This is the first in a short series of blogs looking at recently announced changes to the LBTT 6% additional dwelling supplement (ADS) which are expected to take effect from 1 April 2024.
This blog summarises the changes at a high level. The next blogs will look in more detail at some of these changes and the planning points (and pitfalls) of which clients and advisors should be aware.
Introduction
A couple of years ago I wrote an article for The Journal of the Law Society of Scotland detailing some of the unintended consequences and short comings of the LBTT additional dwelling supplement (ADS). Around the same time (correlation not causation, mind) the Scottish Government announced a consultation on reforming the ADS.
The consultation has been and gone, and last Friday (19 January 2024) the Scottish Government published its response along with draft legislation reforming the ADS rules. Assuming the legislation is approved by the Scottish Parliament, the revised legislation will take effect for purchases from 1 April 2024.
Some of the changes are more complex than others but each case, there are planning points of which that clients and practitioners should be aware.
Change 1 – Extending replacement of main residence window from 18 months to 36 months
This is really three changes, in all cases involving an extension from 18 to 36 months:
- The period before the date of a purchase that a buyer can look at to see if they have disposed of a prior main residence in order to claim exemption from ADS;
- The period after the date of a purchase on which the ADS has been paid, in which a buyer can dispose of a main residence in order to recover the ADS; and
- The period before the date of a purchase in which a buyer must have lived in a property for it to count as a prior main residence for the purposes of both the exemption and the recovery provisions.
Change 2 – Extending the "single economic unit" rules.
Basically, changing the law to make it match what everyone (except tax "people") thought it said anyway.
Under old ADS the single economic unit rules (SEUR) were one sided – a buyer had to count any dwellings owned by their spouses / civil partners / cohabitants and minor children to see if they triggered the 2+ dwellings condition for the ADS to be charged. And that's all it did, which created innumerable headaches.
Under new ADS, the SEUR cut both ways. A buyer has to count dwellings owned by their spouses / civil partners / cohabitants / minor children for the purposes of the 2+ test, but they can also count disposals by the same people – in theory allowing them to access both the replacement main residence exemption and also recovery provisions with less fancy footwork required.
Change 3 – More Changes to the Repayment Rules
In addition to the changes to SEUR and the new 36 month time limit, there are further tweaks to the replacement main residence exemption and the repayment rules for cases where there are joint buyers. In light of the Crawford decision, these should be of particular interest and should be read with care.
Change 4 – Beneficiaries' Relief
A new relief has been included for buyers who have inherited a share in a dwelling, and who potentially have triggered the 2+ rule as a result. The relief provisions also try to clarify when an inherited dwelling is treated as owned (something which has had a spotty history within the ADS).
Crucially, the relief is quite restricted and is only available in cases where: (i) the only property tipping a buyer over the 2+ threshold is the inherited property; and (ii) the inherited property was acquired after the purchase missives were entered into but before the purchase completed. It is not an absolute disregard of inherited property, nor is it a grace period in which inherited property is not counted (as per the equivalent SDLT rules).
For the purposes of the relief (but seemingly for no other purposes) an inherited property is treated as acquired when the disposition by the executors is delivered to the buyer.
Change 5 – Relief for separated spouses and civil partners
Where the relief applies the former family home is not counted for the purposes of the 2+ rule, but there are important provisos.
First – this doesn't cover cohabitants (even with children).
Second – the relief is designed to prevent the ADS applying in cases where spouses or civil partners have separated, and the buyer retains an interest in the family home but without living there. The old family home still needs to be the main residence of the other ex-spouse / partner at the effective date. The parties also need to have retained ownership of the family home as part of a court order or separation agreement.
Change 6 – Small Shares
Under the old ADS rules, if you own a 1/100th interest in a dwelling, you were treated (for the purposes of the ADS) as owning the whole thing. Therefore, that minor interest could trip you over the threshold of the 2+ rule and into the realms of the ADS.
Under the new ADS rules, if the market value of your share is below £40,000 it is no longer counted. This goes some way to countering the issues with family-owned properties (but only if the share is small enough) and is potentially very helpful in cases where properties are owned in partnerships (such as family faming partnerships).
One point of concern – which doesn't seem explicitly addressed in the legislation – is around acquiring an increased share in a property you already own. Revenue Scotland accept that where a person owns a share in a dwelling, any increase in that share is completely disregarded for the purposes of ADS. Arguably the new legislation addresses that concern by restricting the disregard to just applying the 2+ test.
Change 7 – Local Authority Relief
This is not just a relief from the ADS, but a full relief from both LBTT and ADS for local authorities acquiring affordable housing where such purchases are carried out using powers of funding conferred under section 2 of the Housing (Scotland) Act. This is to provide parity between Local Authorities (who currently don't get a relief for housing) and charities and registered social landlords (who do).
Want to know more?
Our tax team would be delighted to discuss the new rules and how they could affect you. Feel free to contact me, Alan Barr or Isobel d'Inverno.
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