There is still some confusion over how the Additional Dwelling Supplement (ADS) rules are applied, and so we have simplified the main issues that arise when parties buy a new property to live in as their main residence in this article.
What is an additional dwelling supplement tax?
Additional Dwelling Supplement (ADS) is an extra charge on additional properties like second homes, rental properties, and holiday homes. ADS has been around for a few years now and most clients know to expect an additional tax of 6% if they are buying a second property in Scotland. This is a second property tax due above any Land and Buildings Transactions Tax (LBTT) that may also be due, based on the value of your property purchase.
Does additional dwelling supplement (ADS) tax apply only when buying an investment property?
There is a common misconception that the ADS tax applies only when someone is buying an investment property. It’s correct that the rules were created to penalise property investors, and to reduce the risk of home buyers being outbid by buy to let or holiday let investors in a crowded market.
However, the reason for buying is irrelevant and the test is purely whether the buyer or their partner will own a second property at the date of purchase. If they or their partner own a share of a property elsewhere it doesn’t matter that they are buying the new property to live in as their main residence. The ADS tax will still apply.
Are you replacing your main residence?
The confusion stems from the primary exemption to the standard rule. If a buyer is ‘replacing their main residence’ ADS won’t apply regardless of how many other properties, the buyer or their partner owns. What’s important to note is that replacing your main residence for ADS purposes involves selling your existing main residence and buying a new property to use as your new main residence.
Revenue Scotland can look for evidence that both old and new properties were being used as the main residence. It is essential that all the parties to the transaction (which means the buyer and their partner) replace their main residence.
When a co-habiting couple are buying a new main residence (regardless as to how they take title to the new property) both parties need to have replaced their main residence to qualify. It is possible that the buyer and/or their partner will still own another property and avoid the tax provided both are selling the property they currently live in, and they move into a new property together.
Can additional dwelling supplement tax be reclaimed?
The third issue concerns reclaiming tax paid if the buyer’s previous main residence is sold after the purchase completes. If a buyer purchases a new property to use as their main residence and sells their existing main residence within 18 months* of the purchase completing, they can reclaim the ADS tax from Revenue Scotland. The same restrictions apply – the ADS tax can only be reclaimed if it is the previous main residence that is sold post completion. If the buyer is selling a rental property after they have purchased their new main residence, they won’t qualify for the tax refund because they are not replacing their main residence. If the new property was purchased as a holiday home or buy to let, the fact the buyer’s previous main residence is sold is irrelevant. Again, the buyer is not replacing their main residence.
*There is currently draft legislation to change the time limit to 3 years after the completion of your purchase, it is anticipated this legislation will come into effect from 1 April 2024.
The easiest way to interpret the rules is to assume that tax will apply in all cases unless the buyer and their partner meet all the criteria for either avoiding or reclaiming the tax.
The rules are complex and can be difficult to follow, and the advice to buyers is to always check this with their solicitor before submitting an offer.
If you need help navigating additional dwelling supplement tax (ADS), or conveyancing rules and regulations, our team at Burnett & Reid is here to provide expert advice every step of the way.
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