Additional Dwelling Supplement (ADS) Changes: Single Economic Units and Joint Buyers – Technical Blog

Introduction

If you haven't read my overview blog on the single economic unit and joint buyer rules, then I'd recommend starting there. This blog is a technical look at the operation of the new ADS rules that will come in to force on 1 April 2024 and assumes some reader knowledge.

From a technical angle, the key points I am looking to draw out from the new legislation are:

• While on the face of it the new rules around joint buyers and single economic units are totally byzantine (see below) the key to unlocking them is the revised paragraph 8 and understanding when paragraph 8(1)(d) bites.
• There is arguably now quite a bit of redundancy in the ADS legislation as – in my view – paragraph 8 on its own does the work of paragraphs 2(2), 8A and 9A. These provisions effectively add nothing to alter the outcome when one applies para 8 on its own.
• In terms of outcomes, they are an improvement over the law as it currently stands. The new legislation – tricky as it is – does deal with a number of the unfair situations that the current law throws up. The uber-example of this is the case of Crawford v Revenue Scotland. (I will argue below that were Crawford to be decided under the proposed new rules, the taxpayers would have won). The Scottish Government deserves credit for continuing to try and resolve these matters. But…
• Crawford type cases still can occur, and the Scottish Government should give more thought to addressing these issues. See my example 3 below. The danger zone is still couples who live apart before buying together.

Crawford v Revenue Scotland

To start with, let's have a quick recap of the Crawford case.

Dr Crawford and Ms Smith lived separately, each in a main residence that they owned in their sole names. They didn't own any other property. They decided to purchase a new house together in joint names, the sequence of events was:

• 17 December 2019, Dr C and Ms S bought the new house in joint names. Dr C also sold his prior main residence. Ms S retained ownership of hers. LBTT and ADS were payable on the purchase.
• On 5 February 2021, Ms S sold her prior main residence and the couple submitted a request for repayment of the ADS.
• On 5 March 2021, Revenue Scotland rejected the claim. After which the couple appealed to the First Tier Tax Tribunal.

The tribunal sided with Revenue Scotland and held that the repayment wasn't due, even though Dr C and Ms S had now disposed of both prior main residences. Their reasoning was – in summary – that:

• The LBTT and ADS repayment rules were inflexible but clear – therefore there was no scope for a purposive reading (nor a fairness argument).
• The LBTT general rule about joint buyers (s48 of the LBTT (Scotland) Act 2013) requires that where there are conditions for a specific LBTT treatment to apply, then those conditions must be met by each of the buyers (call this the s48 principle). The tribunal accepted the reasoning in a prior case (Goudie) when arriving at this view.
• Ms S met the ADS repayment requirements (paragraph 8 of schedule 2A to the LBTT Act): she had sold a prior main residence within 18 months of the purchase and had lived there in the 18 months before hand.
• According to the s48 principle both Dr C and Ms S had to meet the repayment conditions. Dr C was incapable of meeting these as he had already disposed of his main residence on the date of purchase of the new main residence.
• Therefore, as only one buyer met the repayment conditions, the ADS was not recoverable.

The New Law: Single Economic Unit

The changes mean that the law on single economic units will now work as follows.

Spouses, civil partners, cohabitants will now be deemed to:

• Own what the other owns– e.g., a husband is deemed to own what his wife owns in her sole name and vice versa - but only for the purposes of assessing whether or not they own 2 or more dwellings and thus trigger the ADS.
• Have disposed of dwellings disposed of by the other – so one spouse or civil partner is treated as having disposed of property sold by the other and vice-versa - but only for the purposes of paragraph 8.

So far, so simple. But note the restrictions around where these rules apply. They are key to unlocking some of the scenarios we consider below.

The New Law: Joint Buyers

This is where it gets more tricksy. The ADS rules, when revised will have three joint buyer paragraphs which will sit alongside the s48 principle. These are (as amended, with the amendments indicated in bold):

So – the revised paragraph 8 does a few things.

8(1)(a) extends the period for recovering the ADS from 18 to 36 months. It also creates a new exemption which sits alongside the general replacement of main residence rules in paragraph 2(2) through the addition of the words "or ending with" in the first line of this paragraph. I cannot think of a scenario which the paragraph 2(2) exemption covers, but which 8(1) does not.

It also allows that where there are two or more buyers and only some of them own additional dwellings which trigger the ADS (see below on para 8(1)(d)) then only one buyer needs to dispose of a main residence to qualify for exemption or recovery.

8(1)(b) adds flexibility to the rules by ensuring that where not all of the buyers own 2+ dwellings, only one of the buyers needs to have occupied the disposed of dwelling as their main residence. Presumably, although I do not think the legislation says this, the intention is where there are joint buyers the buyer who lived in the main residence should also be the buyer disposing of it.

8(1)(c) requires that where there are 2 or more buyers, all of the buyers occupy the new property as their main residence.

So – 8(1)(a) and (c) seem to introduce a more flexible way for joint buyers to meet the conditions for either exemption from ADS upfront or for recovery.

8(1)(d) is rather more unusual. The intention appears to be that the additional flexibility in paras 8(1)(a) to (c) is switched off in cases where ALL of the buyers own an additional dwelling. I.e., if all the buyers own an additional dwelling then ALL of the buyers must have made a disposal of a prior main residence, must have lived in the main residence in the 36 months purchase of the new dwelling and must live in the new property as their main residence. Also – it's not clear when 8(1)(d) is to be assessed to decide how many buyers need to meet the relevant conditions. In this blog I assume that it's when the purchase is carried out. The position would be slightly improved if, where a refund was claimed, 1(d) could be assessed at the time the claim was made – however, that would only assist in some marginal cases.

There are two things that stand out to me:

First – note the mismatch. 8(1)(d) is only activated where all the buyers own an extra property. But if it's not activated the tests at 8(1)(a) and (b) can be met by only one buyer. So if there are three buyers, two of whom own extra property, then only one buyer needs to meet the conditions at 8(1)(a) and (b). No matter the circumstances, 8(1)(c) requires that all buyers meet the test

Second – what counts as ownership for 8(1)(d)? In my view it's what buyers actually own in their own names, things held in trust for them where those trusts are bare trusts or (in effect) interest in possession trusts, and assets held under a proper liferent where the buyer is the liferenter. It does not include property owned by other members of a single economic unit. The single economic unit provisions do not impute ownership for the purposes of paragraph 8, only disposals.

The other two provisions are the unamended rules in paragraphs 8A and 9A. In my view these (and the exemption in paragraph 2) are now effectively obsolete. This will become clear in the examples

Paragraph 8A modifies paragraph 8 in cases where the joint buyers are spouses, civil partners or cohabitants. Paragraph 9A modifies the exemption in paragraph 2 in similar cases.

Examples

Example 1 – Amelia and Bea

Amelia and Bea are cohabitants, they live together in a flat owned by Amelia which is their main residence. Amelia also owns a buy to let property. Bea owns no property. They decide to sell Amelia’s flat and buy a new home in joint names. Amelia will retain the buy to let.

Here, the ADS is potentially charged but there are two (!) statutory pathways to exemption.

First, we can rely on the replacement main residence exemption in paragraph 2 as extended by 9A. 9A requires that only one of the pair are disposing of a residence if that prior residence was occupied by both of them, and they will own the new property in joint names.

Second, we can get the same result by applying paragraph 8 (whether or not as amended by 8A). Time for the word salad. Since we are dealing with joint buyers who are cohabitants, 8A amends paragraph 8 to read as follows (amendments in bold)

Notice that the effect of para 8A is to introduce two separate joint buyer tests into each sub-sub paragraph of paragraph 8(1). Each of 8(1)(a)-(c) is disjunctive – two tests in each are joined by an “or” (and for the avoidance of doubt this is an inclusive or, you can’t fail by passing both) - so either one leg or the other can be met. But why? I cannot see anything these additional tests add.

In Amelia and Bea’s case:

• 8(1)(a) is met because Amelia has disposed of a dwelling – so this meets both legs of the test.
• 8(1)(b) is met because both Amelia and Bea lived in Amelia’s flat as a main residence.
• 8(1)(c) is met because both Amelia and Bea will live in the new house as their main residence.
• 8(1)(d) isn’t activated because Bea doesn’t own a second dwelling. While the single economic unit rules impute ownership of Amelia’s buy to let to Bea, then only do so for the purposes of paragraph 2(1)(c) and not paragraph 8(1)(d).

So – however you slice it, Amelia and Bea’s purchase is exempt from the ADS.

Example 2 – Crawford and Smith

The facts here are the same as the Crawford case above: Crawford and Smith live apart but both own their own separate main residences. Neither owns anything else. They buy a new main residence in joint names. On the date of purchase Crawford disposes of his prior main residence. Several months later, Smith disposes of hers.

Is the ADS payable on the purchase?

The gateway conditions in para 2(1) of seem to be met. At the point of purchase the buyers are treated as owning more than 2 dwellings: Smith just owns two; Crawford owns the new dwelling and is deemed to own Smith’s prior dwelling under the single economic unit rules. So unless an exemption applies, the ADS is due.

Here, unlike example 1, para 9A does not help. 9A requires that both joint buyers lived together in the prior main residence and Crawford and Smith did not. So the paragraph 2 exemption is not available.

BUT exemption under paragraph 8 is. The extended paragraph 8 (as amended by 8A) applies. So our analysis is that on the purchase:

• 8(1)(a) is met on both the first and second leg – one of the buyers (Crawford) has disposed of a main residence.
• 8(1)(b) is met on the second leg (i.e., the one not introduced by 8A). Para 8(1)(b) does not – unlike 8A – require the buyers to have lived together before hand. The fact that Crawford lived in the disposed of main residence is sufficient.
• 8(1)(c) is met on both legs since Crawford and Smith lived together in the new property as their main residence.
• 8(1)(d) does not apply since at the time of purchase Crawford only owns one dwelling for the purposes of 8(1)(d) - he is not deemed to own Smith’s prior main residence for the purposes of 8(1)(d), only for 2(1)(c). Therefore there is no requirement that Smith also meets the tests in 8(1)(a) and (b). 

Note that if 8(1)(d) did apply then the ADS would be payable. While the single economic unit rules would have deemed Smith to have disposed of Crawford’s prior main residence for the purpose of 8(1)(a) it would not have imputed residence to her so she would still fail paragraph 8(1)(b).

In my view the s48 principle which was fatal to the arguments in the Crawford case is not in point in establishing that the exemption in paragraph 8 applies. A generally accepted rule of statutory interpretation is that a general rule gives way to a specific rule. S48 sets out a general rule about joint buyers which (it is claimed) requires them each to satisfy relevant obligations. Paragraph 8 sets out a specific rule about the application of the ADS to certain joint buyer cases and adds an element of flexibility. The general rule in s48 should give way and allow the more flexible rules in para 8 to take precedence.

Example 3: Danforth and Edmund

Danforth and Edmund live separately, each in a flat that they own in their own names. Danforth also owns a buy to let property in his own name. They decide to buy a new residence in joint names. They sell Danforth's old residence on the date of purchase and, some months later, they sell Edmund’s too.

Does the ADS apply to the purchase? Unfortunately, yes it does.

As Danforth and Edmund lived apart para 9A doesn’t help and so we must look to paragraphs 8 and 8A for exemption. But:

• Paragraph 8(1)(d) does apply here. At the date of purchase, Edmund owns two dwellings in his own right. He owns his prior main residence AND his share of the new one. Danforth owns his buy to let AND his share of the new residence. Therefore both Danforth and Edmund must pass the tests in 8(1)(a) - (c) as amended.
• Both Danforth and Edmund pass 8(1)(a) - Danforth has disposed of a property, and under the single economic unit rules Edmund is deemed to have also disposed of it.
• Only Danforth passes 8(1)(b) since only he has lived in that property as a main residence.
• Both Danforth and Edmund pass 8(1)(c) since they both live in the new property as their main residence.

Therefore the ADS applies. Worse, it cannot be recovered on a sale of Edmund’s property. Since 8(1)(d) applies both Danforth and Edmund must meet the conditions in 8(1)(a) to (c). Again 8(1)(a) and (c) are met for the reasons above; 8(1)(b) is again failed because Danforth did not live in Edmund’s flat. So Crawford cases still can arise.

Perhaps worse still, consider what happens if the order of sales is reversed. In this case it appears that exemption from the ADS is available.

If Edmund sells his flat on the date of purchase, and Danforth sells his afterwards, then:

• 8(1)(d) does not apply. Danforth owns three dwellings for the purposes of 8(1)(d) - his flat, his buy to let and the new residence. But Edmund only owns one – the new residence. He is not deemed to own any of Danforth’s dwellings for the purposes of 8(1)(d). Therefore we do not need all buyers to meet all of the para 8 conditions.
• 8(1)(a) is met in virtue of Edmund’s disposal.
• 8(1)(b) is met on the second (original - not the one added by 8A) leg as the disposed of property was Edmund’s main residence.
• 8(1)(c) is met as Edmund and Danforth live together in the new residence.

Therefore the exemption applies.

I posit that this is unfair and cannot represent any sensible underlying policy for three reasons.

First – why should it matter in what order Danforth and Edmund dispose of their main residences when, ultimately, they have both disposed of them?

Second – it treats couples who lived together before being joint buyers differently from those who lived apart.

Third – and perhaps most egregiously - it leaves Danforth and Edmund’s tax position subject to the vagaries of fate. They may not be fully in control of the order in which they dispose of their dwellings – they may put both up for sale at the same time, yet only find a buyer for one in time for the purchase. So whether or not they suffer an irrecoverable ADS charge falls to a roll of the dice.

It may be possible to mitigate Danforth’s position somewhat – for example, if he can gift his flat into a discretionary trust before the date of purchase then it seems that the para 8 issues are resolved and the exemption can apply. Whether or not this is possible will of course depend on a number of factors so it is not a foregone conclusion. 

Conclusions

As I said at the beginning, I wanted to emphasise that the new rules are – while an improvement – complex, counter intuitive, and still capable of producing unfair results. Hopefully, you too now agree (and please let me know if you do not!).

To recap:

1. While the legislation is now quite baroque, the main point is that for exemptions and recoveries, paragraph 8 is king. To my mind it pretty much supersedes the existing exemptions in paragraphs 2(2) and 9A. And it is completely unclear what the purpose of 8A is since it effectively doubles up the existing conditions in paragraph 8.
2. While the new single economic unit rules are better, the important thing about them is where they don’t apply as much as where they do. Understanding that is one of the keys to unlocking paragraph 8(1)(d) in particular.
3. Couples who live apart before buying together can still face potentially unfair outcomes and need to take real care when structuring their purchases, especially if there are additional properties (buy to lets, holiday homes and inherited properties) in the mix.