Property Update 2017
- RSL Law
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2017 has been an interesting year for all our clients who bought, sold, rented and let-out properties in London and its counties. Buyers are still getting used to the effects of change in SDLT structure (moving to blended rates and second home surcharge). These changes as well as Brexit effected buy-to-let market, and were of particular interest to our private landlord clients. What follows is a brief summary of what kept us busy in the real estate realm in 2017.
Budget and Stamp Duty Land Tax
In November we all found out the current Chancellor, Philip Hammond’s plans for the next financial year to boost home building in the UK with the attendant aim of helping first time buyers up the property ladder. We remind you of a few below:
- The purchase of any first house (up to the value of £300,000) would be free of stamp duty.
- Large areas of protected green belt countryside will be re-classified as open for development.
- Help-to-Buy scheme will have a further £10 billion investment to continue its development until 2021
- Pledge to build 300,000 homes a year by 2025, the largest increase in new homes for almost 50 years.
Despite all the good intentions, the effect these initiatives will have on the property market remains doubtful. National newspaper Telegraph noted that stamp duty is preventing 45,000 house purchases a year. Phillip Hammond comes under growing pressure to cut the tax to help first-time buyers get a foot on the ladder. The number of home purchases blocked by the tax has doubled over five years, with first-time buyers, home movers and downsizers all affected, according to a new report by the Centre for Economics and Business Research. To no surprise really, if one remembers the change of rules on calculating SDLT in December 2014 – overhauled stamp duty structure moved to blended rate. And of course, the rules on increased SDLT when purchasing second home came into force in May 2016 – second home surcharge introduced. We advised on both changes in our publications.
According to London (Reuters), British banks reported that they approved 7 percent more mortgages for house purchase in September 2017 than they had in September 2016. On average, to obtain a mortgage for a residential property might take between 8 and 12 weeks. It is important to know that some lenders are unwilling to provide mortgage unless you have an Indefinite Leave to Remain or a Permanent Residence Card. If you are buying a business asset, for example, a hotel, the process of securing a mortgage offer will not happen as quickly as it does in the residential market. The lender will likely request a lot of information beforehand to be able to assess the proposal and work out the most appropriate lending criteria. The report concludes however that there is increased confidence on the buyer’s side as well as the banks.
Buy-to-let Properties and Non-resident landlords
On 14 August, the Telegraph reported that one in five buy-to-let investors plan to sell their properties. A weakening housing market, tough new tax legislation (second home surcharge) and increased difficulty in obtaining mortgages have all made buy-to-let a less attractive investment. Many of our clients change their strategy, and instead of investing into London homes, move their attention to the northern cities in the UK, like Manchester, Leeds and Liverpool. Remember, if you are not a resident in the UK, and you do own a buy-to-let property here, you must account to HMRC for your rental income. We strongly advise you to register as a non-resident landlord, which will afford you the option of collecting your rent without deducting any tax for the full financial year, and account for your income only after the end of the financial year, and when all costs and expenses can be determined.
Divorce and Family Home
Some of our clients, required assistance in the emotive subject of family property matters, particularly with advice in relation to divorce and its consequences on property rights. Often the most important question is how the real (tangible) property will be account for. What will happen to a family home?
At the end of May we advised one client on whether it is likely that the court will order his family home to be sold and proceeds of sale to be divided. The main consideration is likely to include the needs of children together with the parent with whom they live. The value of the house will determine whether it is likely to be sold. If sale of the property provides sufficient funds to accommodate the children and the parent with whom they will be living, and possible provide sufficient funds to live on until they reach the age of 18, the court may order the sale of the house and division of sale proceeds. The courts have wide discretion in these matters.
Costs of property buying
In May and April, we published a number of articles discussing the importance of every stage in a conveyancing process and correct execution of documents. We received many comments and questions on one particular article- regarding the costs of property buying. In addition to the price for the chosen property, you will also have to pay Stamp Duty Land Tax. From April 2016, the calculation of the Stamp Duty is carried out in accordance with the new rules. The main essence of these changes concerns those buyers which are already legal owners of residential real estate (in the UK or abroad). In this case, Stamp Duty is paid at higher rates (+ 3%). Note that this increased rate is not absolute and there may be other circumstances when there is no obligation to pay the increased tax, including:
- when you buy a second property, in exchange for an existing one, even if the existing house or apartment is not sold yet, as long as the sale completes within 36 months;
- when you buy two properties at the same time, and the main property costs at least 2/3 of the price for both properties.
Higher rates of Stamp Duty are relevant only for residential real estate. Commercial real estate and “mixed use” will continue to attract a maximum of 5%.
Other expenses include the Land Registry registration fees, the payment of various third-party costs and of course solicitor’s fees.
Brexit and its effect on property market
Theresa May has confirmed that Article 50 of the Lisbon Treaty will be invoked before the end of March 2017. By summer 2019 the UK will be out of the EU. How will this affect the property market, and in particular the lives of landlords?
The majority who voted Brexit demanded tighter control of EU migration. Less immigrants, means less demand for rental accommodation. Less demand means lower rent prices. Private landlords must also check the legal status of their tenants. They are personally responsible to let their properties only to migrants who are in the UK legally. There is a specific list of documents that must be obtained before entering into a tenancy agreement.
In addition, there has recently been a greater regulation of the Assured Shorthold Tenancy regime commonly used by private landlords. Assured Shorthold Tenancy is a fixed term tenancy, where a tenant agrees to rent a property for a minimum 6 months, and usually 12 months, with a 6 months break clause. The rent normally remains the same throughout the tenancy term, and can only be increased if the term is extended.
There are requirements on private landlords to follow a strict procedure when entering into the tenancy, including provision of certain documents (EPC, a Gas Safety Certificate, correct version of the Government How to Rent guide and the prescribed information relating to the tenancy deposit) and protection of the tenant’s deposit in approved schemes. Non-compliance may lead to compensation claims.
Lastly if a tenant complains of disrepair and the landlord does not provide an adequate response before serving notice seeking possession then its notice is defective and the process of recovering your property must be commenced again.
Nevertheless, buy-to-let investments can provide a steady (and at times, considerable) income, if landlords organize their affairs according to the rules from the outset.