Stamp Duty on the purchase of residential properties was replaced in Scotland by Land and Buildings Transaction Tax (LBTT) on 1 April 2015. From 1 April 2016, an Additional Dwelling Supplement (ADS) was introduced for people buying an additional residential property, over and above their main home. The purpose of this article is to explain this tax, whether you as a buyer might be affected and examine whether it is fair to buyers and is having the effect that the Scottish Government had hoped. But before that, we need to talk a bit about LBTT!
Stamp Duty is Dead, Long Live LBTT
Stamp Duty had caused distortions in the residential property market in Scotland in previous years because of its ‘slab tax’ nature. In other words, there were huge jumps in the amount of tax payable on properties that differed in value only by a few pounds. By way of example, Stamp Duty on a £249,995 property was approximately £2500 but on a £250,005 property, it was approximately £7,500.
For the vast majority of people in Scotland, the change from Stamp Duty to LBTT was actually quite welcome as it reduces the amount of tax that they pay on residential property purchases. However, for homes worth more than £333,000, the amount payable under the LBTT regime is higher than it was under Stamp Duty. It has, therefore, had a disproportionate impact on higher value areas of Scotland like Edinburgh and the Lothians where a larger than average proportion of residential family homes fall within this price bracket.
Whilst mindful of the negative effect that these changes had on many of our buying and selling clients in and around Edinburgh, it is hard to say that LBTT is not a fairer system than Stamp Duty was. Indeed, it should help to make buying a home more affordable for most people in Scotland, something that can only be a good thing. The same cannot be said for the Additional Dwelling Supplement (ADS).
I See Your LBTT and Raise You an ADS
Where we take exception to these recent changes is the introduction of the Additional Dwelling Supplement (ADS). This is a tax of 3% of the purchase price, over-and-above the LBTT already payable, that was introduced from 1 April 2016. The government’s stated purpose was to impose, “a greater tax burden on those purchasing residential property as an additional purchase, for investment or recreational purposes, compared to those seeking to purchase the property as the main residence.”
The ADS is something that we will continue vocally to oppose on the basis that, from what we have seen, it is actually penalising the wrong people and creating the opposite effect that was intended. In other words, rather than imposing a financial burden on so-called wealthy landlords, it is actually preventing ordinary, non-investors from moving home. In addition, rather than increasing the amount of housing stock that is available to home buyers rather than resting in the hands of private landlords, it has actually had a detrimental effect on the supply of homes on the market.
To illustrate why we believe that the ADS is unfair and ineffective, we will illustrate three scenarios that our clients find themselves in. All of these actually prevent home ownership rather than encourage it and none of them imposes a higher financial burden on wealthy landlords but, instead, hit regular people hard in the pocket or prevent them from moving home at all.
Does ADS Apply to Your Purchase? Common Scenarios.
Delayed Settlement on a Sale
If you are unlucky enough that your property sale is delayed, but you wish to continue with your purchase on the pre-agreed date, you will have to pay the ADS on your purchase and then reclaim it afterwards. If you are purchasing a £300,000 home with a 10% deposit and a 90% loan-to-value mortgage, this means that you will have to put your hands on a further £9,000 in the meantime to cover the 3% ADS charge on the £300,000 purchase price. For many people, this makes the cost of moving home prohibitive and this will cause blockages in the housing market.
Young Couple Retaining One of Their Flats as a Pension and Buying a Family Home
The people who are probably worst hit by this new tax are likely to be younger couples, people who are moving-in with their partner or starting a family. They are the ‘second rung’ on the property ladder and are crucial to the smooth functioning of the property market. Such people will often own a small, first time buyer flat or property in which they currently live but they need to trade-up to a more suitable family home. They often will wish to retain that flat for investment or pension planning purposes when they buy a new, residential home. We would argue that such people are planning for the future and that they are unlikely to be the ‘fat cat’ landlords who are preventing first time buyers from getting a foot on the housing ladder.
Inherited a Property You Can’t Live In, Trying to Buy a Home
We have been contacted by potential homebuyers who have been unaware of the fact that they will have to pay ADS. They have got as far as submitting a successful offer on a home, only to find that they cannot afford to move because ADS applies to them because they have inherited a home or bought a home under the Right to Buy scheme.
It is not uncommon that a relative, living in a Council-owned property, will have exercised the Right to Buy with the funds for the purchase coming from a younger relative who then grants that person a liferent on the property. This person, far from being a wealthy investor, owns a relatively low value property but, assuming that their family member is alive and well, they are now obliged to pay a 3% tax supplement if they want to buy a home for themselves to live in. A number of people who are in this situation have contacted us, furious that the new tax regime means that they find themselves in this inescapable position.
Does This Tax Hit the People it is Intended to Hit?
Apart from these reasons, why do we believe that the wrong people are being targeted by this tax?
Even if we accept that it is fair that someone buying property as an investment should pay a supplementary tax of 3% of the purchase price of that investment property, less-wealthy people are disproportionately badly hit compared with wealthy, professional investors.
A wealthy investor who already owns a large residential home and several buy-to-let properties will only pay the 3% ADS tax on the value of any investment flat that they buy. For example, if they own a £500,000 home and buy a £100,000 buy-to-let flat, they will pay £3,000 in ADS. The same will apply if that person already owns ten or even twenty buy-to-let properties: in other words, they will pay a £3,000 tax on their 21st investment property.
However, a younger couple who are buying a £500,000 family home but who already own a £100,000 flat which they intend to keep and rent-out for buy-to-let purposes, with a view to it being their pension one day, will pay £15,000 in ADS on the purchase of their new home. That’s five times as much as the investor above!
Both will end up in the same position: in other words, they will own a £500,000 home that they live in and have a £100,000 flat that they rent-out. However, the younger, non-professional landlord couple who are planning their financial future will have to sell the ‘investment’ flat to avoid paying the 3% tax surcharge on their new home.
In short, the tax does not seem to target the right people and will cause structural problems in the housing market in Scotland because of the way that it restricts people’s ability to move home. We will, therefore, continue to urge the Scottish Government to reconsider the entire ADS scheme or at least the way to which it applies in circumstances such as those illustrated above.
ADS is a complicated area and one that can be difficult to understand even for those people who are involved as professionals in the Scottish property market. If you have any questions about ADS or how it might apply to the circumstances of your own purchase, please don’t hesitate to get in touch with us by calling 0131 202 5444 (Option 4) or emailing [email protected] and someone from our Conveyancing Department will be happy to explain it to you and to advise you on how best to proceed.