Real Estate Investment in England & Wales

Historically there has been significant investment by overseas individuals and corporations in property in England and Wales and in particular in central London which is perceived as a safe haven for overseas investors.

Much of the recent overseas investment has been focussed on residential property, but there has also been substantial investment in commercial property.

The same property law applies to all properties in England and Wales, but it is not applicable to other parts of the United Kingdom, namely Scotland and Northern Ireland.

Title to property will probably be either:

• Freehold
  Freehold property is the absolute property of its owner, subject to any rights and title covenants in favour of third parties. These may affect how the property is used; or
• Leasehold
  Leasehold property is held under a lease for a fixed period of time usually subject to the payment of rent and the performance of obligations or covenants contained in the lease. Typically these are either long leases which have a capital value and in respect of which there is a nominal rent or shorter leases at an open market rent payable by the occupier of the property.

Know your client (KYC)

The first part of the process with which we are involved is carrying out due diligence on the purchasing entity in order to comply with UK Money Laundering Regulations. The documents which we require will vary depending on the purchasing entity, but they need to establish the identity of the purchaser and its ultimate beneficial owner.

Tax

A major consideration for overseas investors will be tax.

The taxes which need to be considered include:

• Stamp duty land tax (SDLT) which is charged at different rates, namely 0%, 1%, 3%, 4%, 5% and 7% depending on the value of the property and whether it is commercial or residential. A 15% rate applies when a residential property costing more than £2m is acquired by certain “non-natural persons (NNPs)”, which includes companies and partnerships with a corporate partner but not trustees.
• Annual Tax on Enveloped Dwellings (ATED). This tax came into effect on 1 April 2013 and will be payable only in respect of residential properties owned by NNPs worth in excess of £2m. It is an annual charge of up to £140,000 per year, calculated by reference to property value bands. Relief from ATED may be claimed by NNPs carrying on property development or using property for commercial renting, commercial trade purposes and as employee accommodation. Conditions apply.
• Value added tax (VAT). This is applicable to commercial property only and is payable at the rate of 20% unless it is possible to structure an acquisition as a transfer of a going concern (TOGC). A TOGC is generally available to a purchaser of investment property.
• Income tax. Income tax is payable on rental income. Various deductions are permitted against rental income, including interest payable on a loan to purchase or improve the property. Capital allowances may also be available.
• Capital gains tax (CGT). No CGT is payable on gains realised on a disposal of an investment property by non-UK resident individuals or trustees. However, as from 6 April 2013, non-UK resident NNPs have to pay CGT on disposals of residential property worth in excess of £2m.
• Inheritance tax. An overseas individual may be liable to pay 40% inheritance tax on the value of a property situate in the United Kingdom in the event of his death or on making certain lifetime disposals.

The inter-relation of each of these taxes and the formalities which need to be complied with are complex and careful consideration needs to be given to their application to the acquisition of any specified property.

Structure

The tax considerations relating to any proposed acquisition are likely to determine the structure of the acquisition and the nature of the vehicle to be used. The possible vehicles include:

• Individuals (as beneficial owner)
• Trusts
• English Company
• Overseas Company
• Limited Partnership
• Limited Liability Partnership
• Unlimited Partnership

Any of these entities will need to comply with both UK and any relevant overseas laws and regulations.

The process and funding

If funding is required, it is prudent to arrange this in principle before identifying a property to purchase.

After a suitable property has been identified and terms for its acquisition agreed (this will usually be done with the help of agents) the due diligence process will commence. We will investigate the title to the property and review the terms of any lease. We will also carry out all appropriate searches, including a search with the Local Authority and a desktop environmental search.

Due diligence will include investigating arrangements for managing the property and analysis of the service charge.

Compliance with planning and building regulation legislation also needs to be checked.

The condition of the property is not, however, a matter with which we are concerned and you are advised to obtain a building survey of any property.

The role of the surveyor and of the lawyer overlap, especially in the case of a newly constructed building where it may be appropriate to consider the terms of building contracts and of the appointment of the professional team.

It is important that your funder, if any, is also satisfied on all due diligence matters at this stage. This will include the banks valuation survey.

After the due diligence process has been completed, contracts can be exchanged. It is usual for the purchaser to pay a 10% deposit on exchange of contracts. Traditionally completion of the acquisition will take place four weeks after exchange of contracts, but the length of this period is negotiable.

It is likely that you will be responsible for insuring the property from exchange of contracts.

The balance of the purchase price will be payable on completion together with any SDLT (see above).

There are various post completion formalities which need to be handled e.g. registration at the Land Registry. We will advise you on these formalities and handle them on your behalf where appropriate.

In the case of investment property you will need to ensure that arrangements are in place to take over the property management with effect from completion. This may involve taking over employees.

Conclusion

No two property transactions are the same. It is, therefore, beneficial to involve experienced property advisors at an early stage in the transaction in order to ensure that all necessary steps to enable the transaction to complete without difficulty are commenced at the appropriate time.

Richard Reuben (rreuben@fladgate.com)