In this episode, our very first episode, we discuss the various ways in which UK property can be owned and the critical interaction with your lenders terms and conditions.
So what are the 5 ways of owning UK property?
We explore the fundamental difference between legal and beneficial ownership, and how this dictates how any income will be taxed.
How easy it is to split the title of a freehold, into distinct separate titles, and the uplift this gives in valuation and the importance for lenders.
We also discuss how important it is to understand, how sometimes what seems like simple tax and legal planning, can actually put you in breach of your lenders T&C if you are not careful.
A new episode will be uploaded each week on Monday mornings, and if you have any burning questions or queries regarding any tax or legal topic surrounding UK property, then we would love you to send them in to to us at email@example.com, marked 'Property Planet' and we will try and include them in the next podcast.
Also if you would like to arrange a free 30 minute consultation on a particular tax or legal matter relating to UK property ownership, investment or development, then please contact the team on +44 20 7129 1432 or email us firstname.lastname@example.org.
We'd love to hear from you. Lets work together to create a game changing experience
Welcome to the property planet, a podcast for Simon, Holly and Amanda Preston of bell Harley person, a show all about the tax and legal issues surrounding property ownership, where we discuss everything that affects property investors and developers, and go deep into the details. So umbrella the advice Pilate, the traps you can fall into and dispel the myths surrounding property ownership in the UK or in Simon,Speaker 2:
Right? This is our very first podcast. So I thought we would discuss, um, various legal ways of owning property in the UK. Now, in my mind, from my non-legal knowledge, uh, you can be jointly owned, uh, tenancy, common freehold leasehold, uh, interests can be beneficial or illegal. And, but of course we have the, the mortgage deeds do's and don'ts that, that TNC is not to fall a foul off. So can you go through the other properties?Speaker 3:
Yes. So first of all, we must just be careful to say that this is for England and Wales, so the Scottish have a slightly different ecosystem to us. Um, so we'll just deal with the property that's in England and Wales and yeah, so you can own property in all sorts of ways. And it doesn't necessarily mean that if your name is on the title, you are the beneficial owner. So you could hold that property on trust for yourself and another individual or other individuals. So looking at the title itself, you will have, um, if you have it in somebody's sole name and they are holding it on trust for somebody, then you will see a restriction on the title. And the restriction on the title will say that that person can't send it without consent of a second trustee. So that should immediately alert the solicitor that's acting, um, in relation to any transfers on title that this property is not beneficially owned by a single person. So the legal title is a bit like a car wreck and they're gone.Speaker 2:
So speed can be a lender in effect.Speaker 3:
No trustee is quite an odd way of looking at it, but usually it's not, it's not the lenders because the lender, if the lender has a charge on a property, the legal self is split into three. So that would be the property register, which will detail the property. They'll be the proprietorship register. And that will detail who owns a legal title, and then there'll be the charges register. And those are things that affect the title. So it could be covenant on the title. For example, you've got to maintain the fence down the left-hand, but a child will also be where the lender will have their charge recorded and registered. A trustee could be. Um, for example, if there has been, uh, somebody has passed away and there could be an executor, it could be another individual in whom you, um, you can appoint. So it could be a solicitor, it could be a member of a firm. It could be a different number of people, but it fundamentally means that the title of that property cannot be changed or transferred without two people signing a contract and the transfer. So the debt, so you could have it. So lots of people talk about that colorations of trust, um, which I'm sure we'll come on to either now or in late to pass, but a declaration of trust simply, although the legal title might be in somebody's phone name, but that single person is actually the trustee or they're holding it on trust for themselves and another, or on behalf of a number of beneficiaries. And that is where you get the difference between the legal title and the beneficial title.Speaker 2:
Okay. And then that is quite handy way. Isn't it? For tax purposes to splits the way the income is taxed. As we get approached by quite a few clients where they want to own my husband and wife, um, but then they want to suddenly change it from being dried on a ship to split into 50, 50 or 80 20 or whatever they want. And that's the mechanism we would use to normally split the income because of course the income will always follow the ownership or the beneficial ownership will always follow the income. Uh, and that's how we can rectify that for spouses.Speaker 3:
Yeah. So then the natural assumption, as far as HMRC consent is that if you have a property held jointly by a husband and wife, then the income will be split 50 50. So in order to rectify that to the reality of say, if an income is the greater proportion of the income is being given to the wife then, or the husband either party, then you do need a declaration of trust that the land that, uh, HMRC need to see in order to justify the fact that it's not going to be on a 50 50 basis. If you're acting for somebody, two brothers partners, boyfriend, girlfriend, that were going to buy a property, you would naturally put in place a declaration of trust to explain the way in which the contributions have been made to the purchase. Um, and, and if you do capital splits, otherwise in the absence of that, you've got again, a natural assumption that 50, 50.Speaker 2:
Okay, cool. So the freehold release old railway different points of view, they're two separate animals, but from a legal point of view, what are they?Speaker 3:
So a freehold title means that you own underlying land underneath the property that the underneath the property that it's built on. So you've got the airspace above and you've got the ground below. So you can effectively do anything you like with that property within reason, within planning constraints, um, to make alterations to it. Now, if you allow that to happen with a leasehold property, um, you wouldn't actually be interfering with your own land. You would potentially be interfering with the ceiling or the floor of the neighboring property. So if you imagine, even if you converted a house into four separate a flat, you really don't want somebody being able to do whatever they like with the adjoining walls, because there needs to be some consideration for the fact that there's somebody living on the other side of that wall. So what a lease does is it imposes covenant. So it imposes obligations on the lease holder, the person that owns the flat to not interfere with walls, ceilings, roof spaces, et cetera, so shared common or areas of the building, which would otherwise undermine either the structure or the enjoyment of living in that property. So you have what they call cross covenants, cross enforceability, so that you can actually ensure that, um, your neighbor doesn't decide to, um, develop into the loft space without everybody's consent and causes a massive problem with the roof, because you're all sharing the same roof. That's a very basic explanation of why you need have different ways of dealing with those titles. So obviously the lease is granted out of the freehold title or the actual house that's been converted into four flats, has a freehold title out of which could be granted four separate leases for a period of time that then, um, those each individual lease holders own those properties. It's, it's, uh, also a mechanism for clients to increase the value of their properties.Speaker 2:
Yeah, because of two cases the past month where clients have bought properties, or they have a property under one title, vice either split already into say three or four separate self-contained flats, or they want to split it into that. Um, obviously if you have separate titles, it would increase the value of the property and therefore lending beneficial. Is it easy to split?Speaker 3:
It's easy to split the title. Um, but it's not always necessary. So obviously when we're, when we're chatting to clients about this sort of thing, you, if, so if you've got a freehold building that's worth a million, you may find that each flat within that free whole building could be worth 350,000. So actually you can increase the, the base value of the building as an entirety by 400,000, by splitting out each of those flats into a leasehold title. However, obviously with HMO's, it depends how you're going to spec it, whether you're going to actually create very distinctive, separate flats, whether you're going to create an IMO, what sort of lending you've got on it, and whether or not the lender that you usually use would prefer to charge the whole of the building that wants it to be remained as a freehold. But you have to bear in mind that you can't men sell one of the individual units because it comes as a whole. So you've either got four flat with short term tenants in each of the flats, or you've got a freehold building out of which you've grown to four separate leases, each of which has its own value and mortgage.Speaker 2:
Well, assuming the client's going to buy a building like that, they should already be aware.Speaker 3:
Yeah, I think, I think the thing is, is that, um, what we really want to, what we really want to know is what are you going to do with it? Are you looking to, you know, you, you talk to clients a lot about whether or not their trading activity or whether it's an investment activity. Um, so are they planning to redevelop a site, maximize the capital on that site and sell off as many units or, and or all of the units that they can, or are they looking to retain it because, um, they have an arrangement where the local authority, or, you know, they've got certain guaranteed tenants that are going to go into this building, in which case they're going to, they're going to develop it and they're going to, um, then retain it as an investment and take the rents off of it. So I think all of those factors will make a difference in terms of maybe how they buy it, how they divide it, how they, how do they get lending on it, what lenders to approach what lenders prefer, you know, they perhaps their niche is lending on HMO's. Maybe their niche is lending in, you know, certain developments, sites. I think those sorts of conversations, I think they're always quite important, right? From the beginning, because as we've always said, it's easier to panic from the beginning, rather than trying to pick it once it's in place,Speaker 2:
Impossible to pick, it was the same place, but then again, clients or clients. Um, so also we get all requires a moment. Uh, incorporation incorporates in a portfolio with the report released by treasury recently on reform reform, a couple of gains tax. Uh, no doubt requires, would increase, but obviously the issue with incorporation ignore the tax at the moment is, is always going to be lending. Lending is always the, the pain to get around, but I know some lenders allow you to approach it to different ways.Speaker 3:
Yeah. So as, as with, as with all all matters, um, each lender has their own separate terms and conditions. And the terms of conditions obviously formed the contract that you enter into when you take them all get out. So the mortgage need itself will incorporate all of the terms and conditions. So all the small print, um, that the lender is not always expecting you to, or perhaps, uh, I don't know, enabling you to plug through it's this, it's the stuff at the back. It's the 10 pages of teeny tiny little writing with about 17 or 18 conditions. And if you, when you sign up for your mortgage and your mortgage deed, you're basically signing to say that you have read all of those terms and conditions that you understand them, and you agree to abide by them for the term of the mortgage. So popular misconception is that if you default on your mortgage, so you failed to pay one of your monthly payments then, or maybe two or three in a row, then your lender will take action to repossess the property. Actually, the lender has the right to repossess for a breach of any of the mortgage conditions. So it's particularly important to always advise a client before they enter into a mortgage to make sure that they have actually read the small print. And as we said, like the small print will differ from lender to lender. So, and it will also differ depending on weight when you take your mortgage out. So if you took out a mortgage with your lender in 2010, which happens to have now fallen over onto their standard variable rate, because the mortgage rates are so low, you've obviously not bothered remortgaging because you've stuck with them because mortgage rates are so low and interest rates are so low, your mortgage conditions, the terms and conditions will be those affidavit. You took that mortgage out. So in 2010, so you need to look at the terms and conditions that were applicable to you when you took your mortgage out and you need to review whether or not the lender has included a provision that says, if there's any change in the legal or beneficial title, you are obliged to notify your lender. If you are obliged to notify your lender under those terms, then, um, when we look at incorporations, he sees a huge factor to take into account because it may be that the client will have to re mortgage. Um, once the, uh, portfolio has been incorporated,Speaker 2:
Is it Virgin meat, Virgin mortgages, and, uh, TSP. They allow you, don't like to, um, say put in place a beneficial change of ownership without notifying them. Whereas like Paragon, just like you can't do it. Yeah.Speaker 3:
So when you, when you go back to the, um, the beginning of the podcast, when we were talking about how you hold a property, so you will have the legal title and the beneficial title. So the declaration of trust, you can say, well, actually this person is holding this property on trust for the benefit of a and other. And another could be a company. For example, if you're mag mortgage spending addition specifically say that you will need to notify, or you need to obtain the consent of the lender in order to put that declaration of interest in place failure to do so will mean a breach of your mortgage conditions. And obviously with our experience, some lenders are happy to say yes, some lenders are happy to say no. And that's the newer additions of the terms and conditions. I've also now started to incorporate conditions that say, you cannot be this. So if you're with a lender that specifically says you cannot and you can't.Speaker 2:
So to paraphrase, a client led just don't tell them, we'll see issue with that.Speaker 3:
We just don't tell them. Then obviously you're in breach of your mortgage conditions. Cause right back, when you signed that mortgage deed, you sign that mortgage deed and you tick all the boxes that said you have read all the terms and conditions and you agree to abide by them.Speaker 2:
Okay. Um, I hope everyone enjoyed that and hopefully join us on our next podcast next week.Speaker 1:
Thanks very much. Thanks for listening and tune in next week, when we discuss more of the tax and legal issues surrounding your business and property needs.