Inland Revenue could tax buyers’ estate agency fees
The morality of estate agents dual charging both buyers and sellers fees has been in the news, with Hugh Dunsmore-Hardy, non-executive director of Winkworth and former NAEA chief executive publicly calling it “ethically indefensible”.
Estate Agencies such as Haart and Douglas Allen have been charging buyers fees on cases mainly in East London, as was revealed by Mortgage Introducer back in April.
Generally the buyer pays 2% of the purchase price plus VAT and an additional £150 fee.
But Smithers, who is also the chair of the Law Society’s Conveyancing and Land Law Committee, warned: “HM Revenue and Customs may treat the payment as part of the purchase price and consequently it might be liable to Stamp Duty.”
As the fee is liable to be paid up front, he explained, the purchase price and the fee forms a connected transaction.
“The buyer is paying the finder’s fee and the purchase price,” he said.
“If you were doing this as a method of avoiding Stamp Duty then I don’t think that would be effective under the rules.”
Haart treats the fees separately and does not envisage the buyers being taxed.
Under the Open House system in London, which utilises the practice, sealed bids are submitted for the limited stock, with the highest purchasing the property.
John Penn, head of mortgage proposition at Intelliflo, said: “Whether they will be taxed is a grey area because some solicitors are saying that it won’t, others that it will.
“Some solicitors are saying it takes you to a higher bracket and others are saying it doesn’t. What is clear is the purchaser is going to have to find an extra 2%.
“If this comes to the attention to the FCA we could find that lenders will say ‘no, we’re not happy for this additional 2% to be added to the loan. It cascades into the MMR affordability.”
The FCA confirmed that the 2% fee currently sits outside the guidelines of MMR as the money is not lent.
Currently Jonathan Burridge, independent mortgage broker, does factor such fees into affordability, as he said: “A 2% agent fee is 2% less they can put into their deposit so it could impact the loan term and general affordability.”
And when quizzed its position, the CML agreed that the extra fee should carefully considered as part of a customer’s affordability.
The CML said: “Under the new rules of the Mortgage Market Review, the borrower needs to explicitly agree to the adding of a fee to the loan before a lender would do so.
“If it is added, then this would have to be factored into the affordability assessment which would fall under the individual lenders’ criteria on a case-by-case basis.”
On the practice of dual fees, Hugh Dunsmore-Hardy said: “If you are taking the fees off the seller and asking your buyer to pay them that is ethically indefensible.
“People who are buying in the market don’t just have the ability to have another £8-10,000 to pay these fees – they’ve got to pay Stamp Duty to pay as well as these fees.
“Where is the buyer going to get this money from? Mortgage lenders are not going to be able to lend more.
“Isn’t this restricting the market? I think it could make a lot of buyers walk away.”
Thomas Dean, who runs his own local estate agency Thomas and Partners based in Deal, Kent, also finds the practice baffling.
He said: “If the buyer buys a house he’s going to have the burden with stamp duty. Why should he have to pay the estate agency fees as well?
“That’s not what we do but a lot of the larger ones do it.”
Such criticism is not new, as when speaking to Mortgage Introducer back in April Jonathan Burridge said “This is pure profiteering and raises questions over whether agents should be allowed the liberty of self-regulation” while Ray Boulger, senior technical manager of John Charcol, added “in my opinion it’s a highly dubious practice”.
Chief executive of Haart Paul Smith defended the system, as he said: “Where demand for property is very fierce and sales are subject to a sealed bid tender process, the successful buyer may pay the agent’s standard fees.
“This is clearly stated on our website alongside these properties and accounts for less than 1% of all sales. All prospective purchasers are fully aware that they are paying our fee and buyers are prepared to do this in order to secure a purchase.
“In some of these cases, the vendor and the buyer split the standard fee.”
But Hugh Dunsmore-Hardy said: “The buyer and the seller split the fee? That’s not the way I understand it works.
“The buyer is expected to pay a high percentage fee plus VAT – that’s not splitting the fee, that’s the buyer paying the fee.”
The Open House system brings problems for the buyer, as Jonathan Burridge said: “I’ve had a client recently opt to sell subject to tender and he accepted an offer £20,000 higher than the price the agent had.
“But then the property was down valued by the buyer’s mortgage company and the vendor said ‘tough’, so the buyer had to come up with the cash in addition to the 2% fee.
“Agents acting for the vendors are starting to see an issue with down valuations on the house prices.
“It could be that surveyors are not supporting the heating up of prices, which could make things sort themselves out on their own.”
Whilst estate agencies justify the practice due to high demand and low supply in some parts of the country, Dunsmore-Hardy said: “If buyers are desperate it’s not ethical.
“It’s all about agents trying to increase their share of the market.
John Penn said: “The motivation of estate agents is to sell more houses and you can’t fault them for that.
“Their fee on this scheme is above the average of the standard fee – 1.8% plus VAT is the average fee for the vendor.”
Jonathan Smithers speculated that consumers may consider offering less than the market value to factor in the estate agency costs, as he said “don’t necessarily assume that the seller will be better off”.
And Penn said: “Sellers may decide to lower the asking price.”
Speculating as to what could happen if the practice becomes more widespread, he added: “If everyone takes this approach the highest value could be below the asking price. How does that benefit the marketplace?
“What happens if the purchaser goes to the estate agent and makes an offer for the property but does not want to be part of the scheme? What happens if the winning tender happens to equal less than what they offered?”
The legality of the practice was also questioned by Dunsmore-Hardy.
He said: “If the buyer is paying the estate agent then who is acting for whom?
“What they’re doing is not illegal but the potential for a civil dispute to arise exists.
“If after the property has gone through the buyer finds it needs work to be done this leaves agents open to a lot of problems as the buyer might consider that the agent was acting for the seller not the buyer.
“At the very least they could leave themselves potentially open to a lot of ill feeling and reputational damage.”
Jonathan Smithers agreed. “It’s not illegal to do it, but it throws up some legal problems,” he said.
“If I have a client I must avoid acting in conflict with another client as part of the solicitor’s regulatory authority rules.
“Those rules don’t apply to estate agents but sometimes the buyer may have the impression that the agent is also working for them.
“In this circumstance, where the buyer is paying a buying fee, then the buyer may think that the agent they have a duty of care to them.
“That’s where there’s the potential conflict between the buyer and seller.”
The practice has raised questions over whether estate agents will face tighter regulation in addition to consumer protection regulations, which ensure that fees are transparent.
Jonathan Smithers said: “I don’t think, with the current government policy of deregulation, there is likely to be more regulation of estate agents, but you could make a case that if estate agents were more regulated the public would be better protected.
“That’s the political debate. It’s about where you think in political terms how much public protection there should be.”
When asked if estate agents should be regulated John Penn said: “Logically the answer is yes. If the market is regulated where things are grey it would benefit the market.
“However it will would that push the cost up from the estate agent point of view? There are bigger issues.
“The FCA is currently very stringent and very regulated but outside that sits generators of business which is the estate agent’s side.”