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Land and Buildings Transaction Tax: Additional Dwelling Supplement (ADS) What are the Changes and What Do They Mean for You?

August 4, 2016 Residential Conveyancing

In response to the UK Government’s increased rates of Stamp Duty Land Tax (SDLT), the Scottish Government introduced a similar supplement – known as the Additional Dwelling Supplement (ADS) – to the devolved property tax, Land and Buildings Transaction Tax (LBTT) (which was itself introduced only last year), on 1st April 2016. This has caused more questions to be asked of anyone buying a property in Scotland and, in some cases, requires significantly more tax to be payable.

Additional Dwelling Supplement Scotland: Background

Where payable, the ADS represents an additional tax equating to 3% of the price being paid for the property. Whereas ordinary LBTT liability arises only where more than £145,000 is being paid for a property, the ADS is payable where more than £40,000 is being paid. As a result, the purchase of a property where the ADS applies at a price of £145,000 would attract no ordinary LBTT liability however, simply due to the ADS, the buyer would face a bill of £4350.

The ADS, like the additional rates of SDLT, is intended to apply where a buyer is buying a second property or increasing their property portfolio. There are circumstances, however, where a buyer who is not a Buy-to-Let investor or someone looking for say a holiday home may nevertheless find themselves liable to pay extra tax.

When Does the Additional Dwelling Supplement Apply?

The main question which should always be asked is this: At the end of the day on which you buy your new property, how many properties will you own? If the answer to this this question is ‘one’, which will be the case for first time buyers and for those who have only owned one property previously and sold this in order to purchase a new home, the ADS will not apply. If the answer is ‘more than one’, the ADS may apply.

A concept which the legislation makes reference to and to which careful consideration should be given is the replacement of the buyer’s only or main residence. Under the current rules, if a buyer will own more than one property after purchasing their new property but has replaced their only or main residence in the 18 month period before this, the ADS will not apply. On the other hand, if a buyer will own more than one property after the new purchase and has not already replaced their only or main residence before this, the ADS will apply. Importantly, there will be an opportunity available to the buyer to apply for a refund of the ADS provided that the buyer’s only or main residence is replaced within the 18 months period following the relevant purchase.

A further issue to bear in mind is the wide range of circumstances in which, under the legislation, a buyer will be deemed to be the ‘owner’ of a property when considering the above question. If a person’s spouse owns or has an interest in a property, that person will be deemed to ‘own’ it and if a person’s co-habitant owns or has an interest in a property, that person will also be deemed to ‘own the property for the purposes of considering how many properties the relevant person owns. Having an interest in a property extends to and includes situations where a person only owns a share in a property and also includes certain tenants’ interests.

There are a number of considerations for a prospective buyer and a few of these can be more fully illustrated in the following examples:

Buyer A owns 9 investment properties plus his own home and he is now looking to buy a new home. When considering the question posed above in relation to his prospective purchase, his answer will be ‘more than one’. The ADS will not be payable, however, as he has sold his former home prior to buying his new one. Given that Buyer A is not increasing his property portfolio, it would be unfair for him to be penalised simply for moving home and it makes sense for the ADS not to apply.
Buyer B is arranging to sell her home, the only property she owns, and to purchase a new house. Due to circumstances beyond her control she is ultimately unable to sell her home before she purchases the new house and therefore she still owns her home after purchasing the new house. Buyer will require to pay the ADS, in addition to any LBTT which she would otherwise be liable to pay, but she will have the opportunity to apply for a refund if the sale goes through within the next 18 months. Whilst the opportunity to claim a refund is open to Buyer B provided she sells her home within 18 months, she may not have budgeted for the ADS as she had always intended to sell before she bought.
Buyer C, originally from Glasgow, now lives in Edinburgh. Buyer C rents out the flat he bought in Glasgow’s West End and has himself been renting in Edinburgh while he settles into his new job. He is now in a position to buy a home in Edinburgh however, despite moving out of the flat he had been renting in, he is not deemed to have ‘replaced’ his only or main residence as he had not sold a property; he simply moved out. After purchasing his new home in Edinburgh, his answer to the question will be ‘more than one’ and he will accordingly have to pay the extra tax. Even if he then sells the Glasgow flat he will not have the opportunity to claim a refund as he will not be replacing his only or main residence.
Whilst Buyer A’s situation seems straightforward, the position in which Buyer B ultimately finds herself will have costly implications and Buyer C may not have been prepared for what could be an extremely high tax bill.

As the ADS was only introduced a few months ago and its application in practice is still, relatively speaking, in its infancy, changes could yet be made to the rules and the circumstances in which it may be payable however there are, at present, clearly a number of situations where liability to pay the extra tax may arise. It is therefore vital to ensure that, when purchasing your next property, you are assisted by someone who can answer your questions and guide you smoothly through the process.

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