More than a year after the introduction of the Additional Dwelling Supplement (ADS), this tax continues to catch unwary purchasers by surprise. Make sure you are not one of them.

What is ADS?

ADS is an additional 3% LBTT charge payable on the purchase price of any dwellings in Scotland – the “second homes tax”. One common misconception is that the ADS does not apply to ‘non-residential’ transactions, for example, the purchase of an estate. However, this is not always the case.

How does it affect you?

ADS is payable on purchases if any part of the purchased property comprises a dwelling or a building being constructed as a dwelling for which the price is over £40,000.

ADS can apply to:

  • any dwellings purchased by an individual in the course of a business, or by a company, trust or partnership; or
  • an individual buying a dwelling for personal use if, at the end of the date of entry, they are treated as owning two or more dwellings.

Individual purchasers can benefit from an exemption from the ADS if they are replacing a main residence. However, care is needed. The replacement main residence conditions are strict, and the exception will only apply to a single dwelling. Therefore, a purchaser buying an estate with five dwellings and replacing their main residence will still pay the ADS on four of those dwellings.

Similarly, an individual who has no other property, and buys an estate with two or more dwellings, will be liable for ADS on all of the dwellings being bought. At the end of the date of entry they will own more than two dwellings in virtue of the purchase.

Purchasers with complex family trust arrangements, or who are beneficiaries of executries, should also take care. The ADS legislation can look through certain trust structures to treat beneficiaries as if they owned trust property. This can result in the beneficiary being subject to the 3% charge on a purchase, even where they do not own additional properties directly.

Transactions which involve the purchase of 6 or more dwellings are exempt from ADS.

Example

An individual purchases an estate which includes five dwellings. They own no other property. The consideration attributable to the five dwellings is £1 million. The ADS amount on the five dwellings is £30,000, increasing the LBTT liability from £35,250 to £65,250.

If the individual does own another property, which is their main residence, and one of the purchased dwellings, worth £500,000, replaces this as a main residence, the ADS is calculated on the value of the other four dwellings (£500,000) reducing the ADS amount to £15,000.

What about MDR?

Multiple dwellings relief (MDR) can provide partial relief from ADS. However, the interaction between the two is complex and claiming the relief may not always be the most cost efficient option.

Next Steps

If you are considering an estate or farm purchase where multiple dwellings are being acquired, it is worth taking specialist ADS advice early on. Awareness of ADS can not only help plan for an unexpected tax liability; timely advice can also help mitigate it.