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The Additional Dwelling Supplement - an LBTT update

On 1st April 2016, the Land & Buildings Transaction Tax Additional Dwelling Supplement (“ADS”) came into force.

ADS affects the purchase of additional dwellings in Scotland, such as ‘buy to lets’ and second homes, as well as the purchase of most dwellings (additional or otherwise) by companies and other ‘non-natural’ buyers where the consideration is over £40,000. 

It does so by applying a surcharge of 3% of the purchase price onto the amount of LBTT to be paid where the purchaser (i) owns another dwelling at the date of the purchase and (ii) is purchasing otherwise than to replace their only or main dwelling. 

This two part test means that ADS will therefore not apply where the purchaser does not own another dwelling (so may still be avoided in buy to let purchases where that is to be the purchaser’s only property and property development is not their business) or where a purchaser who owns numerous properties is replacing their main residence (so buy-to-let landlords will generally not be charged ADS on the purchase of their own home).

ADS only applies to the purchase of ‘dwellings’ in Scotland.  So what counts as a ‘dwelling’?  A property is to be treated as a dwelling for the purpose of ADS if it is used or suitable for use as a single dwelling or if it is in the process of being constructed or adapted for such use.  It is the use at the effective date of the transaction which is relevant- not any past or intended uses. For the purposes of determining how many ‘dwellings’ a purchaser owns, it is not sufficient to consider what they own in Scotland but instead you must look worldwide.  Any properties with a market value of less than £40,000 can be discounted.

Whether a purchaser is replacing an only or main residence will only need to be considered if the purchaser owns more than one dwelling at the time of the purchase.  Ultimately, where a person’s main residence is will be determined on the facts (e.g. proximity to work and schools, where they are registered to vote etc).

Solely non residential properties will be unaffected by ADS, but mixed use properties (e.g. a shop with flat above) may be caught if the part of the consideration which can be apportioned to the residential element exceeds £40,000.  In such cases, ADS would only be applied to that part of the consideration justly and reasonably applied to the residence.

There will of course be situations where a buyer finds themselves unwittingly holding title to two dwellings at the same time e.g. where a sale of their existing home is delayed or falls through, but the purchase of their new home completes.  In such cases, ADS will apply to the purchase of the new property but the purchaser can apply for it to be repaid to them so long as the new dwelling is to be their main residence and they sell their own home within 18 months.  If the original property is sold after the purchase date of the new home but before the LBTT Return for that purchase has been submitted, then ADS will not apply at all.

The surcharge will also apply to all purchases of dwellings by non-natural buyers (e.g. companies), regardless of whether that buyer owns any other property.  Anyone who buys property either as a sole trader or in partnership in a business whose sole or main activity is investing or dealing in property will also be treated in the same way as non-natural buyers and they will be subject to the surcharge on the purchase of a dwelling, regardless of whether they own any other dwellings at that time.

There are reliefs available for any transaction in which 6 or more dwellings are bought together (such transactions will instead be treated as if they were ‘non residential’ for the purposes of LBTT).  In such cases, ADS is avoided and the commercial rates of LBTT will apply instead.

Helen McGrath
Associate, Commercial Property Group
0131 226 8224

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