A large number of the property transactions we deal with are in the Central London area and with competition for property unstintingly tough, some sellers are cashing in on this demand. It has become common for those who have bought property ‘off plan’ to sell them on before they are finished and before they have even completed their own purchase.
The mark up in price makes this a tempting proposition for investors (many of which are from the Far East) as all they have contributed at this stage is the deposit. Better still, by selling before they have completed, they avoid not only the new higher levels of Stamp Duty (following the budget) that properties attract, but Land Registry fees too.
Leasehold properties are often complex from a title perspective and with some city centre properties having both head and sub-leases, it generally means that there are not one but two landlords to deal with. Couple with that the additional complexity of buying from someone other than the registered title holder and it can become a maze of legal complexity for the unwary buyer.
Buying ‘off plan’ always presents more challenges and greater risk. Buyers will require detailed advice on the terms of the original sale contract, which is effectively assigned to them on exchange of contracts. This should include a detailed specification for the property, a timetable for completion of building work, compliance with planning and building regulations and the defects warranty to be provided on completion (which should also provide cover for the developer’s insolvency pending completion of the development).
On a re-sale transaction, there is no scope to re-negotiate the terms of the original contract, many of which may be skewed in favour of the developer as a result of the original investor having little incentive to bargain over practical details that will only become relevant after he has sold the property on.
The strengthening market in London means that in spite of this, investors are able to insist that buyers not only reimburse the deposit they paid on the original contract, but also demand payment of the “uplift” value in full on exchange of contracts, meaning that buyers have paid considerably in excess of the usual 10% deposit on exchange of contracts, often many months before the property is complete.
On practical completion, there is a very strict timetable for the buyer to complete their purchase – with investors reserving the right to cancel the sale if the new buyer fails to complete on time. This presents particular challenges where the buyer is taking out a mortgage: many lenders are wary of lending on re-sale transactions at all and those who do, will often insist on a final inspection following practical completion before funds can be released for completion.
Following completion the buyer will have to pay stamp duty (SDLT) at the appropriate rate on the total price paid to both the original investor and the developer.
Whilst many had called for wholesale reform of the SDLT regime in this year’s budget, to kick start the property market, this did not happen. There were some changes to the SDLT payable on high value UK residential property held by “non-natural persons”, clearly designed to further discourage the practice of “corporate enveloping”.
Anti-avoidance measures had already been introduced in 2012 to impose a 15% rate of SDLT for residential property purchased for over £2 million via a “corporate envelope” (for example a non-UK company based in a tax haven and owned by a non-UK resident individual). The top rate of SDLT payable by an individual is otherwise 7%. The threshold for the 15% rate of SDLT was reduced from £2m to £500,000 with effect from 20th March 2014. These properties are also subject to an Annual Tax on Enveloped Dwellings and a related charge to Capital Gains Tax when they are sold and the scope of both of these charges was similarly increased to include properties purchased for as little as £500,000.
Also of significance to homeowners in the 2014 Budget, was the announcement that the government intends to reduce the period during which property owners can continue to claim exemption from Capital Gains Tax by claiming principal private residence relief after they have moved out of the property from 3 years to 18 months. In most cases this change takes effect from 6 April 2014.
The clients own perspective: Barry O’Toole recently acquired such a property, below in his own words are his thoughts:
“Essentially this arrangement is buying the right to buy a property through the assignment of somebody else’s contract and it’s a nerve wracking business. However, Bridget and Mark did a brilliant job of holding my nerve for me! My main advice is not to succumb to pressure from the seller to exchange quickly.
The seller is probably a non-resident, most likely from the Far East, and probably doesn’t understand fully the nature of the British market or property system. They’re also likely to be represented not just by the estate agent and their lawyers but by a financial agent acting on their behalf as an intermediary, also probably in the Far East. They’re looking to make a big and fast profit. The pressure is thus likely to be enormous from different fronts.
Take your time at all stages. Given that the deposit money is a great deal more than for a ‘normal’ purchase your lawyers need to be completely certain that everything is done to bind the seller to the assignment and that you have an absolute guarantee of the contact being assigned simultaneously with the passing over of the deposit funds.
Even then, of course, there’ll be an agonising wait while the property is being built. And don’t forget to have the money fully available when it’s handed over at completion. Don’t enter this sort of arrangement unless you are prepared for one or two sleepless nights! Having said that Bridget and Mark kept those to the bare minimum for me!”