Many of our clients have asked us to explain the difference between “freehold” and “long leasehold” interests in properties. In essence, if you buy a UK residential property freehold, you own the building, including the land it’s built on. If you buy a residential property leasehold, it’s slightly different – you don’t actually own the land or building, you just have the right to use it, for the length of the lease. When the lease expires, the property will revert to the owner (called the freeholder), unless you exercise your statutory right to increase the length of the lease.
You may not be familiar with the concept of buying a leasehold, so we’re going to answer the following questions –
- What are the differences between freehold and leasehold residential properties?
- What are the key benefits and drawbacks of owning a UK residential leasehold property?
What does leasehold mean?
When you buy a property that is leasehold, you own it for the length of the lease. New leases usually start at 99 years and can be as long as 999 years. Once the term of the lease runs out, ownership of the property transfers to the person (or entity) that owns the land (i.e. the freeholder). However much you paid for the property, you would lose it when the lease comes to an end. But, of course, this rarely happens.
Clearly, you won’t lose much sleep over the prospect of a 999 year lease expiring! However, if a lease has, for example, less than 80 years to run, your property may become harder to sell. It could also be difficult to re-mortgage. The good news is that you almost always have the right to extend your lease. I talk about this below.
Possible drawbacks of owning a leasehold property
- Most leasehold properties are flats, though some are houses. You don’t own the communal areas such as stairs or hall. Neither do you own the building itself.
- You may (not always) pay fees called ‘ground rent’ to the freeholder. Make sure you know how much this will be and by how much it might rise in the future.
- The freeholder may be able to charge you for maintenance costs, such as roof repairs. If you think they are unjust, you may be able to challenge some charges.
- A lease may include restrictions. For example, you might be barred from owning pets, running a business or sub-letting.
- You may not be allowed to run a business from the property.
- If you may need to ask for permission if you want to make changes to the property.
- The fewer years are left on the lease, the less the value of the property.
- Conveyancing fees are typically higher when buying a leasehold property.
- The biggest risk of buying leasehold is that you may suffer from a greedy freeholder. They might, for example, double the ground rent every 10 years. This could make your leasehold property almost unsellable. Then, you find yourself trapped in the property.
If you break any of the restrictions you risk being taken to court.
What are the benefits of leasehold properties?
- A leasehold property is sometimes cheaper than a freehold.
- The freeholder is normally responsible for building maintenance in communal areas.
- The freeholder is responsible for the structure and maintenance of the building.
- The freeholder arranges building insurance.
- Sometimes flat owners choose to join together and buy the freehold on their block. They then grant themselves 999 year leases. This arrangement combines the advantages of freehold with the few perks of leasehold.
Can I extend or renew my lease?
If you have owned the property for two years or more, and if the lease has less than 80 years left to run, you can extend your lease. It’s best to extend sooner rather than later – the near you are to the end of the lease, the more expensive it can be to extend. Usually, its not particularly expensive to extend a lease, providing that its more than 80 years (there’s a formula that landlords need to use). However, the Government has set out plans to make extending a lease even easier AND cheaper – though it’s not clear when these changes will take effect.
Helping to purchase Freehold and Leasehold properties in the UK
We are accountants and tax advisors, so we can advise you on the tax aspects of buying a property. We work with some very good (and reasonably priced) solicitors that can help you with your purchase.
Find out more. Get in touch, and remember – we’re here to help.
Many of our clients have asked us to explain the difference between “freehold” and “long leasehold” interests in properties. In essence, if you buy a UK residential property freehold, you own the building, including the land it’s built on. If you buy a residential property leasehold, it’s slightly different – you don’t actually own the land or building, you just have the right to use […]