Buying and splitting 2 self contained flats in one Freehold into Leaseholds?

by Readers Question

8:15 AM, 26th January 2017
About 2 years ago

Buying and splitting 2 self contained flats in one Freehold into Leaseholds?

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Buying and splitting 2 self contained flats in one Freehold into Leaseholds?

I am interested on any advice people can give on my current situation. I am looking to buy a house that has been divided into two flats – with a view that at some point I’d like to separate these officially to leaseholds – as I believe they will be worth more on this basis. banana split

So far I have established the properties are acknowledged for council tax and have been for 15+ years, as two flats. I think therefore I will not need planning permission to create two leaseholds.

The services may have been separated – I need to check – but certainly the heating upstairs is electric and downstairs gas.

Is there a method of separation that’s required?

Do I need to check building regs? If so how would I do this?

Finally, I assume there are tax implications. Would I be liable for CGT at the point of separation, or the point of sale?

Finally is there anything else I need to consider? I am also working on the basis I will need plans drawn-up for the solicitor, to identify what makes-up each property for the purposes of the lease.

Any help/advice very gratefully received.

Richard



Comments

Neil Patterson

8:23 AM, 26th January 2017
About 2 years ago

Hi Richard,

Normally if you already own the property and are not looking to sell it is not worth the time and effort until you have a buyer as you need to set up a separate management company and transfer the Freehold to it.

But if you are looking to purchase then it does give you more future options on sale and also mortgaging. Plus you already have the legal work and expenses of sale so it may be worth doing all in one go and this would hopefully avoid any tax implications as well. Have a chat with your solicitor first and see what they say.

I know this type of split is pretty common, but I have not personally transacted one so I am not up on the detail, but again I am sure your solicitors will have done a few and will have a list.

John Pettman

8:59 AM, 26th January 2017
About 2 years ago

No You do NOT have to set up a separate management company and transfer the freehold into it, You can remain as the freeholder and grant the separate Leases remaining as the freeholder. In view of the long backlog at the Land Registry this will take a few months . It is essential that plans compliant with the Land Registry are prepared . See the Land Registry web site for details .
John Pettman

Kris Marsh

9:41 AM, 26th January 2017
About 2 years ago

Note, however, that you can't grant a lease from yourself to yourself. In this case you will need to purchase/transfer the freehold or leaaeholds (or both) into separate companies.

One common reason to do this, is buy-to-keep, so you can remortgage each leasehold unit separately. Remember the minimum property value for mortgagability(£50k) amounts and unit sizes (30sqm+) if you plan to do this.

Other things to consider, assuming at least that you will sell the units individually in the future:
* Imagine you were buying the lease in the future. What's reasonable and desirable?
* Get the lease length + mgmt charge right
* Split the utilities - One per unit, and most likely one for the common areas.
* Therefore one consumer unit, electric rings, boiler and rads, water pipework per unit.
* Sound proofing upgrades between units

Laura Delow

10:40 AM, 26th January 2017
About 2 years ago

It seems from what you say - you are buying & don't yet own this property/2 flats. If this is the case, I would suggest you ask the vendor to sell these units to you as a package of 3 with any extra legal cost incurred to be agreed and paid by you ie 2 leasehold units (supply a draft of the lease terms you want), total price of which add up to the total asking price less say £100 for the freehold sold to you separately for a peppercorn of £100. You can buy the freehold in your own name or a NewCo Ltd Co or ANother's name eg daughter/son if of age, but as there are only few lenders that will allow finance to be raised on leasehold units if the freeholder is the same owner (whether raising finance to buy or later on you wish to capital raise through remortgaging) it may be wise to buy the freeholder in ANother's name or a Ltd Co so that you widen the net of lenders you can access. By buying this way you also give yourself more finance options eg raise the finance required as & when on just one unit, or raise the funds using a fixed rate on one unit & say a tracker on the other, or a fixed rate on both but one for 2 years & the other on 5-10 years and/or different mortgage terms. Plus if ever you choose to sell you have further choice by selling one or both units at different times to take advantage of selling in different tax years & using 2 years personal CGT allowances. Plus if you wish, you can keep/remain the freeholder & collect Ground Rent(s) from the new leaseholders. You could also leave the units on death to 2 different people vs leaving one unit to them jointly.

Richard U

11:56 AM, 27th January 2017
About 2 years ago

Thanks for all the comments very helpful! I have a meeting with my solicitor shortly. I'll update on what I find out.

Richard U

14:22 PM, 27th January 2017
About 2 years ago

OK so spoken to my solicitor and have the following information to share:

I need to apply for building control assessment of the conversion
I will need a company to own the freehold and have one lease owned by my wife and one by me
As I expected CGT is only payable at point of sale, not division
We'd probably need to remortgage when we split the freehold - but as alluded to above, this could be beneficial in terms of rates
I will need architectural plans drawn-up to satisfy land registry of the leases

I am yet to find-out if I need planning permission. I am going to consult my friend who is an enforcement officer, I am also not clear on whether the way the services have been divided is adequate, so will get a viewing and take a builder. I will update again. Any other thoughts/considerations very welcome!

Richard U

11:26 AM, 1st February 2017
About 2 years ago

My planning friend says, that after 4 years of being converted planning is no longer required. There is just a £190 fee to pay to the council to confirm the changes.


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