Buying and selling your property

The legal term for buying and selling property is conveyancing and a solicitor or a licensed conveyancer is appointed to carry out this work. Conveyancing is the process of legally transferring ownership of a property from the seller to the buyer and includes the various searches and checks and any final tasks following a property sale.

As well as acting on your behalf, your solicitor or licensed conveyancer will:

– Carry out all the legal work required, including checking the contract and dealing with the local authority and Land Registry
– Usually liaise with the lender’s legal work, such as registering their interest in the property. Most lenders will use your solicitor or licensed conveyancer as it saves you and them money
– Confirm what’s included in the sale, for example, fixtures and fittings
– Make sure buildings insurance is in place at exchange of contracts

Your solicitor or licensed conveyancer will carry out a search of the local area and will ask about; plans for new roads, planning consents, anything else that could affect the value of the property and details of which mains services are connected. The local authority will charge for providing this information and this cost will be included in your bill.

The vendor will be asked questions by your solicitor or licensed conveyancer about the property to determine; whether any alterations have been made, what fixtures and fittings are included in the price and who is responsible for the boundaries and any other relevant information required.

You will need to make payments to the seller during the conveyancing process. Your solicitor or licensed conveyancer may ask you for the money in advance so payments can be made without delay.

Once you have made an offer to buy a property, called the pre-contractual stage, legal documents need to be prepared to transfer ownership from the seller to you. The seller draws up a contract for your agreement, you can negotiate its terms if necessary. Your solicitor or licensed conveyancer will carry out this work and advise you on the contents of the contract.

The contract contains details including:

– what the boundaries of the property are
– what fixtures and fittings, like carpets and kitchen units, are included in the sale
– how much the property is being sold for
– any legal restrictions or rights on the property, like any public footpaths or rules about use of the property
– any planning restrictions in place
– a description of the services to the property; e.g. drainage and gas
– the date for completing the purchase (called ‘completion’)

Before you sign and exchange the contract, both you and your solicitor or licensed conveyancer should find out as much as possible about the property. The seller does not have to voluntarily tell you about problems there might be with the property or neighbourhood. The seller should, however, reply truthfully to enquiries.

Your solicitor or licensed conveyancer will do a number of searches and checks including:

– checking the ‘title’ – the legal document that proves the seller’s ownership

– asking the local authority about any planned works like roadworks or new developments that might affect the property

– enquiries to the seller’s solicitor or licensed conveyancer about the details of the contract

Your solicitor or licensed conveyancer may need to carry out additional searches depending on the type of property involved. For example, if your property is in an area where there have been mines, your solicitor or licensed conveyancer will need to do a mining check on the land.

You will also need to consider insurance cover for the property and will usually be responsible for insuring the property as soon as contracts are exchanged.

To uncover any problems with the building like dry rot, you should also obtain a property survey before the exchange of contracts.

If you are using a mortgage to buy your property, you will need a formal mortgage offer from your lender before you sign the contract. The lender will send documents for you or your solicitor or licensed conveyancer to sign.

When you and the seller are happy with its contents, you sign final copies of the contract and send them to each other. This is called the exchange of contracts. Once contracts are exchanged, the agreement to sell and buy is legally binding and usually neither party can pull out without paying compensation. Buyers will usually pay the seller a deposit (usually 10 per cent of the purchase price of the property) at the exchange of contracts stage.

In many cases, there are a few further checks to be done at this stage.

After the exchange of contracts (if not dealt with already) your solicitor or licensed conveyancer will:

– prepare the legal documents to transfer ownership

– check mortgage documents

– make sure that they have all the necessary funds – which may include payment of their own fees

– arrange for the transfer of funds to the seller

– complete final Land Registry checks

– check all agreed tasks set out in the contract have been done, like agreed repairs

– check that fixtures and fittings have been left as agreed

Once all matters between exchange and completion have been dealt with, the money for the property is transferred from you to the seller. The sale is now completed and the keys are handed over. The property now belongs to you.

At this stage, you will:

– receive the keys to the property on the agreed date

– pay the seller the remainder of the cost of the property through your solicitor or licensed conveyancer

– receive the legal documents that prove ownership of the property

– pay your solicitor’s or licensed conveyancer’s fees, if not already done

You will be required to register the change of ownership of the property with Land Registry, pay Stamp Duty Land Tax (Stamp Duty) and inform your insurers that completion has taken place.

Why new property investors should
be aware of the essentials

With 70 per cent of the Association of Residential Lettings Agents (ARLA) member offices reporting that demand is outstripping supply, the body is releasing fresh advice to landlords new to the market.

Ian Potter, operations manager at ARLA, wants new property investors to be aware of the essentials they should consider before the first tenant moves in.

He said: “Letting out a property can be a shrewd move whether you’re doing so for the long-term as an investment or because of a pressing need to move on.

“But renting out a property can be full of pitfalls and potentially result in financial loss for the landlord.

“For example, if the right checks are not carried out, you may choose a risky tenant who defaults on paying the rent, leaving you unable to pay your mortgage”.

For anyone considering renting out their property, ARLA has the following advice:

Do your research: Research other rent levels in your local area and look into legislative requirements. For example, if the property is to be used for sharers, you may require a licence from the local authority.

Equally, it is mandatory for landlords to comply with Tenancy Deposit Protection legislation, requiring deposits to be protected for all Assured Shorthold Tenancies, the threshold for which changes to £100,000 from October 1.

Don’t go it alone: Many landlords opt to work with a letting agent either simply to help let the property, or to also manage it. Either way, it is crucial to fully research any agent to guard against unregulated, unethical agents.

A good agent should be able to help a landlord find reliable tenants, conducting the relevant reference and credit checks and ultimately helping to protect your investment. Longer term, the same agent should be able to manage maintenance and repairs, saving you unnecessary hassle.

All ARLA agents are regulated, meaning they’ve received thorough training, adhere to a code of conduct and are backed by a consumer redress scheme as well providing client money protection (similar to an ABTA Bond).

Don’t cut corners: Make sure the property presents itself well to the market in terms of the décor, the condition of the furnishings and also the mechanics of the house, such as the heating system.

A good quality property is likely to attract better and more loyal tenants and achieve a competitive rent level. And don’t forget to prepare a detailed inventory of the property, including a schedule of condition of the contents, walls, ceilings, doors and other fixtures and fittings. Look for an inventory provider who is a member of the Association of Professional Inventory Providers (APIP), which is a subsidiary of ARLA.

Cover yourself: Ensure you have specialist buildings and contents insurance as without a specific reference to letting you may be uninsured. And consider taking out insurance to protect against a tenant not paying rent, a particularly sound investment in a tough economic climate.

Consumers appear sceptical about whether the government can make a difference

Virtually everyone (96 per cent) believes that the UK has housing problems, according to new research undertaken for the Council of Mortgage Lenders by YouGov, and outlined at the CML’s “Future Housing” conference by CML chief economist Bob Pannell.

The biggest problem is seen as the fact that young people cannot afford to buy, or take on too much debt to do so, cited by 80 per cent of respondents.

Too many people on housing waiting lists (48 per cent), housing market boom and bust (44 per cent), the cost of moving house (37 per cent), and the lack of supply of new homes (35 per cent) were also seen as problems – but each of these was cited by fewer than 50 per cent of respondents, paling by comparison with the perceived plight of young would-be first-time buyers.

Yet consumers appear sceptical about whether the government can make a difference. While 15 per cent thought it likely or very likely that the government could improve first-time buyer affordability over the next five years, 80 per cent thought it unlikely or very unlikely.

Indeed, there was a high degree of scepticism about the likelihood of the government alleviating any of the problems identified. In every case, the proportion of people who felt help was unlikely exceeded the proportion who felt it was likely. However, the balance of opinion was less negative about the likelihood of government addressing energy efficiency (-2 per cent), the size of new homes (-10 per cent), and the prospect of some social tenants transitioning to the private sector (-14 per cent).

Mortgage facts

First-time Buyers
A first-time buyer is a potential house buyer who has not previously owned a property. As a first-time buyer you need to consider which sort of mortgage you should use and how you should repay it.

Bad Credit Mortgages
A bad credit mortgage allows a borrower with a bad credit rating to take out a mortgage, a bad credit mortgage usually carries higher interest rates.

Bad Credit Remortgages
A bad credit remortgage is a way a borrower with a bad credit rating can take out a new mortgage with a new mortgage lender even though they are not moving properties. Often used to free up equity, a bad credit remortgage often carries higher interest rates.

Buy-to-let Mortgages
A buy-to-let mortgage is a mortgage you can utilise to assist in the purchase of a residential property that you intend to let rather than occupy.

Commercial Mortgages
A commercial mortgage is a mortgage loan issued for the purpose of buying property, and is typically borrowed by companies or organisations to secure business premises.

Fixed Mortgages
A fixed mortgage also known as a fixed-rate mortgage means your monthly repayments will remain constant for the fixed mortgage term, regardless of the standard variable interest rate in the market place. The benefit of a fixed-rate mortgage is that you will know exactly what your repayments are however if the standard variable rate falls below the level at which you fixed you could end up paying more than the market rate.

Flexible Mortgages
A flexible mortgage is the facility to make extra payments when you have extra money. You may also be able to reduce monthly repayments or even take repayment holidays, although you will normally have to build up a reserve through making overpayments before this arrangement is allowed. Such mortgage rates are usually offered on a daily interest basis. Flexible mortgages typically provide a loan drawdown facility that allows you to borrow extra funds at a set predetermined rate.

How to reduce your monthly mortgage repayments

A remortgage is a mortgage that replaces an existing mortgage borrowed for the purpose of purchasing the property. Remortgage deals are often sought to reduce monthly repayments by finding a mortgage with a lower interest rate, or to free up finance from the increased value of the property. Remortgaging also allows you to consolidate existing loans to one manageable monthly payment or raise money to buy a new car or home improvements.

A remortgage could enable you; to reduce your monthly repayments by securing a cheaper mortgage; release some of the value built up in your property for other spending, such as home improvements or paying off debts; reduce monthly repayments by extending the term of your mortgage, which will mean it takes longer to pay off the loan and could cost more; and to reduce the mortgage term by finding a cheaper deal and keeping your repayments the same to become mortgage-free sooner.

You should start to think about remortgaging three to six months before your current deal ends. The most common time to remortgage is when the fixed or introductory tracker or discounted rate on your mortgage comes to an end. At this point your lender will usually move you to their standard variable rate (SVR). Over the past year or so, there has been a significant decline in remortgage activity because borrowers have actually been better off staying on their lender’s SVR; experiencing rates lower than the rates available on a new mortgage product.

SVRs are not directly linked to the base rate, which is why lenders can change them even though the Bank of England hasn’t altered the country’s official rate of interest since last March. There is also a considerable variation between the SVRs charged by different lenders and now the market is starting to see SVRs increase as new mortgage rates become more competitive and the funding crisis recedes.

Choosing a new mortgage with the lowest interest rate may not actually be the cheapest option. You also need to consider any arrangement fees as well, because you could find that it is actually cheaper to pay a slightly higher rate of interest if the set-up costs are lower, but this will depend on how much you need to borrow. If you are borrowing a large amount, it may be worth paying a larger arrangement fee in return for a low interest rate but on smaller loans it is likely you may want to opt for a higher rate in return for a lower set-up fee.

The amount of equity you have in your home can really make a difference to the competitiveness of the mortgages you’ll qualify for. Currently in order to obtain the most attractive rates you really need a deposit of at least 25 per cent and in some cases more.

If you remortgage there will also be legal and valuation costs to consider. Typically these will be lower than if you were buying a house but your new lender will require a valuation survey and a solicitor will need to do the paperwork. You may find that some mortgage products include a free valuation and legal work for those remortgaging.

The length of time you want to be tied in to your current mortgage deal for is another important consideration. When comparing mortgages this is an important decision you will need to make because most products will charge an early repayment charge (ERC) during the introductory period – this may have a greater impact if you choose a discounted, fixed, cashback or capped deal. So with a two-year fix or tracker for example, you will probably be charged a penalty to get out of the deal during the first two years.

With shorter term deals, being tied in isn’t usually too much of a problem. Where it could become more of an issue is for example with longer term deals such as a 10-year fixed scheme which could be very costly if you want to finish the scheme early. However, not all products have an ERC. Most lifetime trackers for example, are completely penalty-free, which could make them a highly flexible option if appropriate to your particular situation.

You should not also assume that ERCs automatically end when your fixed or discount rate ends. Some loans may have overhanging tie-ins after the initial deal ends and you could find that you need to pay the lender’s SVR for a set period. With interest rates currently low, this is not necessarily a bad position to be in as some SVRs are lower than the fixed-rate mortgages on offer, but at the point rates begin to rise lenders will start to put up their SVRs.

If you decide that remortgaging is the right option, you will be charged an exit fee by your current lender. This is to cover the administration costs of closing your existing mortgage account and costs will vary depending on each lender. The fee will be stated on your original mortgage offer and it’s important to check that it matches – lenders are not allowed to increase these fees once you have signed up for a loan.

Interest rates are likely to remain low until the end of next year

The Bank of England Governor Mervyn King said recently that “interest rates are likely to remain low until the end of next year”, in a bid to help the UK economy deal with the global economic downturn, which could mean that more homeowners will consider opting for tracker deals.

Despite margins increasing in recent years, tracker deals, where the mortgage rate mirrors any movement in the base rate, are still viewed by some market commentators as better value than fixed-rates.

Trackers usually follow Bank of England base rate, though some follow the lenders own base rate. If you take the view the base rate will only go up slowly, opting for a two-year fixed-rate may make little sense.

However, if you want to have the facility to switch to a fixed-rate as soon as the base rate rises, lifetime trackers may be an option to consider as some allow you to switch to a fixed-rate as soon as the base rate begins to rise, although it is important to check for any Early Repayment Charges.

It would appear that some homeowners are not letting the low-rate opportunity pass them by, according to the Co-operative, they have seen a 56 per cent year-on-year increase in the number of customers making mortgage overpayments.

The organisation said that customers on variable rate mortgages make up the bulk of those repaying more than they have to, with this group three times as likely to be making overpayments, than their fixed-rate product counterparts.

Borrowers on lifetime tracker products and standard variable rates do not have any restrictions on overpayments and the majority of those within their initial mortgage deal period can get ahead up to 10 per cent of their loan balance annually without being penalised.

Seasonal rise in activity welcomed

Around 56,000 mortgages were lent to people purchasing a property during the month, 7 per cent more than in June. The CML commented that while the increase reflected a seasonal rise in activity, the lending volumes still represented a “very weak market” during a period that is usually a strong part of the year.

There was a slight fall in the number of mortgages advanced to first-time buyers during the month, amid signs that banks and building societies were tightening their lending criteria again.

Around 19,400 loans were taken out by people buying their first home, 2 per cent fewer than during June, although it was still the second highest figure this year.

The average deposit put down by a first-time buyer remained at June’s level of 24 per cent, after falling to 21 per cent during the spring.

There was also a fall in the average income multiple lenders advanced to first-time buyers, with this dropping to 3.14 times their pay from 3.28 times in June.

The CML said: “Having eased during the early part of the year, loan criteria have now tightened a little.
“But low interest rates mean that interest payments continue to take up a relatively modest share of income.

“At 13.2 per cent this was down slightly from the previous month and the lowest it has been since early 2004”.

But despite interest payments remaining low, first-time buyers appear still to be having problems entering the market, with just 34 per cent of all mortgages for house purchase advanced to people taking their first step on to the property ladder during July, down from 38 per cent in June.

This was the lowest level since before the credit crunch first struck in August 2007.
By contrast there was a 13 per cent increase in the number of mortgages lent to previous homeowners who were buying a new property, at 36,900.

There was also a slight rise in the average deposit they were putting down at 33 per cent, up from 31 per cent, while the average income multiple they were lent also declined to 2.86 per cent from 2.9 per cent.

The number of mortgages taken out by people who were switching to a new deal remained unchanged from the previous month at 28,000, nearly a third lower than during July 2009.

The CML confirmed the number of interest-only mortgages which were taken out remained low during July at just 8 per cent among first-time buyers, compared with 29 per cent in July 2007.

Existing homeowners were slightly more likely to opt for an interest-only loan at 22 per cent among home movers and 24 per cent among those remortgaging.

The increase in the prevalence of repayment mortgages is likely in part to reflect the anticipation of regulatory changes by the Financial Services Authority to limit the availability of interest-only mortgages.

More generally, lending criteria remains tight, underpinned by caution on the part of both borrowers and lenders in the light of continuing economic uncertainty.

Sector showing positive signs of a recovery

The buy-to-let market has been one of the biggest casualties of the credit crunch. But it has received a boost recently with encouraging signs that lending conditions are finally starting to improve. This has been partly due to investors returning to the buy-to-let sector after many had previously put their plans on hold because of concerns that the new capital gains tax (CGT) rate would potentially exceed 50 per cent.

Following the Chancellor of the Exchequer, George Osborne’s first emergency Budget speech, when he announced CGT would increase to the lower-than-expected 28 per cent, the sector quickly experienced higher levels of demand for property.

During his emergency Budget speech, the Chancellor of the Exchequer, George Osborne MP, announced that higher-rate taxpayers would see the rate of capital CGT increase to 28 per cent from the previous 18 per cent, while the annual exemption of £10,100 would remain in place. He also said basic-rate taxpayers will continue to pay CGT at a rate of 18 per cent.

The buy-to-let market has seen the number of products that were once available at the peak during September 2007 fall to below 300 products. However, according to Moneyfacts the sector is showing positive signs of a recovery with the number of buy-to-let loans rising by 50 per cent since September last year.

Long-term desire stronger than ever

Despite the credit crunch, and the knocks to consumer confidence of the past few years, more people than ever before want to be home-owners in the long term. This is one of the many findings of a consumer opinion survey undertaken by YouGov for the Council of Mortgage Lenders (CML).

85 per cent of people cited home-ownership as the tenure they hoped to be living in a decade from now, suggesting that the home-ownership aspiration remains firmly rooted in the British psyche. The CML has asked the same questions about home-ownership aspirations periodically since 1975. Last time the survey was undertaken, in 2007, the proportion who expected to be home-owners in ten years’ time was 84 per cent.

Over the short term, the desire for home-ownership has dipped a little. 76 per cent of those surveyed saw home-ownership as their ideal tenure in two years’ time – down from 78 per cent last time the survey was undertaken in 2007. This primarily reflects a much lower short-term appetite (42 per cent) for home-ownership among adults aged 18 to 24 – although this is also the age group with the highest ten-year home-ownership aspirations (88 per cent).

It is highly likely that this reflects younger people’s lifestyle choices, favouring more flexibility and mobility in the short term, as well as a realistic assessment of the difficulty of entering the housing market under current affordability conditions.

CML director general Michael Coogan, comments:

“It is crystal clear that most people see home-ownership as their tenure of choice over the long term. But the unintended consequence of regulatory change is that it is going to be permanently tougher for people – especially young people – to fulfil that aspiration in the future, even if they are responsible with their finances.

“Home-ownership levels are already falling, and they will continue to fall. Is that the outcome that policymakers want? It is certainly not what consumers want, but it’s what they’re likely to end up with. We urge politicians and regulators to pause and think again about the cumulative effects of their well-intentioned but poorly targeted package of regulatory changes”.

Finding the right wealth structures to protect your assets

One of the great things about wealth is knowing that it can be passed on to others. Your wealth might encompass businesses, property and investments in the UK and abroad that require specialist considerations. We work closely with our clients in order to plan to minimise Inheritance Tax liabilities, which is often linked to the making of wills and setting up trusts.

There are a number of different wealth structures that could help reduce your family’s Inheritance Tax bill but unless you plan carefully, all your assets or your beneficiaries, could eventually become liable to Inheritance Tax. Once only the domain of the very wealthy, the wide-scale increase in home ownership and rising property values over the past decade have pushed many estates over the Inheritance Tax threshold. However, in recent years we have also seen property price reductions.

Inheritance Tax applies to your entire worldwide estate, including your property, savings, car, furniture and personal effects. You also need to consider your investments, pensions and life insurance policies and ensure that life polices are held in an appropriate trust.

Since October 2007, married couples and registered civil partners can now effectively increase the threshold on their estate when the second partner dies to as much as £650,000 in 2010/11.

Inheritance Tax is the tax that is paid on your ‘estate’, chargeable at a current 2010/11 rate of 40 per cent. Broadly speaking, this is a tax on everything you own at the time of your death, less what you owe. It’s also sometimes payable on assets you may have given away during your lifetime. Assets include property, possessions, money and investments. One thing is certain, careful planning is required to protect your wealth from a potential Inheritance Tax liability.

Not everyone pays Inheritance Tax on their death. It only applies if the taxable value of your estate (including your share of any jointly owned assets and assets held in some types of trusts) when you die is above the £325,000 nil rate band or threshold (2010/11). It is only payable on the excess above this amount.

Passing on amounts without any Inheritance Tax
There are also a number of exemptions which allow you to pass on amounts (during your lifetime or in your will) without any Inheritance Tax being due, for example:

– if your estate passes to your husband, wife or civil partner and you are both domiciled in the UK there is no Inheritance Tax to pay, even if the estate is above the £325,000 nil rate band

– most gifts made more than seven years before your death are exempt

– certain other gifts, such as wedding gifts and gifts in anticipation of a civil partnership up to £5,000 (depending on the relationship between the giver and the recipient), gifts to charity and £3,000 given away each year are also exempt

Transfers of assets into most trusts and companies will become subject to an immediate Inheritance Tax charge if they exceed the Inheritance Tax nil rate band (taking into account the previous seven years’ chargeable gifts and transfers).

In addition, transfers of money or property into most trusts are also subject to an immediate Inheritance Tax charge on values that exceed the Inheritance Tax nil rate band. Tax is also payable ten-yearly on the value of trust assets above the nil rate band; however certain trusts are exempt from these rules.

Gifts and transfers made in the previous seven years
In order to work out whether the current Inheritance Tax nil rate band of £325,000 has been exceeded on a transfer, you need to take into account all ‘chargeable’ (non-exempt, including potentially exempt) gifts and transfers made in the previous seven years. If a transfer takes you over the nil rate band, Inheritance Tax is payable at 20 per cent on the excess.

Where the transfer was made after 5 April and before 1 October in any year, the tax is payable on 30 April in the following year. Where the transfer was made after 30 September and before 6 April in any year, it is payable six months after the end of the month in which the transfer was made.

Rule changes regarding trusts

On 22 March 2006, the government changed some of the rules regarding trusts and introduced some transitional rules for trusts set up before this date.

Trusts not affected by the new rules (and so where no Inheritance Tax is immediately payable on any transfers, but with regard to transfers made during someone’s lifetime may be payable if the individual dies within seven years) are:

– lifetime transfers into a trust for a disabled person

– trusts created on death for a disabled person

– trusts created on death for a minor child of the deceased in which the child will become fully entitled to the assets at age 18

– trusts set up under a will for someone who is not a disabled person or minor child of the deceased who becomes entitled to their benefit on the death of the person who wrote the will

Existing accumulation and maintenance trusts had until 6 April 2008 to change (where appropriate) the trust’s rules to enable them to fall outside the new rules.

Interest in possession (IIP) trusts that existed before 22 March 2006, or which replaced a pre-March 2006 IIP up to 5 October 2008, continue to benefit from the old rules until they come to an end. All other newly created IIP trusts will come under the new rules.

Recalculating Inheritance Tax

If you die within seven years of making a transfer into a trust on which you have already paid 20 per cent Inheritance Tax, the tax due is recalculated using the Inheritance Tax rate applicable on death (currently 40 per cent). Tax will be payable by your estate to HM Revenue & Customs on the difference.

If you made a transfer on which no Inheritance Tax was due at the time, its value is added to your estate when working out any Inheritance Tax that might be due.

Trusts that count as ‘relevant property trusts’ must also pay:

– a ‘periodic’ tax charge of up to 6 per cent on the value of trust assets over the Inheritance Tax nil rate band once every ten years

– an ‘exit’ charge proportionate to the periodic charge when funds valued above the Inheritance Tax nil rate band are taken out of a trust between ten year anniversaries

These rules don’t apply to trusts which are exempt from the new rules.

Planning ahead for when you die allows you to set out clearly who should get what from your estate. In order to protect your family and loved ones, it is essential to have the correct wealth structures in place after you’re gone. This is a complex area of financial planning, so to prevent unnecessary future Inheritance Tax payments you should always obtain professional financial advice based on your individual circumstances and needs.