Following an extensive consultation period by Revenue Scotland, new legislation was introduced on 1 April 2024 to alter and, in most instances, improve the Land and Buildings Transaction Tax (“LBTT”) rules in respect of the Additional Dwelling Supplement (“ADS”).

As a quick recap, ADS applies at a rate of 6% on the full purchase price where individuals and non-individuals buy an additional residential property (i.e. dwelling) in Scotland. The ADS is in addition to the normal “core” LBTT charge. The scenarios where the ADS can apply have been the subject of a number of Tribunal cases and is certainly capable of tripping up the uninformed. ADS applies to second homes, rental properties, holiday homes etc. When you buy a residential property in Scotland and you already own one or more residential properties anywhere in the world, ADS will apply if you are not replacing or selling your “only or main” residence.

The ADS rules in Scotland have some similarities with the equivalent Stamp Duty Land Tax (“SDLT”) rules in England and Northern Ireland, however, there are significant differences that can catch the unwary. The new legislation seeks to remove some of these differences.

Key takeaways

The ADS changes are helpful and should enable greater clarity and parity with the SDLT rules applying in England and Northern Ireland.

However, for the uninformed, the rules are still complicated and, if triggered, can result in an additional financial cost (which in some cases may be irrevocable) which could make the purchase of a new dwelling unaffordable, so caution is needed before undertaking a transaction.

Overview of the changes

To summarise the legislative changes:

1. Replacement of Main Residence – ADS Repayment

Where these conditions are met, the ADS repayment window will be extended to 36 months from 18 months.

This can have an impact on three key areas: 

1. The time available to purchase a new main residence after disposing of a previous main residence.
2. The time available to dispose of a previous main residence after purchasing new main residence.
3. The time period for considering whether a property was a buyer’s only or main residence in the period prior to the purchase of a new main residence.

2. Small shares

An individual’s “small” ownership in a dwelling should not result in the ADS rules applying (assuming they are not caught under other provisions).

This is an important change for family partnerships specifically farming partnerships where the dwelling is often owned by the partnership.

Under this change, the market value of an individual’s share in the market value of a dwelling will be disregarded for ADS purposes where this is below £40,000.

3. Divorce or separation

Where this relief applies, the ADS will not apply on the purchase of a new main residence involving separated spouses or civil partners where an interest in a previous main residence (“PMR”) is required to be retained by court order or separation agreement.

4. Joint buyers provision

Where this relief applies, the ADS rules have been tweaked further to be fairer for joint buyers.

A new set of rules will be introduced concerning joint buyers where these will sit alongside the rules currently in place for joint buyers as follows:

• If all joint buyers own an additional dwelling, then all buyers must be able to satisfy the conditions for ADS exemption/recovery to become available.
• Where a main residence is purchased jointly and only one buyer has owned an additional dwelling, the ADS may not apply on the purchase of the new dwelling provided the conditions can be met at the time of the transaction by only one of the buyers (rather than both under the old rules).

The facts of each case will determine how these rules apply so it is important to review them before a transaction to understand the exposure to the ADS. These rules also interact with the changes to the Single Economic Unit.

5. Single Economic Unit rules

Where this relief applies, the application of the ADS rules should be fairer on both purchases and disposals of dwellings by members of the same family unit. 

Generally, when determining if the ADS applies, a buyer has to count dwellings owned by their Single Economic Unit i.e. their spouses / civil partners / cohabitants / minor children to determine if they own two or more dwellings.

A disposal of a dwelling in which a buyer is deemed to have an interest, by virtue of these provisions, is to be treated as a disposal by the buyer. Thus, allowing access to both the replacement main residence exemption and also the ADS recovery provisions.

6. Inherited dwelling

Where this relief applies, the ADS should not apply (in some very niche circumstances) where a new dwelling is being purchased but a dwelling has previously been inherited.

Broadly, an inherited dwelling will only be disregarded for ADS purposes where the following applies:

• The inherited dwelling results in the individual owning two or more dwellings; and
• The individual has inherited a dwelling through transfer or conveyance from executors; and
• The date on which they acquire the inherited dwelling is:

1. after they enter into a contract to purchase a dwelling, but
2. before the date of completion of this transaction.

This timeline is quite complicated and needs an understanding of the legal steps involved in transferring the property and winding up an Estate, but it is only likely to apply in limited circumstances so may not be too valuable.

The transfer of ownership has also been clarified as having been met when the disposition of the property is delivered to the buyer by the Executors of the Estate.

7. Local authorities

Under this relief, local authorities will be obtaining full relief from both LBTT and ADS where the purchase is funded under s2 of the Housing (Scotland) Act 1988.

Get in touch

If you would like help understanding and applying the ADS changes or have any wider LBTT questions, our specialist Private Client Tax team is on hand to help. Please get in touch with Michael Jamieson, Philip Jamieson, or Nicola Horsburgh.