If you already own a residential property and are considering purchasing another, be prepared for potentially higher costs due to the Additional Dwelling Supplement (ADS). This extra charge is added on top of the standard Land and Buildings Transaction Tax (LBTT) rates, which can significantly increase the total price of your property purchase. Whether you are expanding your property portfolio, buying a second home, or investing in a holiday property, understanding the impact of the ADS is crucial; it can substantially affect your overall budget and plans.
Understanding ADS
The ADS is an additional charge added to the LBTT when you purchase an additional residential property in Scotland.
Additional residential property can include a second home, a rental property, a holiday home, or even a property used by family and friends (regardless of whether you charge rent).
Note
Most transactions liable to the ADS involve residential properties only. These are transactions where the main subject matter is entirely an interest in residential land, or in the case of linked transactions, where each transaction’s main subject matter is entirely an interest in residential land. Essentially, any transaction involving residential properties can potentially be affected by the ADS.
When do you Pay ADS?
You calculate the ADS alongside your LBTT. You include it on the LBTT return and pay at the same time as your LBTT.
When Does ADS Apply?
A transaction becomes eligible for ADS, if following conditions are satisfied:
- Single purchaser purchasing additional property: If you already own one or more residential properties anywhere in the world and are buying another property in Scotland, the ADS will apply unless you are replacing or selling your only or main residence.
For Example,
Example: Stela owns a dwelling as her main residence and is buying another to rent out. As she’s not replacing her main home, and at the effective date of the transaction she owns two residences, ADS applies.
- In the case of multiple purchasers: If any of the buyers in a group already own another property at the effective date of the transaction, the ADS applies.
- Joint purchase with company: If a company and an individual purchase a residential property together, even though the individual doesn’t own any other property, the ADS still applies because the company is involved in the purchase.
- Non-natural persons purchasing additional property: The ADS applies to any non-natural person (e.g., companies, corporate bodies, or certain trusts) purchasing a residential property, even if they don’t already own other properties.
For Example,
Raymond Limited, a company, buys a buy-to-let property. Since the purchase price exceeds £40,000, the ADS applies to this transaction, despite the company owning only one residential property.
But these eligibilities are subject to certain conditions. ADS is not applied in the following circumstances:
- If, at the end of the effective date, you only own one dwelling, or
- If the consideration for the property you’re purchasing is less than £40,000, or
- If the additional property you own is worth less than £40,000, or
- If you own a share in a jointly owned property, and the value of your share is less than £40,000, or
- If you sell your only or main residence within 36 months before purchasing a new one to replace it (for transactions with an effective date on or after 1 April 2024).
For Example,
Let us consider, Alex owns a dwelling that they use as their main residence. They then purchase a property for £25,000, which they plan to rent out. Since the consideration for this transaction is less than £40,000, the ADS will not apply, even though Alex now owns two properties. The effective date of the transaction is when the purchase is completed.
Note
For transactions with an effective date before 1 April 2024, you must sell your main residence within 18 months before buying your new main residence for the ADS to be waived.
What about the Purchase of Non-Residential Property?
ADS generally do not apply to non-residential property transactions. These transactions include:
- Transactions where the main subject-matter involves land that is not residential property.
- Linked transactions where the main subject-matter includes non-residential land.
- Transactions involving six or more separate dwellings in a single transfer.
For transactions involving six or more residential properties, full relief from ADS is available, applicable to both individuals and non-individuals.
However, if a transaction includes both residential and non-residential properties, ADS may still apply to the residential portion. In such cases, the ADS rate is 6% of the chargeable consideration attributable to the residential dwellings, calculated based on a just and reasonable apportionment.
Understanding the Application of ADS the Purchase of Residential Properties by Non-Individuals
A non-individual, such as a company, investment trust, or other corporate entity, is not considered to be replacing its only or main residence. Therefore, the ADS applies to every property purchase by such entities, with some exceptions for certain trust transactions.
The ADS will also apply to all purchases by individuals who are acting in the course of a business, specifically those operating as a sole trader or as part of a partnership where the primary activity is investing in or dealing with property. This is particularly relevant when the individual's business involves purchasing or owning residential property as part of its operations.
For non-individual buyers, the ADS applies if the transaction involves the purchase or ownership of a dwelling in Scotland, and the chargeable consideration (the amount paid) is £40,000 or more. The ADS will apply if the buyer is not an individual, or if the buyer is an individual acting in a business where the main activity is property investment or dealing, or when the purchase is made as a trustee under a settlement without an interested beneficiary for the dwelling.
It's also important to note that a "beneficiary" under a settlement is considered an "interested beneficiary" if they have or will have a relevant interest in the property, such as the right to live in the dwelling for life or to receive income from it.
An important exemption exists for bulk property purchases: full relief from the ADS is available if a buyer purchases six or more residential properties in a single transaction, regardless of whether the buyer is an individual or a non-individual.
Can the Paid ADS Be Claimed Back?
Yes. If the buyer sells their previous main residence within a specified period, they may be eligible to claim a repayment of the ADS, subject to specific conditions. In cases of joint buyers, all must meet the all the conditions for a repayment to be considered.
Conditions for Claiming ADS Repayment
- You must sell your previous property within 36 months of purchasing your new only or main residence (for transactions up to and including 31 March 2024, the period is 18 months).
- The property you sold must have been your only or main residence at any time during the 36 months before purchasing the property on which you paid the ADS.
- You must have lived in the property you paid the ADS on as your only or main residence.
Special Rules for Spouses, Civil Partners, and Co-Habitants
For couples, only one buyer needs to meet the first condition (selling the previous property within the specified period), but both must meet conditions 2 and 3. For transactions with an effective date on or after 1 April 2024, only one of the buyers will need to meet conditions 1 and 2, but both must meet condition 3.
What Happens if the Repayment Conditions Aren't Met?
If the conditions are not met, Revenue Scotland cannot consider any exceptional circumstances for repayment. As these conditions are absolute, keeping track of the deadlines is recommended.
How to Claim the Repayment
The process of claiming a repayment depends on who is making the claim.
- Existing agents must amend the original LBTT return in SETS.
- New agents should complete a repayment claim form and email it to Revenue Scotland.
- Taxpayers claiming on their own behalf should use the online process.
The repayment claim must be valid, as Revenue Scotland conducts routine checks and may open enquiries to ensure the correct tax has been paid and all claim requests meet the necessary conditions for repayment. If successful, Revenue Scotland will repay the ADS with interest.
ADS Rates and Interest
S.N. | Date | Interest |
|---|---|---|
1. | For transaction on or after 16 December 2022 | 6% of the purchase price |
2. | For transaction on or after 25 January 2019 | 4% of the purchase price |
3. | For transaction prior to 25 January 2019 | 3% of the purchase price |
*Please note that the additional amount as per Part 3, Schedule 2A of the LBTT Act 2013 is equal to 6% of the relevant consideration.
Comparing Higher Rates: SDLT vs. LBTT on Additional Residential Properties
Like the application of ADS on standard LBTT rates, higher rates are also applied to standard Stamp Duty Land Tax (SDLT) rates on the purchase of additional residential properties. While both higher rates serve a similar purpose of targeting additional residential properties, there are significant differences in the tax rates and rate bands.
To fully understand their implications, it is essential to compare the two systems, as the variations in tax treatment can have a notable impact on property buyers. This analysis will offer a clearer picture of how each tax applies in different jurisdictions.
Subject | SDLT | LBTT |
|---|---|---|
Definition | Where an individual purchaser acquires two or more dwellings in the same transactions | An additional charge which is added to any LBTT. It is charged if you buy an additional residential property. |
Referred as | Higher rates for additional dwelling | Additional dwelling Supplement (ADS) |
Examples | Any residential property such as a second home, a buy to let property, a holiday home. | Any residential property such as a second home, a rental property, a holiday home and properties used by family and friends even if you don’t charge rent |
Non-Individual buying residential property | A purchase of major interests in one or more dwellings by a company will comprise a higher rates transaction | ADS applies if non-individual such as corporate bodies, companies and trust buys a residential property |
Applicability |
|
|
Non-Applicability |
|
|
Legislation | Schedule 4ZA of SDLT | Schedule 2A of LBTT |
Additional Rates | Additional amount is 5% | Additional amount is 6% |
Conclusion
Buying an additional residential property in Scotland can be tricky when it comes to understanding the ADS and its impact on your tax obligations. Our expert team is here to make the process easier, guiding you through the complexities of ADS and helping you minimise your LBTT. We are committed to ensuring you make the most informed decisions and get the best possible return on your property investments.
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