John Swinney, the interim Cabinet Secretary for Finance, announced a 2% increase in the Additional Dwelling Supplement (ADS) in his December Budget. Whilst this does not seem a lot, in value terms it represents a significant amount of money. This impact will be felt by Buy-to-Let landlords and second homeowners.
What is the Additional Dwelling Supplement?
When you buy a property in Scotland, if the price is over a certain amount, you will pay Land and Buildings Transaction Tax (LBTT). If you already own your own main residence anywhere in the world and you intend to keep it, in addition, you will need to pay the ADS. That means, in addition to the tiered LBTT charge, you will also pay the ADS of 6% of the total purchase price of the property.
Why was the Additional Dwelling Supplement introduced?
The ADS was introduced initially to try to protect first-time buyers who were competing with Buy-to-Let landlords and second homeowners in the same market. The view taken was that levying the ADS would be a disincentive to Buy-to-Let landlords and second homeowners to bid first-time buyers out of the market. The policy was not particularly successful because the Buy-to-Let sector continued to flourish even after the ADS was introduced and most commentators believe the ADS has contributed to higher rents in the private rental sector.
It should also be said that the ADS raises a significant sum for the Scottish Government.
How does the Additional Dwelling Supplement work?
As we have stated above, Buy-to-Let landlords and second homeowners need to pay the ADS in addition to any LBTT due on the purchase of the property. In addition, any organisation buying a residential property also has to pay the ADS. This applies equally to limited companies, partnerships and trusts, to name but a few.
Before the title to the property can be registered, the buyer’s solicitor has to complete an online submission for LBTT (whether there is any LBTT due or not). That submission also asks for an ADS Declaration. Please note it is a fraudulent offence to try to avoid paying the ADS.
Here is an example of how LBTT and ADS are calculated on a residential property bought for a price of £195,000.
| LBTT | £1,000 |
| ADS | £11,700 |
| Total | £12,700 |
The LBTT is based on a tiered value system. There is a threshold of £145,000 (£175,000 for first-time buyers) on which no LBTT is paid. In this example, the difference between the purchase price and the threshold is £50,000 on which LBTT is charged at 2% resulting in a charge of £1,000.
In addition, the ADS is charged at a flat rate of 6% on the full purchase price and amounts to £11,700.
Before the Scottish Budget announcement in December 2022, the ADS rate was 4% which meant that those transactions which were being negotiated at the time but where missives had not been concluded faced an immediate increase in the ADS. In this example, that increase amounts to £3,900 – a not insignificant sum!
Unintended consequences
There are some unintended consequences of the ADS rules which affect buyers and sellers of property. If someone buys a new house but cannot, for whatever reason, sell their current home, they too will need to pay the ADS. This can be a significant amount of money to find, usually at very short notice. You can, of course, reclaim any ADS paid once you sell your original house but you only have 18 months from the date the ADS was paid to do that.
You can find out more about Land and Buildings Transaction Tax and the Additional Dwelling Supplement on the Revenue Scotland website by clicking here. You will also find an LBTT Calculator and some worked examples of how LBTT and the ADS apply.
If you are thinking about buying or selling and would like to discuss any aspect of that with us, please get in touch.
