Freehold vs. Leasehold: What’s the difference?
Rachel Maria Knight
Title Split Property Expert helping property investors and SSAS investors split leasehold away from freehold to double the value of their property portfolios. Capital Growth/SSAS/ Pension/Investors
What are Freehold and Leasehold Properties?
In simple terms, a freehold property means you own the building and the land it sits on outright. You’re in full control and can make changes to the property as you see fit (subject to planning laws).
On the other hand, a leasehold property means you own the building for a set number of years, but not the land it sits on. The land remains under the ownership of the freeholder (landlord) , and you essentially have a long-term rental agreement with them.
Why Understanding the Difference Matters
In the UK, whether a property is freehold or leasehold really matters because it changes what you actually own, what you have to pay, and what your responsibilities are. If you own a freehold, you own the building and the land it’s on, with no time limits and no extra payments like ground rent. But with leasehold, you only own the property for a certain amount of time, and the land stays with the freeholder, so you have to pay things like ground rent and service charges.
How long the lease is can affect how much the property is worth and whether you can get a mortgage. UK laws give leaseholders the right to extend their lease or even buy the freehold, but this can be a bit tricky and expensive. Recent changes, like the 2024 Leasehold Reform Act, which got rid of ground rent on new leases, are helping to make things fairer for leaseholders, so it’s really important to know the difference between freehold and leasehold when you’re buying a property.
Key Differences Between Freehold and Leasehold
Let’s take a closer look at some of the main differences between freehold and leasehold properties.
Ownership Structure: Freehold Interest vs. Leasehold Interest
When you buy a freehold property, you acquire what’s known as freehold interest. This means you own both the building and the land it stands on. There’s no time limit on your ownership, and you can sell or pass on the property as you wish.
With a leasehold property, you have a leasehold interest. You’re buying the right to live in the property for a specified number of years, which could be anywhere from 40 to 999 years. Once the lease expires, ownership of the property reverts back to the freeholder, unless you negotiate a lease extension. ?
Key Changes in Leasehold Reform 2024
Changes to Ground Rent in Leasehold Agreements?
The changes to the leasehold bill mean that ground rent cannot be charged on new residential long-term leases (those over 21 years), setting ground rent to zero, or a peppercorn (a peppercorn refers to what was charged centuries ago but basically means zero monetary value). While it doesn’t apply retroactively, it does cover new residential leases. The act is better for leaseholders, as freeholders will have to pay penalties if they don’t comply. The Act also removes ground rent on informally extended leases, preventing freeholders from increasing ground rent for the remaining lease period and ensuring no ground rent is charged once the new lease term starts. This reform aims to provide better protection and clarity for leaseholders, making property ownership more straightforward and affordable.
Duration of Ownership: Permanent vs. Temporary
One of the most significant differences is the duration of ownership. Freehold ownership is permanent; you own the property indefinitely. Leasehold ownership, however, is temporary. You’re essentially a long-term tenant with a contract that eventually expires. As the lease gets shorter, the property’s value can decrease, and it might become more difficult to sell or remortgage.
Rights and Responsibilities of Owners
As a freeholder, you have full rights over your property, meaning you can make alterations, build extensions, or even demolish and rebuild – as long as you comply with local planning laws. You’re also responsible for the maintenance and upkeep of both the building and the land.
In contrast, as a leaseholder, your rights are more limited. You may need permission from the freeholder to make any significant changes to the property. Additionally, you’re often required to pay ground rent and service charges, which contribute to the maintenance of communal areas and the building’s structure.
Benefits of Freehold vs. Leasehold
Each type of ownership has its pros and cons, depending on your circumstances and what you’re looking for in a property.
Advantages of Owning a Freehold Property
Permanent Ownership: There’s no worry about a lease running out or needing to extend it.
Control and Flexibility: You can make changes to the property without needing permission from a freeholder.
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No Ground Rent or Service Charges: Freehold properties don’t come with the extra costs associated with leaseholds.
Benefits of Leasehold Properties
Freehold vs. Leasehold Pros and Cons
Here is a quick rundown of the pros and cons of freehold and leasehold.
Freehold Pros:
Freehold Cons:
Leasehold Pros:
Leasehold Cons:
Financial Aspects of Freehold vs. Leasehold
The financial implications of whether a property is freehold or leasehold can affect you in a couple of ways – everything from your mortgage options to the ongoing costs you’ll face as a property owner.
Freehold vs. Leasehold Mortgage Considerations
When it comes to getting a mortgage, freehold properties are generally more straightforward. Since you own the property outright, lenders often see them as less risky.
Leasehold properties can be a bit more complex. Lenders may be hesitant if the remaining lease term is too short, which is typically less than 80 years. In the past, leaseholders with fewer than 80 years remaining had to pay an extra charge, but when the Leasehold Reform Act of 2024 takes hold soon this will be removed. You might also find that you can borrow less on a leasehold property or that you’ll need to negotiate a lease extension to secure the best mortgage rates.
Cost Differences: Ground Rent and Service Charges
One of the key financial differences between freehold and leasehold properties is the ongoing costs. Ground rent is an annual fee paid by leaseholders to the freeholder, simply for the land their property sits on – however, since the Leasehold Reform Act 2024 has been passed, ground rents will now be set to zero. meaning if you are only a leaseholder you will no longer face annual charges simply for occupying a property. Service charges cover the cost of maintaining communal areas and building structures, such as hallways, roofs, and gardens. These costs can vary widely, and they’re worth factoring into your budget if you’re considering a leasehold property.
Stamp Duty Leasehold vs. Freehold
Stamp duty is a tax you pay when purchasing a property, and the rules differ slightly for leasehold and freehold properties. With a freehold, stamp duty is calculated based on the purchase price of the property. For leaseholds, the calculation can also include the lease’s “net present value,” which could increase the amount you owe, depending on the terms of the lease.
Do You Need Help With A Freehold or Leasehold?
Whether you opt for a freehold or leasehold property, understanding the differences can mean a lot for your future. Freehold offers you full control and long-term stability, while leasehold can be more affordable but comes with added responsibilities and costs. By weighing the pros and cons of each, and considering your long-term goals, you can make a decision that best suits your needs. Ultimately, you can’t go wrong with the advice of seasoned and passionate professionals, so reach out to us at TitleSplit for any advice!?