One would be tempted to say that the introduction of the additional dwelling supplement (ADS) has been a comedy of errors, were it not for the fact that in some respects it has been downright tragic.
Thankfully, then, Holyrood have woken up from their Midsummer’s night dream to correct an anomaly in the ADS exemption for replacement main residences.
From 30 June this year, couples jointly buying a new main residence to replace a former main residence, where title to the former home is in the sole name of one of the partners, will qualify for relief from the additional dwelling supplement. This was not previously the case.
Consider the following two couples, treated differently under the current legislation.
Benedick and Beatrice
Benedick and Beatrice currently own a small home and are looking to move to something larger. Beatrice has inherited her late father’s flat and is currently letting it out. Without a relief they are nominally caught by the ADS. As a married couple, they are both treated as owning the flat for ADS purposes. So when they buy their new home, they will own interests in two dwellings and the ADS is triggered. Thankfully, they can benefit from exemption for replacing their main residence. The exemption requires the buyers (i.e., both of them) to have sold their existing main residence in the 18 months before buying the property that will be their new main residence.
Romeo and Juliet
Romeo and Juliet both own property in their own names. They live together in Juliet’s flat and Romeo’s flat is let. They are looking to sell Juliet’s place and buy a new home together. Romeo and Juliet are cohabitees, so both are treated as owning Romeo’s flat, opening the door to the ADS. However, they will not qualify for exemption: they are not both disposing of a main residence – only Juliet is. She is the only owner. Romeo isn’t an owner of Juliet’s flat, and so isn’t disposing of his main residence, but is buying a new one. Worse still – per the existing legislation – if Romeo cannot qualify for the exemption then Juliet cannot either. The ADS is payable at 3% on the entire price for their new home and cannot be recovered.
The new statutory instrument allows Romeo and Juliet to benefit from the replacement main residence relief where one of them is disposing of a main residence – provided that they are: (a) buying the new property in joint names; (b) are married, civil partners or cohabitees at the time of the purchase; and (c) both lived in the sold property as their main residence.
The unequal ownership of Juliet’s flat is no longer a barrier to the relief. Romeo and Juliet will no longer face an increased tax bill provided their contracts are concluded after 20 May 2017 and their purchase settles after 30 June 2017.
However, the statutory instrument does not solve all of the ADS kinks that could arise. There are still further pitfalls for the unwary:
What if Romeo and Juliet didn’t live together before their purchase? They are both still blocked from replacement main residence exemption even with the new SI.
And what if they have a drawn out divorce? If Romeo moves out of the new home for more than 18 months, but still owns his share, then he could be caught by the ADS on future purchases without exemption or prospect of a refund.
Correcting these additional issues will take further SIs, or potentially primary legislation if changes are to be retrospective.
However, it is encouraging that Revenue Scotland and Scottish Government have responded to pressure from practitioners to alleviate some of the burden on star crossed lovers.
One hopes that further steps will be taken and this will in time be much ado about nothing.