In the latest Scottish Budget, presented by the Scottish Finance Secretary, Fiona Robison, on 4th December 2024, she announced that from 5th December 2024 the rate of the Additional Dwelling Supplement (ADS) would increase by 2%. This means it will rise from 6% to 8%.
This increase mirrors an increase announced by John Swinney, the then interim Scottish Finance Secretary, in December 2022 when he announced an increase in the ADS from 4% to 6%.
While this second 2% increase may appear to be a small in comparison with other budget increases, it will have significant implications for buy-to-let market and second homeowners. Importantly, this will also impact home movers who are unable to sell their current home who might also suffer financial consequences.
What is the Additional Dwelling Supplement?
The ADS is a tax applied when someone buys a second or subsequent residential property. It is payable on the full property price. It is also in addition to any Land & Building Transaction Tax (LBTT) due on the purchase. The ADS is payable even if the property’s price is below the LBTT threshold. Individuals purchasing a second or subsequent home must pay the ADS on any residential property at a price of more than £40,000.
Why was the ADS introduced by the Scottish Government?
Initially, the Scottish Government introduced the ADS to mirror similar provisions in England and Wales. The aim was to assist first-time buyers in a busy property market. The purpose was to add costs to buy-to-let and second home purchases to try to level the playing field in the first-time buyers market. Of course, the introduction of the ADS meant the Scottish Government were able to generate additional tax revenue.
How does the ADS work?
Individuals who already own a residential property as their main residence (anywhere in the world) or organisations that acquire an interest in a residential property and pay more than £40,000 are required to pay the ADS. Companies, partnerships, trusts, and buy-to-let property owners must also pay the ADS on the purchase price.
ADS Rates and Interest
The Additional Dwelling Supplement (ADS) rates have evolved over the years, reflecting changes in policy and market conditions. As of 5th December 2024, the ADS rate stands at 8% of the purchase price for any additional residential property. This is a significant increase from the previous rate of 6%, which was in effect from 16th December 2022. Before that, from 25th January 2019, the ADS rate was 4%, and prior to that date, it was 3%.
First Time Buyer Relief
First-time buyers in Scotland can benefit from a relief that increases the residential nil rate band of Land and Buildings Transaction Tax (LBTT) from £145,000 to £175,000. To qualify for this relief, the purchase must be of a residential property intended to be the buyer’s main residence. Additionally, the buyer must be a first-time purchaser, and the transaction must not be a linked transaction or one to which the ADS applies.
This relief aims to make it easier for first-time buyers to enter the property market by reducing the upfront tax burden, thereby promoting homeownership and supporting the housing market.
Inadvertent consequences of the ADS
However, home movers who have not yet sold their current home and couples who buy a house in their joint names where one of them already owns a residential property as their main residence also need to pay the ADS. Additionally, linked transactions, where multiple properties are purchased as part of a single arrangement, can also trigger ADS liability. This can have a significant financial impact if the sale of the existing house falls through. Parties who separate and the family home is in joint names can also experience ADS problems. If the partner who has left the family home purchases a new house and the title is not transferred into the sole name of the partner who stays in the family home, they will need to pay the ADS on that purchase.
A Worked example of the application of ADS
From 5th December 2024, if someone buys a second or subsequent residential property for £199,000 (the current average price of a property in Scotland), they will have to pay both LBTT and ADS. In this scenario, the following taxes are due:
LBTT of £1,080;
ADS of £15,920;
This totals £17,000.
Before the increase, if the purchase had taken place or had been contracted to take place before 5th December 2024 (the day after the Scottish Budget), the ADS would have amounted to £11,940. Thus, a 2% increase in the ADS from 6% to 8% might seem small in percentage terms, but in this example, it is an increase of £3,980.
Transitional Provision
The transitional provision is crucial for transactions occurring around the date of the ADS rate change. If the effective date of your transaction is on or after 5th December 2024, but the contract was entered into on or before 4th December 2024, the ADS rate of 6% will apply. However, if both the effective date and the contract date are on or after 5th December 2024, the new ADS rate of 8% will be applicable.
This provision ensures fairness and clarity, preventing any confusion about which rate should be applied to transactions during the transition period.
Payment and Repayment Deadlines
Timely compliance with payment and repayment deadlines for Land and Buildings Transaction Tax (LBTT) and Additional Dwelling Supplement (ADS) is essential. The payment deadline for both LBTT and ADS is 30 days from the date of the transaction. For ADS repayments, the deadline is 3 years from the date of the transaction.
Interest on repayments is calculated from the date of the transaction, ensuring that any delays are accounted for financially. Adhering to these deadlines helps avoid penalties and ensures smooth financial management of property transactions.
Claiming an ADS Repayment
If you find yourself eligible for an ADS repayment, the process is straightforward. First, calculate the ADS alongside your Land and Buildings Transaction Tax (LBTT) and include it on your LBTT return. Both taxes should be paid simultaneously.
To claim the repayment, you can do so directly through the Revenue Scotland website if you are handling it yourself. Alternatively, if you are using an agent, they will need to submit the claim on your behalf. This ensures that the process is efficient and that you receive any repayments you are entitled to in a timely manner.
Potential implications for the property market
Given that that buy-to-let purchases and rental property acquisitions attract ADS and the fact that the rent cap introduced in 2023 has already caused a slowdown in the private rented sector, it is likely that this increase will exacerbate an already poorly performing private rental market.
Moreover, private residential property owners looking to add to their residential property portfolios will need to pay a higher rate of ADS, which will inevitably lead to higher rents.
Further information on Land and Buildings Transaction Tax (LBTT) and the Additional Dwelling Supplement (ADS)
For further information on LBTT and ADS, as well as some additional worked examples, you should visit the Revenue Scotland website.
Residential and buy-to-let property specialists in Glasgow and Livingston
Our experienced solicitors are available to answer all your questions on Land and Building Transaction Tax and the Additional Dwelling Supplement. We are also available to provide advice on commercial property transactions and the implications of LBTT and ADS for commercial properties and leases.
If you are considering buying or selling a buy-to-let property or second home and wish to discuss the implications of LBTT and ADS please get in touch with us.
