Buying a Scottish property
30 August 2013
Scotland is considered a good place by many people for investment. It has a fair political and legal system, which is derived from England. England has 53 million people and Scotland has 5.3 million. There are about 380,000 Chinese residing in England and an estimated 20,000 to 40,000 Chinese residing in Scotland. A total of 44,000 Chinese nationals come to the UK each year, 40,000 of whom are students. There are 15 universities in Scotland and has a strong schooling system similar to England. Indeed, former Prime Minister Tony Blair graduated from a high school in Edinburgh. We are currently in a boom period with the relatively weak British pound attracting foreign buyers to purchase properties in the UK, particularly in London where 85% of central London properties are owned by foreign buyers.
In light of the increasing demand for Maxwell Alves’ services, it has opened a new office in Glasgow, Scotland. This article will look at some of the differences between purchasing a property in Scotland and England. (Wales follows the same procedure as in England.)
“Missives” is the contract
In England, those who have experience in purchasing properties (either commercial or residential), are used to the traditional 10% deposit payment followed by completion. The 10% deposit is paid upon Exchange of contracts. However, it can take weeks to reach Exchange because searches are being done. In Scotland, deposits are not usually used and the full price is to be paid on completion. The contract is formed by a series of “missives”, which are letters between the buyer’s and seller’s solicitors which contains the terms of the contract. A formal offer is made in writing and if this is accepted by the Seller’s solicitors, in theory, completion can take place on the same day. This would be similar to an English auction where a survey and searches may have been done beforehand so that the contract is exchanged immediately. The missives are signed by solicitors so the buyer needs to be very careful in his instructions to his solicitor to ensure any conditions are stated in the letter / missives. For example, the buyer may request that the purchase is subject to a satisfactory survey report, otherwise the buyer may find that major repair works needs to be done when he moves into the property.
In England, if you have a look at your solicitors’ letters, you may often see “subject to contract” as the title and the buyer can change his terms or even cancel before the contract exchange. But this does not work in Scotland as the letters are essentially the contract. It is therefore important that if applicable, each letter has a disclaimer which says the contents of the letter do not form part of the missives. For example, the buyer’s solicitor may write in one letter that the buyer agrees to purchase the property but then the buyer subsequently tells his solicitor that in fact he wants the seller to pay for the roof repair first. In Scottish law, it would be too late as the buyer’s solicitor already wrote the acceptance letter. In English law, the buyer would be entitled to ask the seller to do the repair first as the contract has not yet been signed. Therefore, clear instructions needs to be given by the buyer to his solicitor and the solicitor should check with the buyer everything is ok before writing an acceptance letter.
Freehold and Leasehold
In England, there is a distinction between ‘freehold’ and ‘leasehold’ ownership. Freehold means you own the property outright – it is 100% yours. With leasehold, you own the property for a specified term and thereafter, the lease expires and the property ownership goes back to the freeholder. How did this freehold and leasehold distinction derive in the first place? In the middle ages (5th to 15th Century), ownership of land meant that the person had power. The landlord would grant the peasant a leasehold to occupy the land and in return the peasant would have to work for the landlord, which was like a kind of slavery. Moving to the 20th century, landlords lost a lost a lot of power over their tenants but still maintained the use of leaseholds so that they could earn an income from their leases whilst still maintaining ownership of the property. In England, leasehold is the most common ownership of flats.
In Scotland, a similar freehold and leasehold system occurred up to the 15th century. A landlord would grant some land to the tenant in return that he fought for the King. This was then replaced by the tenant paying some form of payment to the landlord as part of his ‘duty’. This system was abolished on 28 November 2004.
When buying a property in Scotland, there is no freehold and leasehold distinction. What you buy is 100% yours and you can say everything is ‘freehold’ in Scotland. Once you buy the property, you can give a tenancy to someone else so they can occupy it for a rent. The desirability of having 100% ownership is that there is no other landlord controlling how the property is managed with extra service charges payable and the buyer does not need to worry about having to pay a premium to extend their lease before it expires. This would then make it easier to sell a property as in England, leases with less than 70 years remaining would find it difficult for buyers to obtain a mortgage.
Guarantor
People who have sold a commercial property (e.g. restaurant or takeaway) in England are probably used to the principle of ‘guarantor’ or ‘Authorised Guarantee Agreement’. This means that when selling the leasehold, the seller guarantees the liability of the incoming buyer. So if the incoming buyer fails to pay rent or other charges due under the lease, the landlord will then sue the seller for this sum. Even worse is when the property is in disrepair and because the original lease said the tenant would keep the property in good repair, the seller may lose thousands of pounds by acting as the guarantor. However, in Scotland, the seller has no responsibility to the incoming buyer for their liabilities.
Taxation for foreign buyers
Although we will provide a separate article in the future regarding taxation of property income for foreign buyers, we will provide some information here.
Income Tax
Foreign buyers do need to pay income tax when they rent out their property in the UK and earn an income. It is similar to being employed in the UK with salaries being deducted of income tax. As a basic rate taxpayer (income up to £32,010), this is 20% of the rental income. For earnings between £32,011 to £150,000, the person becomes a higher rate taxpayer and pays 40% income tax for his rental income above £32,010.
Capital Gains Tax (CGT)
If you are not resident in the UK, then you can be exempt from UK Capital Gains Tax when the property is sold. However, to be considered a non-resident, it is best that you have lived abroad permanently for at least 5 full tax years.
Although in general, people do not need to pay tax on their foreign income, the profit made from the sale (i.e. capital gains) may be taxable. When calculating the profit, the following formula is used:
Sale price – cost price (original purchase price) – incidental expenses = Profit
For China nationals, 20% of the Profit is chargeable on the profits of the UK property sale, but this can be offset against any CGT paid in the UK.
For Hong Kong nationals, tax is only charged from trade, business or profession done in Hong Kong so it is unlikely any CGT tax is due.
For Singaporean nationals, if they are non-resident in the UK, then CGT is not payable.
For Taiwan nationals, people who have household registration in Taiwan but who actually live on the island for less than 31 days in a year will no longer be considered residents of the Republic of China. Their consolidated income tax rate will be lowered to a uniform 20%, and their overseas income will be completely tax-exempt. For those who reside in Taiwan for more than 31 days, then if their overseas income exceeds NT$1 million (£21,500), they will have the income taxed at the minimum rate of 20%.