The Additional Dwelling Supplement (ADS) tax that might apply to a property purchase in Scotland is a complicated area and one that can be difficult to understand. It is often payable in addition to Land and Buildings Transaction Tax (LBTT) which replaced Stamp Duty in Scotland in 2015. However, there are situations where ADS is payable even where LBTT is not.
We are often asked how it might apply, particularly where buyers have not yet completed on the sale of their existing home before they purchase and move-into their new home: technically, the new home is an ‘Additional Dwelling’ until the sale completes and ownership transfers to the new homeowner. The purpose of this article is to explain whether you, as a buyer, might be affected by ADS.
What is LBTT and ADS?
By way of background, Stamp Duty on the purchase of residential properties was replaced in Scotland by Land and Buildings Transaction Tax (LBTT) on 1 April 2015. Then, from 1 April 2016, an Additional Dwelling Supplement (ADS) was introduced for people buying an additional residential property over and above their main home. ADS is 3% of the total purchase price of an additional residential property purchase of £40,000 or more.
When is ADS Applied?
ADS is intended to cover situations where someone buys an additional property for investment or recreational purposes, such as a buy-to-let property or a second/holiday home. However, it can also include instances such as a young couple retaining one of their existing flats as a pension and buying a family home, or someone who has inherited a home or bought a home under the Right to Buy scheme. For further information about these scenarios, read our Guide to LBTT Additional Dwelling Supplement (ADS).
Sale Settlement Delayed But Continuing with Purchase?
ADS can apply where settlement on a sale is delayed, even where the buyer isn’t purchasing their new property as an investment. This can have a significant effect on the affordability of the purchase. How?
If you are unlucky and your property sale is delayed, but you wish to continue with your purchase on the pre-agreed date, you may need to get ‘bridging finance’, a short term (secured or unsecured) loan, or indeed a second mortgage to fund the onward purchase. If you are in the lucky position that you own your current house outright, you may only need a mortgage on the new house which you can take out temporarily and then pay off when your existing home sells. Alternatively, you may go for an ‘offset’ or ‘current account’ mortgage where you can pay the proceeds of your sale into that account when the sale of your existing home settles.
If you find yourself in this situation, you will have to pay ADS equivalent to 3% of the purchase price on the property you are buying. The ADS charge will, however, be refunded by Revenue Scotland if your existing home sale completes within 18 months of completing on the purchase of your new home.
This obviously has a significant effect on how much cash you need to put your hands on to secure your purchase and has to be factored-into your sums.
For example, if you are purchasing a £300,000 home you will already have to pay £4,600 in LBTT to the government. In addition, you will have to be able to put your hands on a further £9,000 in cash to cover the 3% ADS tax charge on the £300,000 purchase price. For a buyer who is purchasing with a £30,000 deposit and a £270,000 mortgage, finding a further £13,600 to cover the short term tax liability might be a step too far.
How to Reclaim ADS
The Land and Buildings Transaction Tax (Relief from Additional Amount) (Scotland) Bill was introduced by the Scottish Government on 13 November 2017. With regard to delayed settlement on a sale, if your existing home sale completes within 18 months of completing on the purchase of your new home (beginning with the day after the effective date of the main residence purchase transaction), you can reclaim the ADS charge. If the period extends beyond 18 months, no repayment may be claimed.
Further guidance regarding ADS repayment claims can be found here.
Despite the potential refund, ADS has a huge impact on how much money you need when budgeting for a new home without first selling your existing one. In addition to any Land and Buildings Transaction Tax (LBTT) payable, you have 3% added on top which you are out of pocket on, albeit only temporarily.
If you have any questions about ADS or how it might apply to the circumstances of your purchase, please don’t hesitate to get in touch with our Conveyancing Team by calling 0131 297 7999 or by emailing [email protected] and we will be happy to explain it to you and to advise you on how best to proceed.
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2 Comments
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I am finding it difficult to get simple answers is ADS payable on properties purchased before 1 april 2016 is LBTT payable when family members are removed from a title deed but mortgage remains in place and no equity is given to those whose names are removed
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Hi Dessie. Thank you for your enquiry. Residential property solicitors are obliged to be involved in property tax matters, by virtue of the fact that a title deed cannot be registered (with some exceptions) without submission of a Land and Buildings Transaction Tax (LBTT) return being submitted by them to Revenue Scotland. However, due to the technical nature of some LBTT/ Additional Dwelling Supplement (ADS) queries, it is necessary to suggest that the person with the query contacts an Accountant (much in the same way that most Accountants are not qualified to provide the best property law advice).
Without knowing the specific details and sums involved in your particular query, we can only provide some general guidance and it may be that you need to seek advice from an accountant. It sounds like you will certainly need to engage the services of a solicitor and/or an accountant, to obtain the correct advice, given the full details of your transaction.
There are guidance notes and Technical Advice sections on the revenue Scotland website which any individual is able to consult and to which any solicitor/accountant employed by you to deal with your transaction would certainly need to refer.
Whether or not, in your case, LBTT and ADS is payable will hinge on the precise details and sums involved, in terms of the mortgage amount being assumed and whether any payment is being made to the party coming off the title.
One Technical Note on the Revenue Scotland website, which MAY apply to your transaction runs as follows:- “We consider that ADS will not apply to transactions where an individual is acquiring a further part of a property which they already jointly own. However, the transaction may still be notifiable and chargeable to LBTT (without ADS) if any consideration is paid, or debt assumed”.
Please do feel free to get in touch with us at [email protected] if you wish to discuss this further. Best wishes, MOV8
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