When will ground rent be abolished?
When will ground rent be abolished?
When you’re buying a house or a flat, there can be a lot of unfamiliar terminology thrown around that doesn’t make a whole lot of sense. Chances are, most of the words that estate agents use mean that something is going to cost you money somewhere along the line.
That’s why we’re here: to clear things up so you know what’s coming and what you can do to avoid ending up out of pocket. Today we’re looking at ground rent and leasehold reform. If you’re wondering what they are and how they might impact you, you’re in the right place.
What is ground rent?
If you’re buying a home that’s a leasehold, it’s possible you may have to pay some form of ground rent. This is essentially a payment to whoever owns the land that your property is on - usually this is the freeholder. We’ll get on to the difference between a leasehold and a freehold in just a second.
Ground rent isn’t like a service charge, where you pay a landlord to take care of the building you live in. Landowners can theoretically charge you ground rent for absolutely no reason. In some cases ground rent conditions might be written into the deed to your home, otherwise, the land owner needs to make a “demand” if they want you to pay them. This is essentially them formally asking for payment.
Try not to worry though, the government is working towards abolishing ground rent entirely, it’s just taking some time to get the Acts passed (we’ll get on to that shortly).
If you’d like to read more about what ground rent is and how it might affect you, you can check out our blog ‘What is ground rent?’
What is a leasehold?
There are essentially two different classifications for the type of ownership you can have over your home: Freehold and Leasehold. This is how we would define them:
- If you own the freehold of a property, you own the property and the land it stands on, forever (literally)
- Thanks to the Civil Aviation Act 1982, you also technically 'own' and have rights to the 'airspace' above your property up to about 500 feet. So if you like to fly kites, you’re sorted.
- Houses tend to be sold as freehold properties as it's fairly easy to define the boundary of your property, because there's only one property on that piece of land.
- If you’re a leaseholder you own the property but NOT the land it’s built on
- Ownership of your property (technically you actually own a lease, which permits you to occupy the property) is also for a set period, which can be a number of years, decades or centuries
- If your lease expires, ownership of your property technically passes to the freeholder
Most flats are sold as leaseholds, with the freehold held by whoever built the building. This isn't always the case, though. Some flats – especially in houses converted into many flats – are set up so that owners share the freehold with others in the same building. This is called 'share of freehold'.
In recent years, a lot of new-build homes were being sold as leaseholds, which caused some controversy and has led to the most recent leasehold reform.
What is leasehold reform?
Leasehold reform is essentially a set of changes to how leaseholds work in the UK that’s been approved by the government. Generally speaking, they aim to make things fairer for leaseholders and allow them to get as close to having full ownership of their property as possible.
As an example, the Leasehold Reform Act 1993 gave flat owners the right to group together and buy the freehold of their block. It also let some leaseholders extend their leases by 90 years on flats, and 50 years for houses.
If you’d like to learn a bit more about the basics of leasehold reform, you can check out our blog ‘When will leasehold reform become law?’
When will ground rent be abolished?
The most recent leasehold reform, the Leasehold Reform (Ground Rent) Act 2022, was designed to combat the increase in new-build homes being sold as leaseholds. Essentially the bill was set out to ensure that ground rent on all newly built properties would be permanently set to zero (what’s sometimes referred to as a ‘peppercorn’).
This Ground Rent Act came into effect on 30th June 2022, so the answer is really that ground rent has already been abolished.
The Act also abolished ground rent for informal lease extensions. This is essentially when you agree on an extension on your lease with the freeholder but without anything in writing. So, the lease will technically expire at some point, and any new lease from then on will have no ground rent. It might not be the best idea to do this though, as most formal extensions will also have no ground rent. They can be quite expensive to negotiate, so that’s worth considering too.
What’s next for leasehold reform?
A lot of people are very happy with the new changes, but they’re only really aimed at new leaseholders. There are around 4.6 million existing leaseholders in England, and they’re still waiting to hear what leasehold reforms the government will introduce to make it easier and cheaper to extend their leases. It’s looking at the moment like that won’t be discussed until at least 2023, so it’s a bit of a waiting game.
There are a few big issues that existing leaseholders are still waiting to hear about:
- 990-year leases - At the moment you can only extend your leasehold formally by 90 years. The current promise is that future leasehold reforms will let you extend by 990 years, and the process will be much simpler.
- Lease extension calculator - Right now, extending a leasehold can be a lengthy, complicated and expensive negotiation process. The government has promised a standardised calculator to help work out how much you would pay to a freeholder in a more definite way.
- Marriage value - Currently, the cost of extending a lease can get much more expensive when you have less than 80 years left. This is because of something called marriage value, which means you’ll need to pay the landowner half of the expected increase in value of the property. Essentially you could be living in that house for another 90 years (in theory), and the landowner won’t be able to make the most of any increase to the land value in that time, so you pay them half of the difference to make up for it. The plan for a future leasehold reform would be to remove marriage value from the process, or at least reduce its impact on the cost.
If you’re looking into extending your leasehold and would like more information on the processes involved, you can take a look at our blog ‘What happens when leasehold expires?’
A few final tips…
It looks like things are going to be getting better and better for leaseholders in the next few years. Here are a few things to remember in the meantime:
- Ground rent for new builds was abolished in June 2022 so, if you’re buying a new house, you shouldn’t have to pay more than a peppercorn
- Leasehold reform is ongoing and, if you’re really passionate about it, there are groups that are always campaigning to get things moving
- If your lease is looking like it’s going to expire in 81 years, it might be a good time to look into an extension
Urban Jungle is not a financial advisor and information in this article should not be taken as advice or recommendation.