Walking past the Extinction Rebellion protest in Bishopsgate, a few weeks back, whether you agree with their tactics or not, brought the reality into focus, that our planet is in serious trouble. The onus is on every single one of us to do more and it will require a concerted effort.
Given that Magnet Capital’s focus is to support our SME Developer clients in building the right new build houses in the right places, it is pertinent to shine the spotlight on what new homes can do to help the country meet its target of reducing greenhouse emissions to net zero by 2050. The new and existing housing stock currently accounts for circa 20% of emissions.
Somewhat under the radar, the Government in its 2019 Spring Statement has turned its attention to residential housing emissions by including a commitment that, by 2025, they would introduce a Future Homes Standard for new build homes. This would include low carbon heating and world-leading levels of energy efficiency. The Government has now published a new consultation, setting out these plans, which is open to responses until 10 January 2020. This consultation marks the first step towards implementation of the 2025 Future Homes Standard, proposing to tighten the standards on energy efficiency and ventilation in new homes as of late 2020.
It includes two options:- the first is a 20% improvement on carbon dioxide emissions by ensuring new build houses have triple glazing and a waste water heat recovery system.
The second would result in a 31% improvement which require only double glazing but crucially low-carbon heating and/or renewables such as photovoltaic (solar) panels.
The government’s aim is for the housing industry to develop the necessary supply chains, skills and construction practices to deliver low-carbon heat, and highly energy efficient new homes by 2025. Crucially, it has been rumoured to include the banning the installation of fossil fuelled heating systems in homes built from 2025. Whether this means gas boilers will be banned for new builds is a matter for debate, given there are genuine concerns over whether alternatives such as air source heat pumps are viable because of their high initial cost and current ability to heat a home.
However, what is not in doubt is that new build house builders cannot bury their head in the sand, as the first raft of changes of increased efficiency standards will apply by the end of next year. These will have cost implications for house builders and SME developers need to be aware.
Changes are coming and some will be painful but ultimately we all have to up our game to protect our planet.
If you are buying one or more properties, it is important that you fully understand how stamp duty liability works, as it does not work in an identical way to buying just one house. But how do you understand the differences between the two? We take a closer look at the things you must be aware of before purchasing multiple buildings.
What are linked transactions?
Knowing what is meant by a linked transaction is important when it comes to stamp duty liabilities, as this will determine how much you will end up having to pay. In summary, a linked transaction is when a single party buys at least two properties from the same seller. This includes a piece of land, flats, or a house.
A transaction is also considered to be linked if the person connected to the buyer (for example, a business partner or relative) decides to buy a property from the same seller.
What’s more, if the purchase is part of a scheme or a single arrangement (or part of a number of transactions) then this is also considered to be a linked transaction.
How much stamp duty tax do I need to pay?
In terms of the exact amount you will need to pay if you are buying two or more properties (and these are considered by the HMRC to be linked transactions) this will be calculated based on the total value of all these linked transactions. This is opposed to calculating the tax owed based on each property’s individual value.
For example: if you decided to purchase two properties, both worth £125,000, then the HMRC would require you to pay stamp duty on its total value of £250,000.
It is important to remember that you will not be required to pay stamp duty on the first £125,000 of a transaction’s value. However, you will need to pay stamp duty at a value of 2% over this initial amount.
That means that with regards to the example given above, you would be required to pay stamp duty that is worth approximately £1250 in total.
You should also keep in mind that Stamp Duty Land Tax has increased since 1 April 2016. This on top of current rates of purchases for additional properties that are residential. This includes second homes as well as buy-to-let properties.
Are there stamp duty exemptions for additional properties?
Yes, not every single property will be required to pay stamp duty. For example, this is no requirement for single properties or properties that are considered to be linked transactions with an overall value that is below £125,000.
In the majority of cases, if you are looking to invest in land or property, you will usually need in order to be able to finance such an investment, but it is possible to purchase with little to no money.
How do you achieve this? Prior to the financial crash in 2006, it was commonplace for mortgage lenders to happily provide 100% mortgages to buyers. These days, finding this kind of mortgage is extremely rare. We take a look at the different alternatives that are available to you, should you be interested in buying land but have little cash upfront to buy it with.
Borrowing against your own property
It could be the case that you do not have much in terms of cash, but do have a considerable amount of equity that is locked in your current property. If this sounds like you, it could provide a way in which you can purchase land, if you decide to extend the mortgage in order to release the equity locked up in it. That would enable you to then use these funds to invest elsewhere.
If you were interested in pursuing this option, there are some questions that you should carefully consider before making any final decisions. For example:
- Not all mortgage providers will necessarily allow you to borrow additional money against your house so you can invest in property: this is something you will need to verify with your mortgage lender or broker.
- The residential mortgage will be assessed on your income, so you will need to make sure you have enough earnings to be able to release equity.
Look at a joint-venture property development
Have you considered looking further into joint-venture property developments if you want to purchase land but have a small amount of money? It is worth taking a further look at.
But how does a joint-venture work in practice? The process is relatively straightforward in nature: you find a development project, research it and then look for another person to join the project who is willing to provide the deposit for it, and may also need to provide other forms of security.
This joint venture can work out profitable, as both parties ultimately share profits upon completion.
Providing additional security
Another potential option for you to be able to buy land with little money is to provide additional security to a lender. This is usually in the form of a high-value possession, in most cases this will be in the form of a property but could be a car or another costly item. Lenders in the property sector will offer 100% borrowing to purchase land if the collateral is given, is this presents less risk to the lender.
There are a variety of things that can end up not going to plan when it comes to a property development project, even if you have planned the project well and manage things accordingly. For example, common issues that can cause construction site delays can be things such as extremely bad weather (for example, torrential rain) making it difficult for work to continue, an important supplier failing to deliver, or overbooked construction teams.
Unfortunately, these delays can lead to you incurring penalty fees if you have taken out development finance in order to fund the project. However, you could look at development exit finance to help you avoid potential charges. Wondering how it could help you? We take a closer look.
Should you consider refinancing your development project?
Before going ahead and making the final decision as to whether or not you should refinance your build, you should carefully consider the options available to you.
For example, what are the terms and conditions of your current project, and would you have to pay additional fees for deciding to refinance that could outweigh any advantages when it comes to changing?
What’s more, is there room for contingencies: a general rule of thumb is to consider nine months into the project as the benchmark for potentially considering refinancing as an option (if you have taken out a 12-month development finance loan).
At this stage, it would be expected you were confident you were going to meet the exit deadline promptly, with most work having already been carried out by this point. If you are not confident that this will be the case, this would be when most developers would look at refinancing options available to them.
Extending the borrowing term
In the majority of cases, property developers who decide to get development finance will have the term of this funding limited to just 12 months. This can make it very difficult timetable wise, should something go wrong with construction, or completing on sales.
This is why it is worth making sure you have arranged your development finance for the longest possible term either by doing it yourself or through an experienced broker. Furthermore, you should also find a provider who will not charge you fees for early repayment, in the event that you complete the project earlier than anticipated.
Reducing the cost of development finance
Exit finance rates can be cheaper than other kinds of development funding, meaning you can potentially save a considerable amount of money on the cost of lending if you are carrying out a construction project. In addition, interest that is accrued on exit finance is retained, which means that you can put all available capital on completing the construction project
Using refinancing to fund your next project
Not only can refinancing your development project reduce penalty fees should your project has delays, but it can also be useful for property developers looking to get their next project started, as refinancing can help fund this.
Many developers who are looking for cost-efficient ways to fund their project use refinancing in order to have site acquisition, design as well as planning all underway whilst currently finishing off a project. This means when the current project is finished, a property developer can immediately get started with the next construction build.
Getting started on your very first property development project is most likely an exciting but also slightly daunting prospect, especially with so many potential options available in terms of funding. To make the decision process a little easier, we’ve broken down the main ways in which you can finance your foray into the property development sector.
If you intend to buy a single property and renovate it with the intention of then renting it out to a tenant for a number of years, it could be well worth your time investigating if a buy-to-let mortgage would be worth considering.
What makes a buy-to-let mortgage is different from a residential one? In many respects, they are similar: you will have certain eligibility criteria you will need to meet in order to qualify for this kind of mortgage. For example, a certain level of income will usually be necessary as this will determine the amount of capital you can borrow from a lender. Buy-to-let mortgages are also limited to one single property too.
The fact that most buy-to-let mortgages are limited to one property means that it is likely you will need to look for funding elsewhere in addition to the mortgage if you would like to expand your portfolio further than one property, or develop a number of properties at once.
Another viable option to getting finance for your very first property development is auction financing. Property auctions are usually considerably more affordable than if these very same buildings were listed in the traditional way, but the caveat is that they often require a lot of work to be carried out on them before being able to sell them on.
Whilst houses at auction tend to be cheaper, you will need to have all the money available to purchase it outright within a month of the auction ending (and your bid was successful). This can pose a problem for some property developers, who may not necessarily have access to all the finance upfront, but at the same time do not want to miss out completely on the possibility of the perfect property to develop.
Auction financing helps to solve this problem, as it a short-term bridging loan that can be arranged very quickly and helps property developers that cover the cost of the building until funds become available at a later point. It can also be agreed in principle before the auction.
Development finance and bridging loans
One of the most popular funding options for property developers tends to be property development finance and bridging loans. But how do these financing options work? This type of short-term funding can help with not only the purchase of a building but also help with the cost of renovating it too. It can be arranged quickly, and funds can be released to you within a very short period of time (within 4 weeks), meaning that it gives developers a great deal of flexibility when it comes to getting access to finance
For more information about development finance and how Magnet Capital can help, contact our team directly.
Are you or your company looking to expand primarily into the commercial property sector? Then a commercial mortgage may be your best bet instead. However, it is important that you keep in mind that this kind of funding will be limited to commercial properties only: for example warehouses, offices, and shops. In all other respects, it works very similar to a residential mortgage, which also means that if you are looking to develop residential properties or need additional funding then a commercial mortgage may not necessarily be the best option for you.
Getting the most out of a land sale
With the housing crisis affecting people nationwide, it has had a knock-on effect on agricultural land by inflating its value, and it is thought that it will continue to increase further if the government follows through with its promise to build and provide over 300,000 new properties each year.
When it comes to privately owned agricultural land is estimated to be worth approximately £20,000 per hectare on average in the UK. However, this could rise to as much as £2 million per net developable hectare if planning permission has been gained for housebuilding in certain areas across the country.
Consequently, the potential to capitalise on land profit is encouraging many individuals to look at getting planning permission for land assets to then sell on to house builders. However, there are some important aspects to take into account that can affect a land sale, as well as the process of selling and tax implications too.
Things to consider when selling land
- Land assemblies: most landowners often pool their assets into what is otherwise known as a ‘land assembly’ to make it more profitable to sell land. This is because individually, small amounts of land will not be as lucrative for property developers, who are generally less interested in small sections of land.
- The time and cost involved: it is worth remembering that it can take some time to get planning permission alongside selling land as there are many different stages that can be involved. On average, this could take 18 months but can take years: the larger the site, the longer it will take.
The process of selling land
It is typically a three-step process when it comes to getting planning permission and selling land to a property developer. This works as follows in most cases:
- The Local Plan: prior to getting planning permission, you will need to make sure that your land has formed part of the council in your area’s Local Plan: which means the document that refers to your local area’s housing strategy. It may take some time before this is achieved.
- The application: as soon as you’ve managed to get the land included in the Local Planning you can get planning permission. To apply, you will need to draw up a housing development scheme, which the land promoter can do on your behalf. This scheme is then put to public consultation.
- Sale: if the public consultation goes well land your planning permission has been granted the land agent and land promoter can broker the sale of your land.
Tax implications of a land sale
There will be implications with regard to liability on your sale proceeds as well as inheritance tax applications. The exact tax implications will be depending on the type of land being as well as how you intend to sell it.
Main residence land sale: if it part of your main, long-term residence it can qualify for Principal Private Residence Relief (PPR) this will exempt you from paying capital gains tax (CGT) at 28%.
Land assemblies land sale: the tax implications if selling as part of a land assembly can vary, therefore always seek specialist advice for further details.
Separate land from main residence: this will incur income tax up to 45% in total, or capital gains tax at 20%. The tax you will need to pay will depend on the intention when acquiring the land – for example, whether it was a family asset or a long-term investment.
Ground rent explained
The ground rent is the monthly fee that a homeowner pays to the holder of the leasehold property. So if the property you are living in has a leasehold, you can expect to pay a ground rent every month for essentially living on that land.
This is different to if you are freehold, because them you essentially own the land. But you are required to pay ground rent even if you have a mortgage and own the property.
How much ground rent will I need to pay?
The exact amount you need to pay will be specified in your lease, but you can expect this to be around £370 per year. In the majority of cases, ground rent is an amount of money paid either in one instalment or can be asked for on a quarterly or half-yearly basis.
If there is more than one leaseholder, then regardless of whether or not they own the property as tenants in common or joint tenants, every leaseholder has the responsibility to pay the ground rent.
Any details regarding your responsibilities to your freeholders, such as ground rent or other potential liabilities are detailed in the lease. To make sure you are fully aware of the responsibilities you have and to avoid problems at a later date, it is important that you make sure you have the asked a leasehold qualified solicitor to look over the lease before moving in.
How can I avoid ground rent increases?
Making sure you have taken on a qualified solicitor is one way to avoid the potential increase, or at least be aware of them and factor them into consideration when purchasing a house, as many buyers can get caught out, being unaware that it is possible for ground rent to potentially double every few years. This has become very hot in the media recently.
It is vitally important that you know about ground rent increases before trying to purchase a property or trying to gain access to development finance, as it could impact your ability to get a mortgage or other kinds of funding.
What is meant by fixed or escalating ground rent?
There are two different types of ground rent, and these are known as fixed and escalating.
Fixed means that the amount you will be required to pay will not change for the duration of the lease, whilst escalating ground rents mean it will increase over the course of the lease. Whether the ground rent is fixed or escalating will be confirmed in the lease.
What is a ground rent review?
A ground rent review is when the freeholder is looking to increase the ground rent. If a ground rent review is requested, then it mostly works in the way mentioned below:
- The freeholder informs the tenant that they would like to increase the ground rent, whilst stating what they want this rent to be. It is necessary for the lease to designate how long before the new rent will then become payable if the notice is served (for example 6 months or 12 months).
- The leaseholder can either agree to new rent or suggest a different offer.
- If the leaseholder and freeholder fail to make an agreement it will usually be passed onto an arbitrator that has been appointed by the Royal Institution of Chartered Surveyors (RICS).
When is the ground rent paid?
Unless it has otherwise been stated in your lease, this is usually paid at the end of the year or bi-annually.
What happens if you do not pay the ground rent?
There are two scenarios that may result in you not paying the ground rent. This is either because you cannot afford to pay the rent, or you have not been asked by the freeholder of the property to pay the ground rent.
If you cannot afford to pay ground rent and the freeholder demands it, it is possible for them to take legal action to settle the cost.
What do I do if the freeholder has not asked for the ground rent?
Unless your freeholder asks for the ground rent, it is not required for you to reach out and pay. This is because any demand for ground rent by the managing agent or freeholder needs to provide notice. This will need to include:
- The duration that the ground rent demand covers
- The name of leaseholder
- The name of freeholder and address
- Amount of ground rent required for a period
- Name of the managing agent if applicable
- When payment is required
Is it possible to reduce your ground rent?
Yes, there are two ways to decrease the amount of ground rent you pay. You can either extend the lease under the formal process or by collective enfranchisement.