Whether you’re buying a newly built flat or a period home, understanding the market will ensure your transaction goes smoothly.
The British property market has long been a magnet for foreign property investors, attracted by a robust legal framework and buoyant prices. London estate agent Chesterton has said that more than two-thirds of its new-build sales have been to foreign buyers in recent years1.
The housing market in the UK has largely bounced back after the global financial crisis. It triggered a 15% fall in house prices between 2008 and 20092, and a sharp drop in the number of transactions. But average national property prices have climbed 33% since 2009, the aftermath of the crash3.
The number of transactions in the last financial year hit 1.2 million4. That’s up from 796,000 in 2009, but still below the 1.7 million in 2006-7.
But the UK market is now fiercely competitive, particularly in fashionable areas of major cities such as London, Bristol and Manchester. Despite the pressure to act fast, do your research and make sure you know what you’re buying.
Remember that, like any asset, the value of residential property can fall as well as rise. Any property you decide to buy may be worth less in the future than the price you paid for it originally.
There are also a number of additional and continuous costs involved in owning property in the UK. If you fail to keep up with these payments it can lead to significant penalties and potentially the loss of the property. If you are unsure, seek financial advice.
Most foreign buyers opt for newly built homes, either houses or flats in apartment blocks. There are various reasons forthis. New properties are likely to be cheaper to maintain and more energy efficient, some offer a porter or concierge service, and are often finished with the latest fixtures and fittings.
You can buy new-build properties directly from the builder or via an estate agent, who will be selling on the builder’s behalf. Some of the biggest home builders in the UK include Berkeley Homes, Barratt and Persimmon.
Buying a property before it is built or completed is known as off-plan. If you buy in this way, you may be able to get some features changed, such as the position of a door, electrical sockets or cupboards. However, these costs are extra and the builder may not agree to make any changes until after contracts are exchanged.
If the property is registered with the National House-Building Council (NHBC), it’ll come with a 10-year warranty and protection scheme. There are also specialist companies that provide warranties and insurance for new homes.
To buy an older property on the open market in England, Wales or Northern Ireland, most people use an estate agent. An agent can search the market on your behalf and find a property that meets your criteria. However, you could also approach a seller directly, or buy at auction.
Once you’ve found a home you like, an estate agent will contact the seller with your offer.
In a competitive market, you may also be out-bid by rival buyers, potentially forcing you to raise your offer or walk away. Once your offer has been accepted, you will need a solicitor to handle your purchase.
In Scotland, the market works differently. For example, properties are usually listed with an “offers over” price, which is the lowest price the seller will accept. In practice, the final agreed purchase price may be much higher. It is also common to use a solicitor (rather than an estate agent) to help with your property search. Once you’ve found a property you would like to buy, a solicitor will also handle the process of making a formal offer on your behalf.
After the offer is accepted, you’ll need to exchange solicitors’ details with the seller. Your property solicitor or conveyancing specialist (a lawyer specialising in buying and selling properties), can handle a range of tasks. These include drawing up and explaining the buying contract and managing various charges. All these costs come on top of the price of a home and can catch buyers unaware.
There are many tasks your solicitor will undertake for you. For example, they will prepare a contract for sale and liaise with all relevant parties about a moving date. They will also find out if there are any planning applications that may affect your property. The last thing you want is to buy a property for its countryside views, only to have them blocked by a housing development.
A solicitor will also notify the Land Registry that you have bought a property and deal with your title deeds. These items are straightforward for a solicitor but inconvenient and potentially risky for the inexperienced buyer.
But watch out for additional fees if the process ends up taking longer than anticipated. Budget at least £1,000 for your solicitor. Keep in mind additional costs such as VAT and postage, known in the British property market as disbursements.
It is a good idea to obtain quotes from three different solicitors before deciding. You could choose a local one and two recommended to you, for example. Most of your contact with the solicitor will be over the phone or by email.
For more information on finding a solicitor please visit www.lawsociety.org.uk
You should also factor in the cost of a survey, which checks that the building is indeed worth the money you are spending on it. Is the building in good condition and structurally sound?
If you’re buying with a mortgage, your lender is likely to conduct their own valuation. But even if you’re paying cash, an independent survey is worthwhile to uncover any major faults before you invest. There are two main surveys available for those buying a property: a Homebuyer’s report and a full building survey.
A Homebuyer’s report is the cheaper option and is likely to be adequate if the property is in a reasonably good condition. A chartered surveyor carries out an inspection and highlights any structural issues that could affect the property’s value. These could range from damp walls to damage in the timbers or drainage problems.
The full building survey is more expensive as it assesses the property’s condition in more detail. So it’s a sensible option if the property you’re interested in is much older or has listed status. Bear in mind that you can’t alter, extend or, indeed, demolish a listed building without permission from the local planning authority. This type of survey may also be more appropriate if the property was built in an unusual way or altered extensively.
It’ll be a few hundred pounds less for a Homebuyer’s Report. It may be tempting to take the cheaper option, but make sure you opt for the one your property needs.
If you’re overseas and buying a new-build property in the UK, consider hiring what’s known as a snagging company, to catch any initial faults or hitches before you move in. These could range from poorly fitted cupboards to drains that don’t work, or more serious issues with the building’s structure. Spotting these problems before you buy the property, and asking the builder to correct them – could save you thousands of pounds – and months of hassle. You could use a chartered surveyor or a dedicated snagging company.
One of the biggest costs in home buying is stamp duty (Stamp Duty Land Tax) – a property tax that the buyer pays on the agreed purchase price. The amount you pay depends on the various tax thresholds that your property exceeds.
The tax bands start at £125,000, so you pay no stamp duty if the purchase price is less than this. The bands then gradually increase. The next £125,000 (for properties priced between £125,001 and £250,000) is charged at 2% of the purchase price. Then the next £675,000 (between £250,001 and £925,000) is taxed at 5%. Most properties will fall into these brackets.
However, if you are buying a more expensive property, you need to be aware of the two further bands. There is one at 10% on the next £575,000 (between £925,001 and £1.5m) and another at 12% on anything above £1.5m.
Calculate the tax due on each portion separately and then add them together. For example, someone buying a home for £1m will pay nothing on the first £125,000, then 2% on the next £125,000, 5% on £675,000 and 10% on the final £75,000. The final bill tax bill will be £43,750.
The rates apply only for those buying in England, Wales and Northern Ireland. The Land and Buildings Transaction Tax has replaced stamp duty in Scotland (https://www.revenue.scot/land-buildings-transaction-tax).
A recent change in the rules means that overseas investors (or strictly speaking, any non UK residents) may now have to pay capital gains tax (CGT) when a residential property is sold. The rules are complicated. Essentially, a tax charge of 18% for basic-rate taxpayers (with UK income of less than £42,385 in the 2015/16 tax year) or 28% for higher and top-rate taxpayers (earning above £42,385) could apply on properties sold after 5 April 2015.
However, the tax will typically only apply on the increase in value after this date. Various conditions, reliefs and allowances could have an impact on the amount of CGT you ultimately owe.
Also, you only need to pay CGT on your total taxable gains that are above your annual allowance, which is currently £11,100. For help and further guidance, visit the gov.uk website or seek financial advice.
Another tax you should be aware of is the Annual Tax on Enveloped Dwellings (ATED). However, it applies only to residential properties owned by a company or a partnership with a corporate member. It does not apply to those held directly by individuals.
There are five bands of this tax. It kicks in when the value of a house surpasses £1m. The annual chargeable amount between 1 April 2015 and 31 March 2016, for a property worth £1m-£2m is £7,000, while those worth £2m-£5m incur a charge of £23,350. The highest band is for properties worth over £20m, which carry a £218,200 charge. From 1 April 2016, a further band will be introduced for homes between £500,000 and £1m, with an annual charge of £3,500.
Once contracts have been exchanged and the buying process completed, there are other costs to think about. If you or someone in your family will be living in the property, you may need to move furniture and other belongings, potentially from overseas. This can be expensive, so get quotes from several removal companies to ensure you get the best deal.
Once you’re officially the new owner of the property, expect some continual costs. These can be large, and will depend on your type of home ownership. There are two basic types: freehold and leasehold.
If you own the freehold, it means you own the building and the land it stands on outright and forever. By contrast, a leaseholder only owns the building for a limited time, and not the land upon which it sits. They have a legal agreement with the freeholder (effectively the landlord), known as a lease.
The lease can run for more than a hundred years, but it may be very short when you come to buy the property. Ownership of the building reverts to the freeholder when it comes to an end, but it is usually possible to extend it.
A leaseholder can incur several charges. They may have to pay for the lease to be extended, as once it runs out, the ownership of the property reverts to the freeholder. Most lenders will not allow a buyer to borrow money against a flat with a lease of less than 70 years, so properties become less attractive to buyers once they reach this threshold. It means you may have no option but to extend the lease if you wish to sell it on.
Leaseholders may also have to pay an annual management charge, which can run into thousands of pounds a year depending on where the property is. This pays for the upkeep of the property, covering items from insurance for an entire block of flats to cleaning the communal hallways and looking after the gardens.
Separately, leaseholders are charged ground rents, typically £100 to £200 a year. However, some developers are starting to charge much higher rents. These can rise over time – to as much as £6,000 a year. Before you buy, your solicitor will be able to let you know when the rent review is due.
Both leaseholders and freeholders face recurring taxes such as council tax. This is used to help fund services provided by local authorities, such as street cleaning, cutting grass verges and waste collection. How much council tax you pay will depend on the value of your property and where it is, with rates set by the local authority. Discounts are available for single occupants as well as for unoccupied and unfurnished properties. This is something worth knowing if you are a landlord and you have any periods without a tenant.
You will also need to pay for building insurance, which covers you against damage to the structure of your property from, say, fire or flooding. There is also the option of landlords’ insurance for those who buy to let and want to insure against damage by tenants and any periods when there is no rental income.
So there are several additional costs to factor in when you buy property in Britain. They are often overlooked or ignored, especially when property prices are rising. But if you include them into your overall budget from the outset, your purchase will go more smoothly and you will avoid any nasty surprises.
Remember that if you are buying in a country with a different currency, you are exposing yourself to exchange rate risk. Currency movements can boost your returns. So if you buy an asset abroad, and the foreign currency rises, any money you make on the purchase will be worth more when translated back into your original currency.
But the reverse is also true. A fall in the foreign currency will mean your holdings shrink in terms of your home currency. And the foreign exchange market is notoriously volatile. For instance, the euro slipped by more than 10% against the pound between December 2014 and March 2015. As property transactions can take several months, this kind of movement could have had a major impact on the price a continental investor buying a UK property ultimately paid, blowing a hole in the original budget.
This means the payment for the property goes through at an agreed rate. It is also possible to fix repayments on foreign-currency mortgages in advance. Some fixed contracts can lock in rates for up to three years.
Note: The government will introduce the Mortgage Credit Directive (MCD) to the UK later on this year which relates to credit agreements for residential mortgages. The MCD is a European legislation which will create additional consumer protection and standardisation for home loans across EU member states. For more information please visit:
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1 “Prime Residential Sales Report”, Chesterton Humberts, November 2013
2 DCLG, March 2015 – http://www.ons.gov.uk/ons/dcp171778_403650.pdf
3 DCLG, March 2015 – http://www.ons.gov.uk/ons/dcp171778_403650.pdf
4 HMRC, May 2015 – https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/436572/UK_Tables_Jun_2015__cir_.pdf