Of the 213,700 transactions in the second quarter of this year – that’s 8.7 per cent more than in the first quarter – 60,000 transactions fell into the additional property charge, up from 58,200 in the first quarter. That means that the overall stamp duty take in the second quarter rose to £2.3bn from £2bn in the first quarter. And most additional rate transactions were made in the sub-£250,000 bracket, just where you might expect to find aspiring first-time buyers looking.
The latest proposal by the government is not another revenue raiser but could be just as controversial as the taxes on landlords. There is now to be a consultation on how to clamp down on the sale of leasehold properties. This is an understandable move as long as it is handled properly. The issue came to light when conventional houses were being sold on a leasehold basis; the freehold having been sold off to a property management agency which then installed clauses with the leasehold purchaser’s contract that doubled ground rents every 10 or 15 years.
The surprising aspect of all this is not that some sharp operators have been operating such schemes, but that it hasn’t been going on for even longer, because although it’s morally hard to justify, it is legal. The only safeguard at the moment is for potential buyers to read the small print, or better still, get someone professional to read through the contract. Some reaction has already come from a few mortgage lenders such as Nationwide who will not advance funds on a leasehold house with ground rent doubling every 10 years. It has to be said that there are very few reasons why a house should be sold on a leasehold basis. There are exceptions of course. If the builder, for example, acquired the land on a leasehold basis he can hardly sell it freehold as he doesn’t own the freehold.
Leasehold agreements work well with multi-occupancy buildings. In fact, without something similar, they are essential. A freeholder will charge ground rent and a service charge to cover the cost of maintaining communal areas such as the roof and guttering. Someone has to pay the wages of the concierge, and redecorating doesn’t come cheap. Imagine the chaos caused by selling off a block of flats on a freehold basis where different flat owners have different ideas about who should pay for a leaking roof.
If unscrupulous freehold owners have been slow to exploit the legal loophole, the government has been even slower to act because of the 4m leasehold properties in the UK, 1.2m are now houses.
The government also needs to take a look at the rules governing lease extensions. You can ask to extend your lease if you have been living in a property for more than two years, but your landlord will probably demand an inflated price. To avoid this you will have to pay for a valuation and instruct a solicitor to make the freeholder comply. If he still refuses then the whole process has to go to a tribunal. Why should you want to extend the lease? There are several reasons. If the lease is shorter than 80 years, the value of the property starts to decline. Furthermore, many mortgage lenders will not offer a mortgage on shorter-dated leasehold properties, so you will struggle to sell.
There are other pitfalls, too, one being marriage value. In simple terms this is the process whereby the value of the property is increased by securing a lease extension. But by doing so you could end up paying half that increase to the landlord. So, once again, it’s essential to take expert advice.
The bottom line is that there is room for both freehold and leasehold. The latter becomes almost obligatory in multi-occupancy single units but doesn’t have any place when it comes to single occupancy units. Fresh legislation has to take this on board or run the risk of introducing more badly thought through rules and regulations.
Jonas Crosland
