Purchasing A Residential Property: What Are The Formalities?

Malcolm Finney explains a common transaction that is often not properly understood. 

Purchasing a residential property, as anyone who has done it will know, is both a stressful and an expensive business, not helped by the jargon used by solicitors when corresponding with their clients. Unfortunately, for various reasons, land transactions (compared to other types of property transactions relating to (for example) a car; a painting, etc.) have always been regulated by different and complex legal rules.

Although in general terms one talks about ‘buying a house/flat’, strictly speaking, a purchaser is purchasing an interest in land referred to as ‘an estate in land’ because post the Norman Conquest, all land belongs to the Crown. The term ‘land’ is defined in legislation as including ‘buildings or parts of buildings’ (Law of Property Act 1925, s 205(1)(ix)).

Once the vendor and purchaser have informally agreed on a purchase price (which has no legal effect; hence why, for example, a purchaser may be ‘gazumped’) after viewing the property in question, the legal process of sale/purchase begins. This process is typically a three-stage process:

Whilst this legal process is continuing, the purchaser will normally arrange for a survey to be carried out on the property and a mortgage to be obtained.

Legislation lays down the formalities which a contract must adhere to. Most importantly, it must be in writing and signed by both vendor and purchaser. Under the contract, the vendor is agreeing to sell and the purchaser is agreeing to purchase. This signing by both parties is commonly referred to as ‘exchange’. Both parties are then legally committed to ‘complete’ (see below) the transaction. Tradition requires that at this stage the purchaser pays a deposit equal to 10% of the purchase price, with the balance of the purchase price being paid on completion.

Before both parties sign the contract, various checks/enquiries are made by the purchaser’s solicitor (e.g. checking that the vendor does possess legal title to the property; whether any third party also has an interest in the property, e.g. a mortgagee, sitting tenant, etc.). It is the making of such enquiries that takes the time.

Following the signing of the contract, the vendor is then required to transfer the legal title to the property to the purchaser, and the latter is required to settle the outstanding purchase price.

The transfer of the legal interest by the vendor needs to be in writing (as did the contract) but in the form of a deed (i.e. a document which is signed, witnessed, and delivered). This transfer is commonly referred to as ‘completion’.

Historically, the period between exchange and completion was approximately 28 days; this period has been reduced as an investigation of legal title is now typically conducted prior to exchange and not, as in the past, between exchange and completion.

Once legal title has been transferred to the purchaser it must then be registered at HM Land Registry (LR). Until registration, the interest in the property (i.e. legal title) is not officially transferred. Any stamp duty land tax liability (payable by the purchaser) based on the purchase price needs to be paid to HMRC within 30 days of completion and prior to registration at LR (in Scotland, land and buildings transaction tax is dealt with by Revenue Scotland).

A recent tax case heard in the First-tier Tribunal (Tax) (Higgins v Revenue and Customs [2017] UKFTT 236 (TC)) involved consideration of private residence relief for capital gain tax (CGT) purposes which, in turn, caused the tribunal to have to consider the aspects of ‘exchange’ and ‘completion’.

Mr Higgins had purchased an apartment and subsequently sold it; as it was his private residence throughout his period of ownership he claimed that any capital gain arising on sale was totally exempt from CGT. The issue for the tribunal was to identify when the period of ownership of the apartment commenced and ceased.

HMRC had asserted that ‘…section 28 [TCGA 1992] applies to determine the period of ownership for all purposes concerning the availability of the relief’ (TCGA 1992, s 28 refers to the date of ‘exchange’ of contracts). However, the tribunal disagreed, stating:

‘(10). The period of ownership …. began when Mr Higgins owned the legal and equitable interest in the lease of the Apartment and … the legal right to occupy the Apartment. That was the date of legal completion of the purchase …. The period of ownership ended … when the contract for sale … was completed.’(italics added).

Exchange of contracts is irreversible; do not exchange unless you are able to complete the purchase.