Additional Dwelling Supplement and reliefs available to mitigate it

The increase of Additional Dwelling Supplement (ADS) – sometimes known as the “second home surcharge” – to 6% of the purchase price from 16 December 2022 was unwelcome news to buyers of investment properties and second homes in Scotland. ADS is paid on top of the ordinary rates of Land and Buildings Transaction Tax (LBTT).

The rate of ADS has now doubled since it was introduced in 2016, having started at 3% and later increased to 4% in January 2019. In England the equivalent of ADS has remained at 3% since its introduction in 2016.

This unexpected tax hike makes it all the more worthwhile to know about the exemptions and reliefs allowed by the ADS legislation.

When is ADS payable?

ADS applies when individuals buy a house (“dwelling”) for at least £40,000 and, at the end of the day when the purchase completes, the buyer (or any of them if there are several) owns more than one dwelling. The other dwelling might be anywhere in the world, or one of several bought at the same time.

Another dwelling owned by a buyer’s spouse or civil partner (unless permanently separated), live-in partner, or child under 16 counts as being owned by the buyer, even if the actual buyer’s name is not on the title deeds.

“Completion” means handing over the purchase price in exchange for the keys and a signed deed transferring ownership of the house, as opposed to merely entering into a binding contract of sale.

ADS also applies when companies or discretionary trusts buy a dwelling, even if the company or trust doesn’t own any other properties. So if you thought of putting each house you buy into a brand new company or trust, nice try! (But see below for how some trusts can be exempt.)

If you transfer property to a company you control, LBTT and ADS are charged on the market value. Property traders/investors also pay ADS on purchases in the course of their business.

Replacing a main residence

Even the wealthiest property investor is allowed to move house. If you have sold or given away a house on the same day as completing your purchase, or in the 18 months before completion, and that house was your main residence at any time in the last 18 months, ADS will not apply if the new house is to be your main residence.

If the sale of the previous main residence has not yet completed, you do pay ADS, but can claim it back once the sale completes – if that’s not more than 18 months after the purchase.

There are some pitfalls though:

• If your main residence is rented or provided by an employer, you cannot sell it, so even if you give up your lease you aren’t technically “replacing your main residence”. (But “long leases” of houses for more than 20 years – rare in Scotland but common elsewhere – count as ownership.)
• The “18 month” rule can cause problems for separating couples. When a relationship ends, one partner might move out of the jointly owned home and ask the other to buy them out. But if the buyout takes more than 18 months to complete – hardly unlikely – they will have been too long away from the family home to be “replacing their main residence” on buying a new home.

Bare plots

Plots of ground are not dwellings, even if there is planning permission for a house build, provided no construction work has begun. So you can buy a bare plot without worrying about ADS – and up to £150,000 you won’t pay LBTT either.

Multiple dwellings relief

If you buy more than one dwelling at once, or in linked purchases, ADS can still apply, but multiple dwellings relief can bring the tax bill down. This can be useful when buying a block of flats, or a farm with workers’ cottages.

The formula is complicated, but the basic idea is that you can “average out” the price of all the dwellings involved, and pay LBTT and ADS as if you were buying each one separately, each for the average price. This gives you multiple uses of the lower tax bands, and could take the more expensive houses out of the higher tax bands if there is a wide spread of values.

There are limits to this relief, and in some situations the formula can actually produce a higher tax bill! So, seek expert advice any time you’re buying multiple houses.

Purchase of six or more dwellings

If you buy six or more dwellings in a single transaction, the purchase is exempt from ADS – and even better, you pay LBTT at the lower non-residential rates.

Liferent trust

You may be buying a house not as a second home or investment, but for a family member to live in – for example a student son or daughter or an elderly or disabled relative. Depending on their circumstances, you may not want to give total control over the property to the family member – but if you buy the house in your own name, ADS could be payable. What to do?

A liferent trust could be the answer. If the trust gives your relative an absolute right to occupy the property, the ADS legislation will look on them as the buyer, not the trustees who hold title. So if the relative wouldn’t have paid ADS if they’d bought in their own name, the trust won’t.

Despite the name, no rental payments are involved, and a Deed of Trust can be extremely flexible to suit your family’s needs.

Setting up a trust can have income tax, inheritance tax and capital gains tax consequences, so you should always take expert advice and work out whether the savings outweigh the costs and ensure you understand all of the practical implications.

If you have queries on LBTT/ADS for a property you hope to buy, our specialist team is on hand to advise. Please get in touch with Tim Macdonald or your regular Anderson Strathern contact as early as possible.

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