-natural" persons including corporate bodies)
|Purchase price/lease premium or transfer value
|Up to £150,000 - annual rent is under £1,000
|Up to £150,000 - annual rent is £1,000 or more
|Over £150,000 to £250,000
|Over £250,000 to £500,000
In addition to the above rates, new SDLT provisions were introduced by the 2014 Budget, intended to discourage wealthy purchasers from buying homes through a corporate vehicle, to avoid tax. Accordingly, where residential properties worth over £500,000 are purchased by non-natural persons (NNPs), SDLT will be payable (by the purchaser) at rate of 15%. Certain exceptions will apply, to 'genuine commercial businesses', for instance.
Any potential buyer should also note that Stamp Duty payable on the purchase of shares is currently 0.5%. Hence, the purchase of the shares of a company that owns property, as opposed to buying the property directly, represents a substantial tax saving on the purchase, subject to ATED as explained below.
Annual Tax on Enveloped Dwellings (ATED)
ATED is an annual tax on certain NNPs who hold an interest in UK residential property. The Budget 2014 made changes to ATED provisions, so that from 1 April 2015, they now apply to residential properties worth £1 million or more.
From 1 April 2016, there will be a new band for ATED, applying to residential properties worth £500,000. Rates of ATED range from £7,000 per annum to £140,000 per annum depending on the purchase price/lease premium of the property. From April 2016, rates will start at £3,500. Purchasing a property directly, rather than the shares of a company, saves this tax.
Corporation tax may apply to purchasers acquiring property via a limited company. UK based companies must pay corporation tax on all taxable profits regardless of where in the world such profits arise.
Companies not based in the UK but operating in the UK (for example via an office or a branch) pay corporation tax on taxable profits arising from UK activities. Taxable profit in a property context is most likely to be rental income. If investment property is later sold for a profit, then this 'chargeable gain' may also attract corporation tax.
From April 2014, corporation tax will be charged at a rate of 21%. Certain tax reliefs may be available, such as 'capital allowances', detailed analysis of which is beyond the scope of this note.
The following taxes may also be relevant:
- carbon tax (for businesses with high energy usage);
- business rates - a tax payable on most commercial premises, to fund local services; and
- Community Infrastructure Levy - payable by developers to local authorities to fund any infrastructure required as a consequence of a new development.
There are few restrictions and significant advantages for overseas companies buying or renting property in the UK. The UK property market is an attractive, stable and safe place for non-UK companies to invest, either for occupation, income and capital growth or development and resale. UK tax will almost certainly be a key issue when determining how such investment should be financed and structured, and we strongly recommend that potential investors seek UK tax advice.
Our property and tax experts regularly advise international investors, and would be delighted to assist you with your investments in UK property.