Why Do People Do Cash-Only?
In property transactions, you may occasionally encounter buyers who want to purchase a house with cash only and are resistant to bank finance. With mortgage rates competitive, why do some buyers prefer paying completely in cash when purchasing a property? There are several motivations why some favour cash-only house purchases. But there are also risks for buyers and sellers to consider with these cash-focused transactions.
Speed and Convenience
For buyers with large cash sums available, paying the full amount upfront in cash can appear an attractive, fast option. A cash purchase means:
- No need to arrange a mortgage, saving time and paperwork.
- The purchase is not reliant on securing loan approval and valuation.
- The transaction can proceed more quickly without a financing chain.
- Settlement on completion is instant without waiting for lender funds.
By removing delays related to mortgages, cash buyers can move faster from offer accepted to exchanging contracts. This appeals to buyers who are impatient to secure the property or concerned the seller may accept a higher offer. It provides convenience for those with accessible funds ready to deploy.
Anonymity and Privacy
Certain buyers prefer the anonymity and lower profile a cash purchase allows compared to financing through a lender. Motivations may include:
- They want privacy around their financial affairs and asset ownership.
- Purchasing as a corporate entity makes it harder to trace the ultimate buyer.
- Keeping the purchase off public records which logged mortgages create.
- Avoiding scrutiny banks apply during mortgage applications.
- Preventing financial background checks by lenders before approval.
For individuals desiring discretion around their wealth and property assets, the privacy cash buying permits are advantageous. It reduces the visibility of their financial position.
Yield and Investment Goals
Investors able to purchase the property outright in cash may be looking to generate ongoing yields from rentals. Benefits of cash purchasing for investment include:
- Properties can be acquired quickly taking advantage of deals in the market.
- No restrictions on property types, unlike buy-to-let mortgages.
- Instantly ready to let out after completing the purchase.
- Positive cash flow with no mortgage to service.
- Reduced risk if investing in areas with potential capital declines.
Cash purchases allow experienced property investors to build portfolios rapidly. Without leverage, immediate yields on rental income are higher. This suits investors wanting income returns.
Do You Pay Taxes on Selling a House?
When you sell a property in the UK, you may have to pay Capital Gains Tax (CGT) if you make a taxable gain on the sale. This depends on:
- Your ownership of the property – CGT applies if you were a sole or joint owner.
- Being a UK tax resident – non-residents may escape CGT in some cases.
- Making a capital gain on the disposal – this is the sale proceeds less allowable costs and your purchase price adjusted for inflation.
- Already using your tax-free allowance – currently £12,300 per tax year before CGT applies.
You may also face Income Tax if selling is considered part of a property trading business rather than a one-off sale. Key factors determining this include:
- Frequency of property transactions. HMRC may consider regular buying and selling to be trading activity.
- Period of ownership – quickly reselling may imply flipping for profit.
- Buyer intentions – was the property acquired for occupation or quick resale?
- Work undertaken on the property – extensive renovations may signal an intention to trade.
- Existence of a rental business alongside occasional sales.
With property prices rising long-term, you should not automatically assume any gain made on sale is tax-free. Seek expert advice to establish if tax applies when selling your house.
Risks of Cash-Only Purchases
While cash house purchases may seem straightforward, there are downsides and risks to consider:
Difficulty Obtaining Finance – Buyers will struggle to secure a mortgage against a property they already own outright. Unless they have sufficient equity, they may find it hard to borrow against the property for future needs.
Impact on Returns – Making an outright cash purchase misses out on potential leverage benefits that boost overall returns when values rise. Mortgage finance can multiply gains.
Source of Funds – Large cash sums may arouse suspicion around criminal conduct or money laundering without documentation of legal earnings.
No Recourse If Issues Arise – Unlike with a regulated lender, the seller has no protections or comeback if a cash buyer defaults on completion.
Higher Risk Without Checks – Cash buyers avoid the detailed checks lenders make, so verifying their credibility is more challenging.
Inflexible at Completion – Buyers may encounter last-minute problems raising the full amount in cash resulting in delayed completions.
While convenient, cash-only purchases do carry an increased risk for sellers to weigh up carefully before proceeding.
Money Laundering Risks with Cash Transactions
A buyer insisting on paying cash only with no financial trail should prompt money laundering concerns that require further due diligence. Warning signs may include:
- Vagueness about the source of cash funds.
- Reluctance to provide documentation verifying legitimately earned income.
- Unwillingness to disclose identity or attempts to hide behind corporate entities.
- Living profiles do not match substantial cash sums at their disposal.
- Lack of plausible reason for avoiding mainstream lending options.
- Attempts to speed up the transaction and avoid excessive scrutiny.
- Signs of third-party funding with no clear explanation.
- Cash originating from higher-risk locations is linked with corruption.
While not all cash buyers are criminals, sellers and agents must report suspicious transactions under money laundering regulations. A buyer with nothing to hide should not object to questions about the origins of cash funds. Arm’s length cash-only sales require extra vigilance.
What Checks Should a Seller Make?
When faced with a cash-only offer, there are important checks a seller should make:
- Ask questions on the source of funds and press for documentation evidencing legitimately earned income. Bank statements over a period can help.
- Corroborate cash is from the sale of another property through paperwork like sale contracts.
- Verify any inheritance with legal probate documents.
- Check corporate entities are properly registered and the buyer owner can be identified.
- Assess if the buyer’s income and occupation feasibly support access to the cash amounts.
- Review records like payslips and tax returns to confirm earned income.
- Check identity documents like passports and driving licences for authenticity.
- Increase scrutiny for overseas buyers from high-risk jurisdictions.
Conducting reasonable due diligence provides assurance cash is not from dubious origins. While not conclusive, it creates a paper trail evidencing steps taken. Refusal to provide explanations or documents may be a red flag.
Should a Seller Accept Cash Offers?
Sellers naturally want the security of being paid and cash offers provide this. However, weighing up the advantages and risks will determine if accepting a cash-only offer makes sense.
- Provides certainty that the buyer has readily available funds.
- Avoids delays in waiting for mortgage approvals.
- This may allow for quicker transaction timescales.
- Eliminates risks of a mortgage falling through.
- Seller receives net sale proceeds promptly.
- Higher money laundering risks require due diligence.
- Lack of comeback to the lender if the buyer pulls out.
- Difficulty verifying the credibility of the buyer without lender checks.
- Scope for deal falling through if cash cannot be transferred.
- Potential tax evasion implications.
Ultimately the seller must judge if guarantees of cash outweigh the risks presented by the specific buyer. Proceeding with cash buyers should only follow rigorous identity and funds screening.
Reporting Cash Offers to Tax Authorities
In some countries, cash-property transactions need to be reported to tax authorities to provide greater transparency. The UK does not currently compel disclosure of cash property sales. However, a seller should inform HMRC if during the transaction:
- There is clear evidence the buyer intends tax evasion that the seller could become implicated in.
- The seller suspects the cash funds stem from illegal tax evasion activities.
- Payment is insisted upon in physical cash requiring anti-money laundering disclosure.
- The buyer requests concealment of the sale or purchase price from tax authorities.
- Offshore entities are involved in attempting to hide ownership from tax obligations.
While not mandated, reporting morally questionable cash buyers to HMRC maintains integrity. A seller should avoid facilitating transactions seemingly structured around willful tax evasion.
How Solicitors Can Assist with Cash Buyers
Appointing a solicitor adds an extra layer of protection when dealing with cash buyers. Solicitors have a legal obligation to:
- Verify buyer identity and check against watchdog databases.
- Request evidence on the origins of cash funds used.
- Assess the plausibility of explanations given for cash sources.
- Highlight warning signs like unusual complexity in the transaction.
- Refuse to proceed if not satisfied with the responses and information provided.
- Submit Suspicious Activity Reports if concerns of laundering.
Drawing on experience handling cash purchases mitigates risks for sellers. Law Society anti-money laundering guidance instructs solicitors on best practices around cash. Follow your solicitor’s advice before accepting a cash-only offer.
Using Escrow Accounts for Cash Purchases
A safer option when dealing with a cash buyer is using a solicitor’s escrow account to handle the money safely during transactions. This involves:
- The buyer transfers the cash funds into the solicitor’s client account ahead of the exchange.
- The solicitor verifies cleared funds and retains cash until completion.
- Only releasing cash to the seller upon legal completion taking place.
- Returning funds to the buyer if completion is delayed or fails.
With the solicitor controlling cash, until all legal obligations are met, risks decrease for the seller. Escrow accounts ensure while maintaining transparency. This can give sellers confidence in accepting substantial cash payments from buyers ramping up due diligence.
Cash-only house purchases undoubtedly have advantages for buyers around speed, privacy, and investment returns. However, transactions lacking any financing paper trail require extra vigilance to ensure legitimate origins of cash. While not all cash buyers have ill intent, verifying the source of funds is critical to avoid facilitating illegal activity. With expert legal guidance, cash property transactions offer workable alternatives. However, sellers should exercise judgment and avoid compromising ethics or regulations in pursuit of a quick sale. Informed prudence rather than blanket refusals of cash buyers is advisable for sellers. In the process of selling a house, it’s important to be aware of your financial responsibilities. This may lead you to ask, “Do you pay taxes on selling a house?” Understanding the tax implications of selling a property is crucial to ensure compliance with relevant regulations and make informed decisions throughout the selling process.