Previously, I wrote about a dip occurring in the London property market. Now let’s explore how an American goes about buying property in the U.K. The rules are the same for London, and your interests may lie in other (cheaper) parts of the kingdom.
Unlike property in Bermuda, foreigners are able to buy any property in the U.K. However, buyers seeking a mortgage from a local bank may be in for a shock as expats are sometimes asked for a 40 percent down payment.
Like many, many other countries, the U.K. has no centralized MLS-like vehicle to aggregate all available property into a single place. Also, many property brokerages are very specific to an area. It’s not uncommon, therefore, for a buyer to be engaging with several estate agents simultaneously as they seek property. Click and shoe leather are the name of the game. An alternative is to engage a buyer’s agent, but their payment would come from the buyer, not the seller.
As a result, buyers often really don’t have an agent. They use the seller’s agent to view property and make offers and a lawyer (conveyance solicitor) working for them to manage contracts, act as title company and close the deal. A seller will also have a lawyer.
Also differing from the U.S., until all the work of contract negotiation, inspections, title work and funding mortgages is complete and contracts are exchanged and signed (the US version of “closing”), either party can walk away from the deal. This process leads to the possibility of being “gazumped” or “gazunded.”
Gazump means that at any point before the contracts are signed at the very end of the transaction a seller can accept a higher offer and kick a buyer out without reason. Gazund is the opposite, whereby a buyer can drop their offer price before the contracts have been signed. If there’s been no other interest in the property an eager seller may agree to a lesser amount. It’s definitely a gutsy move as the seller may refuse and dump the buyer’s offer altogether.
Types of Buildings
In the U.S., we dabble with historic designations. In the U.K., it’s a serious societal compact. “Old” often refers to buildings of a pre-World War II vintage. “Period” describes homes before World War I encompassing Elizabethan, Georgian, Victorian, or Edwardian.
In the U.S. we have the National Register of Historic Places. In the U.K., English Heritage and its sister arms in Wales, Northern Ireland, and Scotland “list” over 500,000 properties. Any structure constructed before 1700 in vaguely original condition is automatically “listed.” Nearly all listed buildings date before World War II. Listed building status is double-edged. People pay more for these properties, however, the maintenance is higher and augmentation options are limited. A buyer must understand what a property is and if any changes would be allowed. The grading system is:
Grade I – buildings of exceptional interest (approximately 2 percent of listed buildings).
Grade II* – particularly important buildings of more than special interest (approximately 4 percent).
Grade II – buildings of special interest warranting every effort to preserve them (90-plus percent).
Leasehold versus Freehold
In the U.S., most property transfers as “fee simple” meaning the owner owns the land under a dwelling. In the U.K., this is known as freehold. In a leasehold situation it means the landowner leases their land to a dwelling owner for a set period of time. While some older leases can be for centuries newer leases are averaging 125 years that include several points where the lease amount is renegotiated.
For example in part one, I mention the Duke of Westminster owning 300 acres in Mayfair and Belgravia. Much of that land is leased to various commercial and residential tenants who are responsible for the structures on the land. Condo owners owning the condo but not the land under the building is very common in London. There is generally nothing inherently risky in leasehold in London.
Theoretically at the end of a lease the landowner can evict you but is much more likely to renew the lease for another century at a higher rate. And that’s the risk of leasehold property. If you have to renegotiate the lease, the new amount may be prohibitive. Also, if the remaining lease term is short, getting a mortgage may not be possible. Buying a condo with a 100-plus-or-minus-year lease term outlasts your life while providing the next owner a solid cushion before a new lease of required.
It’s also worth investigating with your lawyer whether the condo owners can band together and purchase the land freehold owner. Another option, while unusual, is investigating whether an individual lease extension is possible in the case of a short lease. Most buildings have a master lease that expires at the same time. A property with five years remaining on a lease may be viewed unsalable except to a cash buyer.
“Closing Costs” and Taxes
As a buyer, you’ll be paying other fees as you would in the U.S. Deposits, surveys, insurance, title searches, registry fees and solicitor’s fees. Plan on a few thousand pounds.
The biggest surprise for American buyers will be the Stamp Duty. This is a one-time tax based on the purchase price. It ranges from zero for properties costing under £125,000 to four percent for those costing over £500,000 (pretty much everything in London). If you’re a non-resident buyer, from April 1, 2016 onwards there’s an additional three percent Stamp Duty. Meaning a second-home buyer of a London flat gets slapped with a total of seven percent Stamp Duty upon closing. That’s an additional £35,000 on a £500,000 flat!
Ongoing a buyer will owe Council taxes, which are much like our property taxes and dependent on the valuation of the property.
Upon selling a property you’ll have to do some math. If your property is viewed as an investment property and you profit from the sale, as a foreign national you are NOT subject to capital gains tax however you are subject to income tax. If your property is owner-occupied you do not have to pay income tax on the gains and if somehow you also qualify as a non-resident, you owe no capital gains tax as well. (Sounds like an accountant’s Gordian knot.)
- Be close to public transportation. Train stations, subway and bus stops all factor into a property’s value. Fewer people drive and London has a congestion tax for cars operating within the city center.
- In older buildings get a full building survey to understand any structural and infrastructure issues.
- Unlike in the US, sellers often set a price “from X-price” meaning they expect more, not less than their asking price. This doesn’t mean all property sells for above asking. These properties set a low guide price to spur bidding.
Of course the best part of owning a home in the U.K. will be all those “Keep Calm and Carry On” kitchen ditties you’ll get at your housewarming!
Remember: Do you have a secondshelters.com location you’d like to see featured? I travel quite a bit and enjoy poking around real estate. Realtors, have clients who’d like to document their second home journey? Shoot Jon an email. Marriage proposals accepted (they’re legal)! firstname.lastname@example.org