Land and Buildings Transaction Tax (“LBTT”)
- Where an individual buys a residential property, for example a house or a flat, “Land and Buildings Transaction Tax” (“LBTT”) is usually payable.
- The amount of LBTT payable depends on:
- the date the property was purchased; and
- how much was paid for it.
- For example, if a residential property was bought for £235,000 now the LBTT payable would be £1,800. The Revenue Scotland website has an online calculator Calculate property transactions | Revenue Scotland to help work out the LBTT due.
Additional Dwelling Supplement (“ADS”)
- The ADS is an additional charge which is added to any LBTT which may be due. It is charged if you buy an additional residential property or “dwelling” in Scotland.
- Examples of an additional residential property can include: a second home; a rental property; a holiday home; and a property used by family and friends even if you don’t charge rent.
- The rate of ADS is now 6%. So, for example, if you buy an additional residential property for £235,000 as a holiday home whilst retaining your main home the LBTT would be £1,800 (as above) and the ADS would be £14,100 (being 6% of £235,000) giving a total tax bill of £15,900.
General comment on refinements to the ADS legislation to take effect from 1 April
- The above introduction may make it look as if ADS is reasonably straightforward but it ignores all matters of detail. Since ADS was first introduced in 2016 various points of detail have been found to contain unwelcome complexities which may result in unfairness. Certain changes have been made and are to come into effect at the start of next month. The changes reduce some of the harsher aspects of the rules but do little to reduce the complexities. This note touches on two, and only two, of the changes and, in doing so, flags up some of the more intricate aspects of ADS.
Replacing your main residence and extending the 18 months rule to 36 months
- ADS is not payable where the purchase of a main residence is accompanied by the sale of the previous main residence. This removes from ADS the standard case of purchase and sale.
- The exemption operates regardless of whether the sale precedes the purchase or the purchase precedes the sale. But a person who buys before selling will need to make an initial payment of ADS on the purchase transaction (because the immediate result will be the ownership of two homes) before reclaiming it from Revenue Scotland once the other house is sold or otherwise disposed of.
- One needs to be aware of this significant, if temporary, liability. It can be avoided only if the sale follows so soon after the purchase that the LBTT return for the purchase can be held back until the sale takes place.
- Certain time limits are imposed by the legislation.
- Under the pre-1 April 2024 rules the house being sold must have been the buyer’s “only or main residence” at some time during the period of 18 months ending with the effective date (i.e. settlement or completion) of the purchase transaction.
- And:
- where sale preceded the purchase, the sale must have occurred during the same 18-month period; and
- where sale follows purchase, the sale must occur within 18 months from the day after the effective date of the purchase.
- Under the new rules having effect from 1 April 2024 those 18 month time limits are extended to 36 months.
Couples as a “single economic unit”
- For individuals the basic charge to ADS is triggered if, at the end of a day on which they buy a dwelling, that person owns two or more dwellings.
- If that were all, it would be simple for couples to avoid the ADS by one party (“the first party”) giving any “spare” residence to the other party and then having the first party carry out the purchase. The first party would then own no other residence and so no ADS.
- The “single economic unit” rules combat this by imputing ownership across spouses, civil partners, cohabitants, and parents with their minor children (together a single economic unit).
- So, if your spouse or civil partner or cohabitee or child under 16 owns a dwelling you are deemed to own it too. But under the old ADS rules that imputation of ownership stops there i.e. it only applies for the purposes of counting whether a couple own more than one property.
- Broadly speaking, from 1 April 2024, the imputation of ownership will be extended so that it not only applies for the purposes of counting whether a couple own more than one property but also so that members of “single economic units” will be treated as though they have disposed of properties that have been disposed of by other members of their “single economic unit”.
- This potentially opens up exemption from the ADS and ability to recover the ADS in more cases than before.
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Ross Leatham: email Ross@mitchells-roberton.co.uk