Additional Dwelling Supplement – am I liable?

From April 2016, the purchase of a second home not only brought a liability to Land and Buildings Transaction Tax (“LBTT”) but also to Additional Dwelling Supplement (“ADS”) which is a levy of 4% of the property price where that price is in excess of £40,000. The original rate was 3% but the increase to 4% was brought in at the beginning of 2019.

A general misunderstanding is that ADS does not apply to the purchase of a main home. However, this is incorrect, and can still apply to the purchase of a main home where an individual owns another property, including an interest in another property. For example, if someone has inherited a property and subsequently goes on to buy their first home, ADS will be charged on that second property purchase. Ownership of another property includes a property abroad for ADS purposes and consideration therefore needs to be given to worldwide property ownership before understanding if an individual is liable to ADS. Despite the purpose of the ADS charge being to ‘protect and support opportunities for first-time buyers’ the spirit of this legislation is often lost by the tightly drawn legislation.

Where a main residence is being replaced and the replacement main home is acquired before the original property is sold, ADS will be charged. However, it is possible to have this refunded provided that the original main home is sold within 18 months of the acquisition date of the second property. It is worth noting that the Stamp Duty Land Tax (“SDLT”) rules south of the border are more generous and allow a 3 year period to sell the main home and obtain a refund.

Although the principle seems simple, there have been a number of cases over the past few months where Revenue Scotland have refused the refund and this has been upheld at Tribunal. Two of those cases (Dr Andrew Christie and Mr Elvis R A Mohammed) concern the same principle; both owned homes in the UK which had previously been their main residence but they had not lived in these properties for a number of years due to working abroad. Although they met the disposal timeline, the refunds were refused because the original properties were not lived in as main homes in the 18 months before acquisition of the second property.

In another case, the appellant (Dr Ewan H Crawford) had claimed a refund of ADS following the purchase of a home with his partner.  Both had their own homes prior to the second property purchase although neither had lived in each other’s home. Following the disposal of both of the original properties, a refund claim was made but this was refused on the basis that both individuals would have been required to live in both properties in order to qualify.

Other common areas of difficulty are often around separation and divorce or buying a property with a granny flat or holiday accommodation attached. Often, some planning in advance can reduce the exposure to ADS; for example in the latter case the ADS liability could have been reduced by the couple moving in together and the order of the property transactions being altered.

It is important that advice is sought in respect of ADS, particularly where it is not a straightforward main home replacement. If you have any queries or would like advice in this area, please contact Jill Walker or your usual AAB advisor.