How might the changes to the LBTT Additional Dwelling Supplement affect you?

The law on Additional Dwelling supplement is evolving and significant changes are coming into force on 1 April 2024. Here we consider how they might impact proposed transactions.

5 March 2024

Two properties side by side in Edinburgh

The Scottish Government have published a draft Statutory Instrument as a result of their consultation on changes to Land and Building Transaction Tax (LBTT) and the application of the Additional Dwelling Supplement (ADS). 

The updated legislation, if approved by the Scottish Parliament, is due to take effect from 1 April 2024 for purchases with an effective date thereafter. The timings and parameters of ADS are changing, and it may affect any upcoming purchases where you are acquiring an additional property.

Replacing your main residence 

Under the current legislation, if a buyer owns another property and is not replacing their main residence, they are subject to ADS at a rate of 6% on the whole purchase price. 

This can be reclaimed if the purchase is of a new main residence and the previous main residence of the buyer is sold within 18 months of the purchase date. The new rules will extend this timeframe to 36 months. The extension from 18 to 36 months will also apply when claiming exemption from ADS in a transaction where the previous main residence has already been sold.

This change will bring Scotland in line with the rest of the UK, who already enjoy a 36-month window in similar circumstances.

The single economic unit 

The ADS rules consider married couples, civil partnership couples, or cohabitants and any dependent children to those relationships to be a “single economic unit” for the purposes of determining how many properties a buyer owns. 

A buyer must still count the properties this way, but the new rules expand on this to allow any disposals that the buyer has an interest in under this single economic unit perspective to be treated as a disposal by the buyer themselves. This could open the door to the buyer claiming relief under the replacement of the main residence exemption.

Inherited property 

A form of beneficiaries’ relief is to be introduced to prevent an unexpected ADS charge for buyers who have inherited a share in an additional property. 

The relief is restrictive and will only apply where:

  • the property that’s tipping the buyer into the realm of owning multiple properties is the inherited property; and
  • the property was acquired after the purchase missives were entered into but before the missives were concluded.

The new rules will still differ from England, Wales, and Northern Ireland which do not consider a 50% or smaller beneficial interest in a property that was inherited in the last three years. 

Local Authorities

Local Authorities will receive full relief from both LBTT and ADS where they are acquiring affordable housing under section 2 of the Housing (Scotland) Act 1987, or where the purchase is funded by a grant under section 2 of the Housing (Scotland) Act 1988. 

This change will provide uniformity between social landlords who currently receive relief and Local Authorities who do not.

Divorce or Separation 

Relief will be introduced for separated spouses and civil partners who retain an interest in the former family home. 

Where the relief applies, the family home will not be counted when considering how many properties are owned by the individual who no longer lives in the home. The requirements are that there must be a court order on the divorce or separation, which stipulates that the individual must retain an interest in the house and the other party to the separation must continue to reside there as their main residence.

It is important to note that this impacts couples who were married or in a civil partnership only. Cohabitants cannot claim this relief, even if there are children residing in the property.

Small Shares in a Property 

The new rules will stipulate that a person will not be considered the owner of a dwelling if their share in the property is worth less than £40,000. This brings Scotland in line with the rest of the UK in this regard, though it remains unclear how an increase in a share already owned would be treated for these purposes. 

The proposed amendments will in many cases help to smooth out various issues with the application of the ADS rules. 

The vast majority of cases heard by the Tax Chamber of the First Tier Tribunal for Scotland relate to ADS and the Tribunal has been clear that while in many cases the application of the rules may appear unfair, they are obliged to apply the law that is in place. 

By making these changes it is hoped that some people who might otherwise inadvertently find themselves paying the ADS will escape it in future.

If you think these changes might affect any purchase you are considering later in the year, please contact our tax team to discuss how this update might impact you.